The GasFields Commission Queensland has recently published a ‘Land Access Checklist for Landholders’, which lists seven general principles to assist landholders in negotiating land access agreements with coal seam gas operators.
This publication serves as a timely reminder that land access negotiations can have a serious impact on a landholder’s use of their land and that landholders should seek advice during the negotiation of their compensation agreement.
Tax consequences of compensation payments are often overlooked during these negotiations but it is essential to consider the tax implications before negotiations are finalised.
From a tax perspective, the characterisation of a payment as either income or capital can have drastically different tax results. This is a complex area and guidance given by the Australian Taxation Office on the tax treatment of compensation payments may be difficult to understand.
If compensation is paid for the loss of value or damage to the land, this will generally be a capital payment, which reduces the cost base of the land and means no tax is payable on the compensation payment. This is generally the best outcome for the landowner.
If compensation relates to other matters, landowners will generally get the best after-tax result if the payment is regarded as being a capital receipt, as they will be able to take advantage of various capital gains tax concessions.
However, if the compensation is for loss of income, it will be fully taxable.
In some cases where compensation relates to loss of income and some other issues, it may be possible to achieve an outcome where the whole amount is treated as capital for tax purposes if the compensation is expressed as a lump sum compensation payment without identifying the separate components of the payment. However, to achieve this outcome it will be important that tax advice is taken early in the negotiation process and that the compensation agreement is carefully drafted.