Tax on compensation part of offer to relocate

[Terryw]

A friend of mine has been having problems with a neighbour which is a commercial operation. The neighbour has offered to buy his property and the price offered is "market value" plus another component which is an amount for "costs and compensation for disturbance". The home is a main residence, so should be exempt from CGT.

I assume the compensation component would be taxable. Could anyone offer any insights on how this would be treated?

 

[Rob G.]

Unlikely to be ordinary income if it relates to residence.

Whether there is a net capital gain depends on the particular circumstances.

Whether it is more closely associated with releasing a cause of action to sue the developer, or whether it is deemed more closely associated with the disposal of the their main residence.

TR 95/35

Cheers,

Rob

 

[Terryw]

Thank you Rob, very helpful.

 

[Gordon Farkus]

...the price offered is "market value" plus another component which is an amount for "costs and compensation for disturbance". The home is a main residence, so should be exempt from CGT.

Sorry if I'm missing the point but: unless the amount for compensation is huge and distorts the price to be paid for the property (when added to the market value), I don't understand why you'd even detail and draw attention that there's a component for compensation. Who's to determine what the market value is to the buyer?

 

[Terryw]

Hi Gordon

'They' are structuring their offer with a price for the property, as determined by the higher of 2 sworn valuations and then the other part. So I think the transfer price would only be the valuation price and the other would be separate. The other bit is rather large too!

 

[Gordon Farkus]

Fair enough, Terry, knew there must have been a good reason.