ATO ID 2010/34: Capital gains tax: roll-over relief - compulsory acquisition - easement created
Date of decision: 21 January 2010
Year of income: Year ended 30 June 2006
Business line: Public Groups and International

Issue
Can any of the roll-over threshold conditions in paragraphs 124-70(1)(a), 124-70(1)(aa) or 124-70(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997), be satisfied by an entity that has an easement created over their land?

Decision
No. The threshold conditions in paragraphs 124-70(1)(a), 124-70(1)(aa) or 124-70(1)(c) of the ITAA 1997 cannot be satisfied in this case.

Facts
An Australian government agency (the acquirer) intends to obtain road access across a landowner's property for the construction of an infrastructure facility. The acquirer serves a notice on the landowner inviting them to negotiate for the creation of an easement over the landowner's land. The notice informs the landowner that if negotiations are unsuccessful, the acquirer will proceed to create an easement pursuant to its powers under State legislation. The parties negotiate and agree. An easement is created, for which the acquirer pays an amount to the landowner.

Reasons for decision
Summary: Provided the other requirements are satisfied, capital gains tax roll-over under Subdivision 124-B of the ITAA 1997 may be available where the threshold conditions in paragraphs 124-70(1)(a), 124-70(1)(aa) or 124-70(1)(c) of the ITAA 1997 are satisfied. Both paragraphs 124-70(1)(a) and 124-70(1)(aa) of the ITAA 1997 require that a CGT asset that you own is compulsorily 'acquired' by another entity. Paragraph 124-70(1)(c)of the ITAA 1997 requires that you 'dispose of' a CGT asset to another entity in circumstances where the disposal takes place after service on you of a notice inviting negotiation for a sale and informing you that, if negotiations are unsuccessful, compulsory acquisition will follow. A disposal involves a change of ownership of an asset from you to another entity (the definition of 'dispose of' in subsection 995-1(1) of the ITAA 1997). For roll-over under Subdivision 124-B to be available under the threshold conditions in paragraphs 124-70(1)(a), 124-70(1)(aa) or 124-70(1)(c) of the ITAA 1997, there must be a change of ownership of an asset that is the subject of the CGT event, which must exist both before and after the event. In accordance with Taxation Ruling TR 97/3, when an easement is created by being granted to an entity that has the power to compulsorily create the easement (such as the acquirer), a landowner's rights of ownership are affected. The right to exclude all others is forfeited in part when the easement comes into existence. The ending of part of this right causes CGT event C2 to happen to it (section 104-25 of the ITAA 1997). The change of ownership required does not happen, as that part of the right ceases to exist when CGT event C2 happens. Therefore, the threshold conditions in paragraphs 124-70(1)(a), 124-70(1)(aa) and 124-70(1)(c) of the ITAA 1997 cannot be satisfied in this case. Accordingly, the landowner cannot claim the roll-over under Subdivision 124-B of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 104-25 Subdivision 124-B paragraph 124-70(1)(a) paragraph 124-70(1)(aa) paragraph 124-70(1)(c) subsection 995-1(1)
Related public rulings and determinations: Taxation Ruling TR 97/3
Subject references: Capital gains tax CGT compulsory acquisitions CGT events CGT roll-over relief Disposal of assets