Private ruling: Capital gains tax - water rights - disposal
Published: September 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Paragraph 108-20(2)(a) | Income Tax Assessment Act 1997 Subsection 112-30(3). | Income Tax Assessment Act 1997 Subsection 118-10(3).

Reasons for decision: Detailed Reasoning - Water Rights: Water rights, such as licences and water allocations are CGT assets as defined in section 108-5 of the ITAA 1997. They are legal rights existing by the terms of the prevailing State legislation and therefore satisfy the definition. Where a water right has been acquired after 19 September 1985 any disposal of that right will have CGT consequences. The capital gain on each disposal will equal the excess of the consideration over the cost base. | Detailed Reasoning - A water entitlement is separated from the land: If the separation of a water entitlement is a result of a change in the relevant State legislation, the owner of the land will have two CGT assets, being the land and the water entitlement. More than one water entitlement could be separated from the land. No CGT event happens on this splitting of a CGT asset into two or more assets; it is the eventual dealing with the asset which gives rise to the CGT event. | Detailed Reasoning - CGT event: A capital gain or capital loss will occur when a CGT event happens to a CGT asset. The most common CGT event occurs when a CGT asset is disposed of, CGT event A1. Where an owner permanently disposes of their water entitlement, for example by sale or assignment, CGT event A1 happens. This event happens when the owner enters into the contract. If there is no contract, the event happens when the change of ownership occurs. You make a capital gain to the extent that the capital proceeds from the disposal exceed the cost base of the water entitlement. A capital loss is made to the extent that the reduced cost base of the water entitlement exceeds the capital proceeds. | Detailed Reasoning - Cost base of water rights: On the disposal of the water rights you calculate the cost base of the rights using the following formula. Cost base x Capital proceeds for the acquisition of the water rights (Proceeds + market value of the remaining land)

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Question: 1: Is the amount you received subject to capital gains tax (CGT)? | Question: 2: Does the sale constitute a CGT event A1 within the terms of subsection104-10 (1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | Question: 3: Is the cost base of the asset calculated by reference to the market value of the remaining part? | Relevant facts: You and your spouse purchased a property after 19 September 1985. | The property also included water use licences and water shares. | You and your spouse have been using the property for private purposes. | The state Government, through the Department of Primary industries set up an assistance package for flood affected irrigators. | · De-Irrigate option/ change of land use to dry land farming. | You and your spouse have accepted an option, and have received an amount which was split into two separate components: | You have supplied a document which forms part of and should be read in conjunction with this private ruling: