Private ruling: CGT - water rights
Date of advice: 28 April 2026
Published: 20 July 2026
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20YY
Date scheme commenced: DD MM YYYY

Ruling: Q1: Is your water right considered a 'personal use asset' as defined in subsection 108-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will capital gains tax (CGT) event A1 occur when you dispose of the water right? | A2: Yes. | Q3: If a CGT event occurs, can you disregard any capital gain you make from the disposal of the water right under section 108-20(2) ITAA 1997? | A3: No.

Relevant facts and circumstances: After 20 September 1985, you jointly purchased the land at the property. You built a dwelling on the property and used it as your main residence. A water right of XX megalitres (ml) was included with the property but not specified in the contract. Your water right is a water access entitlement which is an ongoing right to an exclusive share of water from a water resource. Your water right does not change regardless of whether any restrictions are imposed to allocation rights. Any unused water cannot generally be carried over to the following period. Prior to 20YY, water rights were bundled on a single licence and, in practice, commonly bundled in property sales, while site-specific permissions inherently attached to land. The water right was effectively treated as part of the land package. In or around MM YYYY, you received sole ownership of the property and the water right after a marriage breakdown. For period A, you leased XX ml. For period B, you leased XX ml. For period C, you leased XX ml. For period D, you leased XX ml. In MM YYYY, you sold the property without the water right. The current value of the water right is approximately $XX per ml. This gives an estimate value of $XX. For period E, your intention is to lease the water right. Your intention is not to lease the water right in the income year ended 30 Junes 20YY. You will sell the water right in the income years ended 30 June 20YY or 20YY for a capital gain.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 108-20(2) | Income Tax Assessment Act 1997 Division 115 | Income Tax Assessment Act 1997 subsection 118-10(3)

Reasons for decision: Summary: No. The water right would not be considered a 'personal use asset' as defined in subsection 108-20(2) because you no longer would be holding the asset for personal use at this time of disposal. | Detailed Reasoning - Detailed reasoning: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. The Act in the state your property is located in provides rights in relation to the ability of a person to access, take and use water. Under this Act, water licences (including volumetric licences and water access entitlements) and water allocations are personal property that can be transferred independently of land. The transfer of a water entitlement is commonly referred to as 'permanent' trade, although entitlement transfers can be: • for all or part of an entitlement, or • for a defined period (i.e. a temporary lease arrangement). A temporary lease arrangement passes the benefits and responsibilities associated with holding the water entitlement from the seller to the buyer for the agreed period. After that period, the entitlement will return to the original holder. Parts 3-1 and 3-3 of the ITAA 1997 contain the capital gains and capital loss provisions commonly referred to as the capital gains tax (CGT) provisions. Section 102-20 provides that a capital gain or capital loss results from a CGT event happening to a CGT asset. A CGT asset is defined broadly as any kind of property, or a legal or equitable right that is not property. Water rights, such as licences and water allocations, are CGT assets as defined in section 108-5. They are legal rights existing by the terms of the prevailing State legislation and therefore satisfy the definition. Personal use assets are defined under subsection 108-20(2) as: (a) a CGT asset (except a collectable) that is used or kept mainly for your (or your associate's) personal use or enjoyment or; (b) an option or right to acquire a CGT asset of that kind; or (a) a debt arising from a CGT event in which the CGT asset the subject of the event was one covered by paragraph (a); or (b) a debt arising other than: (c) in the course of gaining or producing your assessable income; or (d) from your carrying on a business. In Favaro v FC of T (1996) 34 ATR 1; 96 ATC 4975, the court highlighted that there is a difference between an asset used for personal use, compared to business use. The court accepted that the expression 'personal use' is used in 'contradistinction to use for business or profit-making purposes'. Whether or not your water right is used or kept mainly for personal use or enjoyment will depend on the particular facts and circumstances of each case. During a period of ownership, the way you keep or use the asset may change. For example, you may have originally used the asset for personal use and enjoyment but ultimately keep it as an investment or use it in carrying on a business. It is the main use, determined at the time when you dispose of the asset, that dictates whether it is a personal use asset. | Detailed Reasoning - Application to your circumstances: In your circumstances, when the property was sold the water right can no longer be kept as a personal use asset and is now being kept to produce income. The use of the asset at the time of the CGT event (when the right is sold) will be the relevant time and you would no longer be holding the asset for personal use at this time of disposal. Therefore, the water right would not be considered a 'personal use asset' as defined in subsection 108-20(2). | Detailed Reasoning - Question 2: Will capital gains tax (CGT) event A1 occur when you dispose of the water right? | Summary: Yes. You have stated you will dispose the water right for a capital gain in the income year ended 30 June 20YY or 20YY. CGT event A1 will occur at this time. | Detailed Reasoning - Detailed reasoning: Under section 104-10, a CGT event A1 arises when you dispose of a CGT asset. You dispose of a CGT asset when a change of ownership occurs from you to another entity, whether because of some act or event, or by operation of law. You have stated you will dispose the water right for a capital gain in the income year ended 30 June 20YY or 20YY. CGT event A1 will occur at this time. | Detailed Reasoning - Question 3: If a CGT event occurs, can you disregard any capital gain you make from the disposal of the water right under section 108-20(2) ITAA 1997? | Summary: No. We have determined that your water right is not considered a personal use asset. Therefore, you cannot disregard the capital gain under subsection 118-10(3). | Detailed Reasoning - Detailed reasoning: Subsection 118-10(3) states that a capital gain you make from a personal use asset, or part of the asset, is disregarded if the first element of the assets cost base is $10,000 or less. Section 108-20 operates on an all-or-nothing basis: if the water right is not considered a personal use asset, the loss is not disregarded and there is no partial exemption. Division 115 of the ITAA 1997 provides the conditions for a discount capital gain. You make a discount capital gain if the following requirements are satisfied: • you are an individual, • a CGT event happens to a CGT asset of yours after 11:45am (by legal time in the Australian Capital Territory) on 21 September 1999, • you acquired the CGT asset at least 12 months before the CGT event, and • you do not choose to use the indexation method. For Australian resident individuals the discount percentage is 50%. However, you can only reduce your capital gain after applying all your capital losses for the year and any unapplied net capital losses from earlier years. | Detailed Reasoning - Application to your circumstances.: We have determined that your water right is not considered a personal use asset. Therefore, you cannot disregard the capital gain under subsection 118-10(3). You meet all the conditions for a discount capital gain and therefore are entitled to reduce your capital gain using the discount method under Division 115.