Private ruling: Capital gains tax
Date of advice: 22 March 2016
Published: May 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the payment a receipt which is capital in nature for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is the payment referable to the occurrence of capital gains tax (CGT) event D1 upon the execution of the agreement? | A2: Yes. | Q3: Is the payment consideration from CGT event H2 occurring in accordance with section 104-155 of the ITAA 1997? | A3: No. | Q4: Is the payment a non-assessable capital receipt? | A4: No.

Relevant facts and circumstances: The Access Road is legally vested in the entity (body corporate). The entity was established pursuant to the Body Corporate Act. The Access Road is part of, and was constructed over, common property owned by the Body Corporate. The Access Road was originally established as a condition for the subdivision of the land upon which the Access road and the surrounding lots are situated. You are the owner of Lot X as designated on the Current Plan and Lot X as designated on the Proposed Plan. Your land adjoins the Access Road. You rent the land to commercial tenants. You also own an interest in the common property on which the Access Road is situated as tenants in common with other lot owners in proportion to your unit entitlement. A company as trustee for the property trust (the company) are the owners and managers of Lot X as designated on the Current Plan and Lot X as designated on the Proposed Plan (the company's land). In addition to owning this land, the company also owns another parcel of land which it operates a X complex. The rear of this complex is accessible to the public, and to businesses located in the complex, by using the Access Road, Prior to the land being subdivided, the owner of the lots comprising the land was XYZ Pty Ltd. XYZ and X entered into a deed pursuant to which XYZ agreed to grant an access easement over the Access Road (Equitable Easement). The Equitable Easement was a condition of approval for the subdivision of the land and was intended to be registered. However, while the easement documents and plans were sealed by the city council during the 19XX-XX financial year, the documents were not subsequently submitted to the state land titles office for registration. The Access Road has been used principally as a right-of-way on and from the date of the initial deed. In 20XX, the company sought the consent of the Body Corporate (as XYZ's successor in title) for the Equitable Easement granted over the Access Road to be registered so that there was no doubt that its customers, the public and businesses were entitled to access the rear of the complex. The Body Corporate acknowledged and agreed that the Equitable Easement was granted on and from the Grant Date and provided its consent to register the Equitable Easement. The company and the Body Corporate executed a 'Deed of Agreement to Create Easement' to: • confirm the existence of the Equitable Easement on and from the Grant Date • evidence the Body Corporate's consent to the registration of the Equitable Easement given on the Grant Date; and • evidence the company's undertaking to pay all costs and expenses associated with maintaining the Access Road on and from the date of the Body Corporate Agreement. The Recitals within this agreement state: The company agrees to pay you the Compensation Amount on the terms and conditions set out in the Deed. The compensation amount is defined as $X (plus GST) The agreement provides that: The company has requested that the Body Corporate enter into the body Corporate Agreement. You agree: a) to vote in favour of any resolution of the Body Corporate to enter into and perform obligations under the proposed Body Corporate Agreement b) that it will not do anything to prejudice the performance of obligations under the Body corporate Agreement. Under the Body Corporate Act, the lot owners who have a unit entitlement in common property are required to consent to the registration of an easement. You, as one of the lot owners, therefore signed the Agreement in recognition that the Equitable Easement existed, and continued to exist, on and from the grant date, and that the Body Corporate was merely allowing that Equitable Easement to be registered as contemplated on the grant date. Notwithstanding the designation given to the Body Corporate Agreement, the agreement is a deed confirming the existence of the Equitable Easement and the Body Corporate's consent to the registration of the Equitable Easement.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 subsection 960-100(1)

Reasons for decision: Detailed Reasoning - Question 1 and 2: We accept that the compensation is a once-off payment that is not connected to your business activities. It does not have the characteristics of revenue and instead is a capital receipt. CGT event D1 CGT event D1 happens under section 104-35 of the ITAA 1997 (former section 160M(6) of the Income Tax Assessment Act 1936) 'if you create a contractual right or other legal or equitable right in another entity.' Under subsection 960-100(1), an entity is defined as any of the following: a) an individual; b) a body corporate; c) a body politic; d) a partnership; e) any other unincorporated association or body of persons; f) a trust; g) a superannuation fund. Taxation Ruling IT 2561 considers the capital gains tax (CGT) implications of granting an easement. It states that an easement is an asset created at the time it is granted. An agreement from 19XX-XX financial year, executed by the previous property owner, granted an easement over the access road. We accept that the creation of the easement asset in the hands of the company occurred at this time, regardless of the fact that it was never registered on the title. Therefore, we also accept that the compensation under the new agreement is not for the granting of an easement. Taxation Determination TD 1999/80 considers that CGT event D1 happens when you receive money or property for withdrawing an objection against a proposed land development. It states that: If you received money or property for withdrawing your objection against a proposed land development, and the receipt is not for permanent damage or reduction in value caused to your property by the development, CGT event D1 happens in section 104-35 of the Income Tax Assessment Act 1997. TD 1999/80 goes on to explain that in undertaking not to exercise your right to object, you create a legal or equitable right in the developer. In this case, under the agreement you consented to 'vote in favour of any resolution of the body corporate to enter into and perform obligations under the proposed Body Corporate Agreement' and 'that it will not do anything to prejudice the performance of obligations under the Body Corporate Agreement'. The agreement specifically required you to vote in favour of the Easement at the relevant meeting organised for the resolution of the grant and creation of the Easement. We consider that as a result of entering in the agreement, you have essentially retracted any objection against the registering of the Easement on the title. We consider the circumstances are similar to those considered by TD 19XX/XX. Therefore, in undertaking not to exercise your right to object to the Easement being registered on the title you have created a legal or equitable right in the other party to the agreement. Therefore, CGT event D1 happened on entering into the agreement. | Detailed Reasoning - Question 3: CGT event H2 CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset that you own; and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base. For example: You own land on which you intend to construct a manufacturing facility. A business promotion organisation pays you $50,000 as an inducement to start construction early. No contractual rights or obligations are created by the arrangement. The payment is made because of an event (the inducement to start construction early) in relation to your land. Note that CGT event H2 does not apply if any other CGT event applies. CGT event H2 does not happen if: a) the act, transaction or event is the borrowing of money or the obtaining of credit from another entity; or b) the act, transaction or event requires you to do something that is another CGT event that happens to you; or c) a company issues or allots equity interests or non-equity shares in the company; or d) the trustee of a unit trust issues units in the trust; or e) a company grants an option to acquire equity interests, non-equity shares or debentures in the company; or f) a company grants an option to dispose of shares in the company to the company; or the trustee of a unit trust grants an option to acquire units or debentures in the trust; or a company or a trust that is a member of a demerger group issues new ownership interests under a demerger. As discussed, we consider that CGT event D1 applies. Therefore, CGT event H2 has not been considered. | Detailed Reasoning - Question 4: As discussed at question 2, we consider that CGT event D1 applies. Therefore the payment is not a 'non-assessable capital receipt'.