Private ruling: CGT - Water entitlements
Date of advice: 14 August 2015
Published: August 2015
Ruling period: 1 July 2014 - 30 June 2015 | 1 July 2015 - 30 June 2016 | 1 July 2016 - 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: The company is participating in a Private Irrigation Infrastructure Operators Program (PIIOP) under a Sustainable Rural Water Use and Infrastructure Program (SRWUIP). Under the funding agreement with the Commonwealth the taxpayer is compelled to return part of their water entitlement to the Commonwealth in return for funding for infrastructure works. The total quantified amount of water entitlement returned is specified in the agreement and is not necessarily the same as the actual or estimated quantity of water which is saved through the infrastructure program. The company will acquire water entitlement on the open market or from irrigation customers to meet the terms of the Agreement. Is the whole amount of the SRWUIP payment included when disregarding a capital gain in terms of sub-section 118-37(1)? | A1: Yes, providing the terms of the Agreement have been met by the taxpayer.

Relevant facts and circumstances: The Commonwealth of Australia is funding certain infrastructure works to be carried out by the company under a Sustainable Rural Water Use and Infrastructure Program (SRWUIP). Under the funding agreement with the Commonwealth the taxpayer is compelled to return a quantified amount of its water entitlement to the Commonwealth. The total amount of the water entitlement returned is specified in the agreement and is not necessarily the same as the actual or estimated quantity of water which is saved through the infrastructure program.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997) Section 118-37 | Section 124-1105 | Section 59-65

Reasons for decision: Detailed Reasoning - Question 1: The company is participating in a Private Irrigation Infrastructure Operators Program (PIIOP) under a Sustainable Rural Water Use and Infrastructure Program (SRWUIP). Under the funding agreement (the Agreement) with the Commonwealth the taxpayer is compelled to return part of their water entitlement to the Commonwealth in return for funding for infrastructure works. The total quantified amount of water entitlement returned is specified in the agreement and is not necessarily the same as the actual or estimated quantity of water which is saved through the infrastructure program. The company will acquire water entitlement on the open market or from irrigation customers to meet the terms of the Agreement. Is the whole amount of the SRWUIP payment included when disregarding a capital gain in terms of sub-section 118-37(1)? | Detailed Reasoning - Reasons for decision: The Commonwealth of Australia is funding infrastructure works to be carried out by the company under a Sustainable Rural Water Use and Infrastructure Program (SRWUIP). Such funding is effected through the Agreement. Section 118-37(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that you may disregard any capital gain or capital loss from any capital gains tax event relating directly to: (ga) a * water entitlement, to the extent that the CGT event happens because an entity * derives a * SRWUIP payment that is * non-assessable non-exempt income under section 59-65; (gb) a * SRWUIP payment you derive that is non-assessable non-exempt income under section 59-65; Sub-section 124-1105(4) of ITAA 1997 states: Meaning of water entitlement (4) A water entitlement is a legal or equitable right that an entity owns that relates to water, including a right to: (a) receive water; or (b) take water from a water resource; or (c) have water delivered; or (d) deliver water; and includes a right that must be owned by the entity in order to own a right covered by paragraph (a), (b), (c) or (d). Section 118-37(1)(ga) of the ITAA 1997 will apply to the whole amount of the SRWUIP payment relating to the Water Access Entitlements that are required to be assigned to the Commonwealth under the agreement and any capital gain or capital loss made in relation to this will be disregarded. Under the terms of the Agreement the Schedule specifies the volume of water entitlements to be transferred to the Commonwealth, subject to satisfaction of the Agreement. Therefore if the agreement is satisfied, section 118-37(1)(ga) will apply to the whole amount specified in the agreement regardless of whether the company has been required to purchase any additional water to meet the requirements. | Detailed Reasoning - Other things for you to consider: Section 118-37 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you may disregard any capital gain or capital loss from any capital gains tax event relating directly to: (ga) a * water entitlement, to the extent that the CGT event happens because an entity * derives a * SRWUIP payment that is * non-assessable non-exempt income under section 59- 65; (gb) a * SRWUIP payment you derive that is non-assessable non-exempt income under section 59- 65; Section 59-65 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a SRWUIP payment, in respect of a SRWUIP program, to an entity that is a participant in the program is not assessable and is not exempt income if: (a) the entity has made a choice under subsection (2) for the program; and (b) if the payment is an * indirect SRWUIP payment--the entity * derives the payment because it owns an asset (otherwise than under a * financial arrangement) to which the program relates. The Commissioner has not determined within your ruling whether you pass the non-assessable non-exempt income test as set out in Section 59-65 of the ITAA 1997.