Private ruling: Conservation covenant
Published: March 2014
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the payments you receive in relation to your conservation covenant be treated as capital gains or losses under section 104-47 of the Income Tax Assessment Act 1997 ( ITAA 1997) and be subject to taxation if and when you sell your property in the future? | A1: Yes.

Relevant facts and circumstances: You own a property, which, apart from the domestic area, is entirely bush. You have never previously received any money in relation to the property. During the year ended 30 June 2011, you entered into a conservation covenant with Trust For Nature (Victoria), who are a government agency with a mission statement to strive to ensure that all significant natural areas in private ownership in Victoria are conserved. Your conservation covenant will make annual payments to you over eleven years.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-47

Reasons for decision: Summary: Section 104-47 of the ITAA 1997 is about conservation covenants and states CGT event D4 happens if you enter into a conservation covenant over land you own. It states the time of the event is when you enter into the covenant. You make a capital gain if the capital proceeds from entering into the covenant are more than that part of the cost base of the land that is apportioned to the covenant. You make a capital loss if those capital proceeds are less than the part of the reduced cost base of the land that is apportioned to the covenant. Importantly, subsection 104-47(5) of the ITAA 1997 specifies: The cost base and reduced cost base of the land are reduced by the part of the cost base or reduced cost base of the land that is apportioned to the covenant. The part of the cost base of the land that is apportioned to the covenant is worked out in this way: Cost base of land × Capital proceeds from entering into the covenant Those capital proceeds plus the market value of the land just after you enter into the covenant | Detailed Reasoning - Example:: Lisa receives $10,000 for entering into a conservation covenant that covers 15% of the land she owns. Lisa uses the following figures in calculating the cost base of the land that is apportioned to the covenant: The cost base of the entire land is $200,000. The market value of the entire land before entering into the covenant is $300,000, and its market value after entering into the covenant is $285,000. Lisa calculates the cost base of the land that is apportioned to the covenant to be: $200,000 × 10,000 ÷ [10,000 + 285,000] = $6,780 She reduces the cost base of the land by the part that is apportioned to the covenant: $200,000 - $6,780 = $193,220 In general, sections 118-110 and 118-120 of the ITAA 1997 disregard a capital gain or loss that occurs to an individual's main residence and also 2 hectares of land adjacent to the residential dwelling (to the extent that the land was used primarily for private or domestic purposes in association with the dwelling). In your case, the payments you receive in relation to your conservation covenant will be treated under section 104-47 of the ITAA 1997, as explained above. Any gains or losses you make will be used to reduce your CGT cost base. It follows any tax payable will crystallise if and when you sell your property in future (subject to sections 118-110 and 118-120 of the ITAA 1997).