• CGT rollover for a replacement entitlement

    The single entitlement capital gains tax (CGT) rollover may apply to you if your water entitlement ends and you acquire one or more replacement water entitlements.

    You may be able to choose the multiple entitlement CGT rollover if more than one of your water entitlements ends and you acquire one or more replacement water entitlements.

    If you choose to apply the multiple entitlement rollover to your original water entitlement, the single entitlement CGT rollover will not apply to that entitlement.

    If your water entitlement is a statutory licence, you will need to consider whether CGT rollover dealing with the replacement of statutory licences applies.

    Example: water replacement entitlement

    Avery Irrigation Ltd (Avery Irrigation) owns a statutory licence with a 900 ML entitlement to water.

    Joe, an Australian irrigator, owns 100 class A shares in Avery Irrigation. Each class A share has:

    • one vote at the Avery Irrigation annual general meeting
    • a right to receive dividends
    • a right to receive up to 1 ML of water
    • a right to have up to 1 ML of water delivered by Avery Irrigation.

    Each of Joe’s 100 class A shares in Avery Irrigation is a water entitlement.

    In January 2011, Joe exchanges his shares in Avery Irrigation for a replacement 100 ML statutory licence and 100 class B shares in Avery Irrigation. Except for not having the right to receive up to 1 ML of water, each class B share has the same rights as a class A share.

    The replacement statutory licence and class B shares in Avery Irrigation are water entitlements. As a result, Joe may be able to obtain the single entitlement rollover in relation to each of his 100 class A shares. Alternatively, Joe may be able to choose the multiple water entitlement rollover.

    If Joe chooses the multiple entitlement CGT rollover, the single entitlement CGT rollover cannot apply to each class A share.

    End of example

    See also:

    CGT rollover for a replacement entitlement if a foreign resident or trustee of a foreign trust

    A foreign resident or trustee of a foreign trust may be able to obtain CGT rollover if:

    • the original water entitlement they own ends
    • the replacement water entitlements is taxable Australian property    
      • just before their ownership ended
      • just after they acquire it.
       

    CGT rollover for a reduction in entitlements

    If you had changes to your water entitlements to remove the conveyance loss and the changes do not impact on the total amount of water you actually receive, then you may be able to obtain CGT rollover for a reduction in water entitlements.

    Conveyance loss is the amount of water lost in an operator’s network due to factors such as evaporation or seepage. The loss is passed onto irrigators or holders of water entitlements through a reduction in the amount of actual water received. This loss may form part of your water entitlements.

    Example: water reduction entitlement

    River Irrigation Ltd (River Irrigation) is an operator that owns a statutory licence with a 100 GL entitlement to water. River Irrigation has 100 member irrigators, each with a contractual right to water. The size of this entitlement depends on the number of shares they own in River Irrigation. Each share in River Irrigation entitles its owner to 1 ML of water.

    However, each member's contractual right to water includes a conveyance component of 20%. Consequently, each member only receives up to 80% of their contractual entitlement.

    Julie, a member of River Irrigation, owns 500 shares (that she acquired in 1994) consequently, she has a 500 ML entitlement to water.

    However, due to the conveyance component, Julie only ever receives up to 400 ML of water.

    River Irrigation reorganises its affairs and cancels 20% of each member's shares on a pro-rata basis. River Irrigation, with the agreement of its member irrigators, also cancels each member irrigator's contractual right and reissues a new contractual right without a conveyance component. These transactions ensure that each member's contractual entitlement and shareholding accurately reflects the amount of water they receive.

    The cancellation and reissue of the contractual rights qualifies for the replacement water entitlement rollover.

    As Julie is one of River Irrigation’s member irrigators, her total water entitlement has been reduced to 400 ML through the cancellation of 100 shares. However, Julie continues to receive the same amount of water, so the total market value of Julie's original water entitlements is the same as her retained water entitlements. Julie may be able to obtain CGT rollover for the reduction in her water entitlements.

    End of example

    Rolling over your capital gain

    If you satisfy the conditions for CGT rollover, you may be eligible to roll over all or part of your capital gain.

    Generally, the rollover has three consequences:

    1. You can disregard any capital gain or capital loss that arises from the ending of your original water entitlement.
    2. The replacement water entitlement is treated as though you acquired it on the date that you acquired your original water entitlement.
    3. The cost base of your original entitlement will be allocated to your replacement entitlement or entitlements.

    What you need to know

    Pre-CGT water entitlement

    If you acquired your original water entitlement before 20 September 1985 (pre-CGT) your replacement water entitlement will be treated as if they were acquired before that date. Generally, any capital gain or capital loss on a pre-CGT asset is ignored.

    Post-CGT water entitlement

    If you obtained your original water entitlement after 20 September 1985 (post-CGT) your original entitlement is a post-CGT asset. A replacement water entitlement will also be a post-CGT asset.

    If the single entitlement CGT rollover applies to the replacement of your water entitlement, you will need to calculate the first element of the cost base or reduced cost base of your post-CGT replacement water entitlement, having regard to:

    • the cost base of your original water entitlement
    • the number and market value of your replacement entitlements
    • any amount you paid to get the replacement entitlement, which can include giving property.

    If the multiple entitlement CGT rollover applies to the replacement of your water entitlement, you will need to calculate the first element of the cost base or reduced cost base of your post-CGT replacement water entitlement, having regard to:

    • the total of the cost bases of all your original water entitlements
    • the number and market value of your    
      • original water entitlements
      • replacement entitlements
       
    • any amount you paid to get the replacement entitlements, which can include giving property.

    When entitlements are of both pre- and post-CGT entitlements

    If your water entitlements are a mix of pre-CGT and post-CGT entitlements, you will need to calculate how many of the replacement water entitlements are pre-CGT, having regard to the number and market value of your:

    • original water entitlements
    • replacement water entitlements.

    You will also need to calculate the first element of the cost base or reduced cost base of your post-CGT replacement water entitlements, having regard to:

    • the total of the cost bases of your post-CGT original water entitlements
    • the number and market value of your post CGT replacement water entitlements
    • any amount you paid to get the replacement entitlements, which can include giving property.
      Last modified: 24 Aug 2016QC 24125