Edited version of private ruling

Authorisation Number: 1011485124675

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Ruling

Subject: CGT - easement created

Does the grant of the easement by the taxpayers result in a disposal by them of a capital gains tax (CGT) asset, acquired prior to 20 September 1985, so that any capital gain or loss they might otherwise make is disregarded under subsection 104-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following period:

1 July 2009 - 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

The taxpayers each own separate freehold farming property (the land).

Their interests in that land were entirely acquired by them prior to 20 September 1985.

A company is the holder of an electricity generation license issued pursuant to the relevant legislative provisions.

The company plans to construct and operate a system on properties adjoining the land. As part of the project the company will need to infrastructure on parts of the land owned by the taxpayers.

An easement is to be created by agreement between the parties, however, the company has the legal capacity to compel land owners to grant an easement under the relevant legislative provisions.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 160M(6)

Income Tax Assessment Act 1997 Subsection 104-10(5)

Income Tax Assessment Act 1997 Section 104-35

Reasons for decision

Summary

CGT event A1 will occur on the granting of the easement, a disposal of part of your land. You acquired the land prior to 20 September 1985, as a result subsection 104-10(5) of the ITAA 1997 applies to disregard any capital gain resulting from the disposal.

Detailed reasoning

Taxation Rulings IT 2561, TR 95/35, TR 97/3 and Taxation Determination TD 93/235 refer to implications under the Income Tax Assessment Act 1936 (ITAA 1936). The ITAA 1997 applies to assessments for the 1998-1999 and later income years. No change to the taxation treatment of easements occurred in the rewrite of the provisions from the ITAA 1936 to the ITAA 1997.

Compensation payments

Taxation Ruling TR 95/35 discussed the treatment of compensation receipts for capital gains tax and provides for a look-through approach to identify the most relevant asset, in order to determine the asset to which the compensation amount is most directly related. The underlying asset is the asset that is disposed of which directly leads to the payment of the amount of compensation.

Paragraph 4 of TR 95/35 states that:

If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation.

Though paragraph 2 of TR 95/35 states that:

The ruling does not consider amounts received for grants of easements - these are covered in detail in IT 2561, TD 93/235 and TD 93/236.

Easements in general

Taxation Ruling IT 2561 defines an easement as a right over someone else's land or property and provides that an easement is an asset created at the time it is granted. TD 93/235 states that the granting of an easement constitutes the disposal of an asset by the grantor.

Usually the most appropriate CGT event to occur at this time is CGT event D1 creating contractual or other rights under section 104-35 of the ITAA 1997. A capital gain from a CGT event D1 is not a discount capital gain, as the easement is created at the time of the agreement.

Easements which can be created by compulsory acquisition

Easements which can be created by compulsory acquisition are considered differently to general easements.

Taxation Ruling TR 97/3 at paragraph 4 states:

Compensation in respect of an easement created by statute in favour of a public authority cannot be said to have been received for the grant of the easement. The Land Acquisition (Just Terms Compensation) Act 1991 (NSW) and similar Acts in other jurisdictions enable public authorities to take land or an interest in land (including an easement) for specified purposes and confer on the affected landowner a right to compensation. In these circumstances, the landowner cannot be said to have created an asset as required for subsection 160M(6) of the Act to apply. The easement is created by operation of the relevant statute and is vested in the public authority. This constitutes a compulsory acquisition of the easement.

Compensation received by a landowner is accepted as consideration received for the part disposal of the underlying asset (the land). The amount is not consideration received for the disposal of any other asset, such as the right to seek compensation. TR 97/3 paragraph 8.

TR 97/3, at paragraphs 9 and 10, provides the Commissioners view on easements granted to a public authority, which has the statutory power to compulsorily acquire the easement, but acquires the easement by agreement with the landowner. As the public authority has the power to compulsorily acquire the easement, if it chooses, the amount received takes on the same character as compensation for a compulsorily acquired easement. It is payment for a part disposal of land.

Paragraph 11 of TR 97/3 provides the Commissioners view on granting an easement to an entity without any statutory power to acquire the easement. The grant of an easement in this case, where the grantee does not have any statutory power to acquire the easement, constitutes the creation and disposal of an asset to which subsection 160M(6) of the ITAA 1936 would apply (CGT event D1).

Application to your circumstances

You have entered into an in principle voluntary agreement with the company to grant an easement over your property. The company is to pay you compensation in return for the easement.

The company is the holder of an electricity generation license issued pursuant to the relevant legislative provisions.

If an agreement could not have been reached the company has the legal capacity to acquire compulsorily an easement for the purposes of constructing infrastructure under the relevant legislative provisions.

As the company is the holder of an electricity generation license issued under the relevant legislative provisions, the company is considered an authority holding the power to compulsorily acquire the easement, if it chooses. As a result, the amount received takes on the same character as compensation for a compulsorily acquired easement.

Compensation for a compulsorily acquired easement is treated as a payment for a part disposal of land (TR 97/3). CGT event A1 occurs. Under subsection 104-10(5) of the ITAA 1997 a capital gain is disregarded if you acquired the asset prior to 20 September 1985.

Conclusion

Based on the facts and your submission, CGT event A1 will occur on the granting of the easement, a disposal of part of your land. You acquired the land prior to 20 September 1985, as a result subsection 104-10(5) of the ITAA 1997 applies to disregard any capital gain resulting from the disposal.