Edited version of private ruling

Authorisation Number: 1011834638959

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Ruling

Subject: granting of easement

Question 1

Will the granting of an easement affect the capital gains tax (CGT) free status of your pre-CGT asset under Part 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will a change in zoning from farming to residential on some areas of the property affect the CGT free status of the property?

Answer

No

Question 3

Will the CGT free status of your pre-CGT asset under Part 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) be lost if 'Area A' is sold to a developer and a portion of land between Area A and the river is vested free of charge to Council for a park?

Answer

No

Question 4

Will the CGT free status of your pre-CGT asset under Part 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) be lost if 'Area B' is sold to a developer and a portion of land between Area A and the river is vested free of charge to Council for a park?

Answer

We decline to rule. The facts are not known with reasonable certainty. General information is instead provided.

Question 5

Would purchasing adjoining land and incorporating it into your existing title affect the CGT-free status of the existing land?

Answer

We decline to rule. The facts are not known with reasonable certainty. General information is instead provided.

This ruling applies for the following period

1 July 2010 to 30 June 2014

The scheme commenced on

1 July 2010

Relevant facts

The property was jointly purchased in prior to September 1985 by Mr X and Mr & Mrs Y.

Stage 1

The Council seeks to acquire an easement through the property as part of their Wastewater Management Re-Use Project. Council has advised they won't compulsorily acquire the land and is seeking to acquire the easement by agreement. Council does have the power to compulsorily acquire the land. There is community pressure to sell as the linear park is to run along the river and to the coast, providing a benefit to the community.

The water re-use project under which the granting of this easement (Stage 1) is proposed, is currently in progress. The council has received a government grant for the proposal. Council has issued no paperwork other than the 'Water Re-Use Pipeline - Memorandum of Understanding - preliminary discussion points March 2011' which has been provided. It is expected that when the agreement is reached the final MOU document will be prepared and signed pretty well straight away.

Stages 2 and 3

This is expected to be ratified by the State Government in 2013. Council will in mid 2013 change zoning from farming to residential in areas A and B of the property.

Under this Council plan;

Area A would be sold to by you to a developer in around 5 years. The original title would remain, and this Area A land would be taken off the title. Some land between Area A and the river would be vested free of charge to Council for a park.

Area B would be sold by you to a developer in around 10+ years. The original title would remain, and this Area B land would be taken off the title. Some land between Area B and the river would be vested free of charge to Council for a park.

The 2 parcels of land are to be sold as is directly to the developer. You will not be undertaking any of the work required to develop or sell the land. The developer will then do all works necessary, including selling the blocks. The 2 parcels of land are to be developed at different times/stages. The two parcels of land have been selected by council. The blocks are not adjoining as council requires a 500 metre farming zone to be maintained between the two developments.

Purchase of adjoining property

You have the opportunity to purchase a small property adjoining your land. The block is too small to be sold as a house block. This land may in future be acquired by the council for the linear park. Because the land adjoins your property the owner will consider selling it to you. You plan to purchase this block and incorporate it into the farm title. You intend to then move the newly purchased lands title to another area of your farmland, add some existing land added to it, and then sell the newly title land as larger block.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-65

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 subsection 116-40(1)

Reasons for decision

Question 1

Summary

No, the status as a pre-CGT asset will not be affected by the granting of the easement.

Detailed reasoning

Taxation ruling TR97/3 considers the CGT consequences to a landowner who grants an easement to a public authority which has the statutory power to compulsorily acquire the easement.

The right to exclude all others is forfeited in part when the easement comes into existence. This loss constitutes the disposal of part of the underlying asset (the land).

Paragraph 10 of TR 97/3 states that the position is the same when the easement is granted via agreement when the public authority has the power of compulsory acquisition.

If the amount of compensation is received wholly in respect of the disposal of part of an underlying asset, the compensation represents consideration received on the disposal of that asset. It follows that if the underlying asset disposed of was acquired before 20 September 1985, there are no CGT consequences.

In your case, Council, a public authority, has proposed to acquire through agreement an easement through your property. You will be compensated for the granting of this easement. The Council has the power to compulsorily acquire the easement.

CGT event A1 under section 104-10 of the ITAA 1997 will happen when you grant the easement.

As you acquired your property, including the portion to be disposed of, before 20 September 1985, any capital gain or capital loss you make will be disregarded. This exemption will apply regardless of whether the disposal is as a result of a compulsory acquisition or a negotiated purchase.

The disposal only applies to this portion of your property. The rest of your property will remain as a separate asset and will retain its pre-CGT status.

Therefore, you will not be subject to CGT in relation to the granting of the easement.

Question 2

Summary

No. There is no CGT event.

Detailed reasoning

You only make a capital gain or a capital loss if a capital gains tax (CGT) event happens to a CGT asset. The gain or loss is made at the time of the CGT event. Section 104-5 of the ITAA 1997 lists a summary of CGT events.

In your case, there is no change of ownership of an asset as a result of the re-zoning. You retain ownership of the property. There is no CGT event. The status as a pre-CGT asset is not affected.

Question 3

Summary

No. The CGT free status of your pre-CGT asset will be retained if 'Area A' is sold.

Detailed reasoning

You have advised that the land that is to be re-zoned is pre-CGT land.

An asset purchased prior to 20 September 1985 loses status as a pre-CGT asset where;

· there is a change to the 'majority underlying interests' in the asset, or

· an improvement to a pre-CGT asset is made that exceeds the improvement threshold for the income year or represents more than 5% of the capital proceeds from the event.

In the scenario provided, your pre-CGT asset, a portion of your land in this case called Area A, is to be sold, unimproved, to a developer.

As you acquired your property, including the portion to be disposed of, before 20 September 1985, any capital gain or capital loss you make will be disregarded.

The disposal only applies to this portion of your property. The rest of your property will remain as a separate asset and will retain its pre-CGT status.

Question 4

We decline to rule on this question as the proposed arrangement is too far into the future such that the facts are not known with reasonable certainty. However, we provide general information below concerning this matter.

Question 5

We decline to rule on this question as the proposed arrangement is too far into the future such that the facts are not known with reasonable certainty. However, we provide general information below concerning this matter.

General information

Purchase of the adjoining land

Taxation Determination TD 8 provides that where a person owns the title to two adjoining properties, the amalgamation of the two titles does not involve any change in ownership of the land. There is no disposal of the land for CGT purposes.

If land is acquired by a taxpayer on or after 20 September 1985 that is adjacent to land the taxpayer acquired before that date, and the titles are amalgamated, the land acquired on or after 20 September 1985 is a separate CGT asset (section 108-65 ITAA1997).

Sale of the land

If one property was acquired pre-CGT and the other after 19 September 1985, there are no CGT consequences on the amalgamation but the land acquired after 19 September 1985 remains subject to the CGT provisions and the pre-CGT land remains exempt.

On a CGT event happening to the real property (eg sale of the property - CGT event A1), that CGT event happens to each separate asset comprising the property and a separate capital gain or loss calculation is necessary for each CGT asset. The capital proceeds from each CGT event are so much of the overall capital proceeds as is reasonably attributable to that event (subsection 116-40(1) ITAA 1997).

Subdivision of land

Section 112-25 of the ITAA 1997 discusses the splitting of a CGT asset, such as subdividing a piece of land. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks.

However, you may make a capital gain or capital loss if you dispose of a subdivided block. Profits from the sub division may be taxed as ordinary or statutory income under sections 6-5 or 6-10.

Profits on the sale of subdivided land may be income according to ordinary concepts within section 6-5 of the ITAA 1997 if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture.