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Ruling
Subject: Capital gains tax (CGT) implications of granting an easement
Question 1
Will a CGT event happen when you grant an easement?
Answer
Yes.
Question 2
Are you entitled to a partial exemption on any capital gain or capital loss that you make when you grant an easement?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2014
Year ending 30 June 2015
The scheme commences on:
1 July 2013
Relevant facts and circumstances
Some time after 20 September 1985, you purchased a property.
The property is over two hectares in size.
The property was rented from the date of purchase until a number of years later.
After you ceased renting it, you moved into the property and it has been your main residence ever since.
You are not registered for GST, you do not hold an ABN and are retired.
No business has been conducted on the property at any time since you purchased it.
You have used the property as a lifestyle residence with a hobby being carried on since you moved into it.
You have spent an amount on improving the access road, building facilities in relation to your hobby activity and pasture improvement.
You have been approached by a public authority who is seeking an easement over your land in order to construct new power lines.
The public authority has offered you compensation for your granting the easement.
At this stage it appears that you and the public authority may come to a voluntary agreement, however the public authority has the power to compulsorily acquire the easement under a legislative Act. The public authority has advised you that they will act on this power to compulsorily acquire the easement if no agreement can be reached.
You have chosen to apply the extension to the main residence exemption to your circumstances.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 102-20
Income Tax Assessment Act 1997 - Section 104-25
Income Tax Assessment Act 1997 - Section 104-35
Income Tax Assessment Act 1997 - Section 118-110
Income Tax Assessment Act 1997 - Section 118-185
Income Tax Assessment Act 1997 - Section 118-240
Income Tax Assessment Act 1997 - Section 118-245
Income Tax Assessment Act 1997 - Section 118-250
Income Tax Assessment Act 1997 - Section 118-255 and
Income Tax Assessment Act 1997 - Section 118-260.
Reasons for decision
Where a taxpayer grants an easement over land there are a number of CGT events that may occur. These events include CGT event D1 (creation of contractual or other rights) and CGT event C2 (ending of an intangible asset).
There are a number of Taxation Rulings and Taxation Determinations that may be relevant where a taxpayer grants an easement over part of their land including:
· Taxation Ruling IT 2561 - grants of easements, profits a prendre and licences,
· Taxation Determination TD 93/235 - how are grants of easement treated for the purpose of the CGT provisions of the Income Tax Assessment Act 1936 (ITAA 1936)? and
· Taxation Ruling TR 97/3 - compensation received by landowners from public authorities.
These Taxation Rulings and Determinations confirm that the Commissioner takes the view that CGT event D1 applies to the voluntary grant of an easement. However, CGT event C2 applies to the compulsory acquisition of an easement by a public or government authority.
CGT event C2 applies on the basis that the compulsory acquisition of an easement involves the surrendering or relinquishing of rights over the land rather than the creation of rights over land. Furthermore, this is regardless of whether the acquisition may occur by way of agreement or negotiation. Where the public authority has the power to compulsorily acquire the land, any agreement made by negotiation is taken to have been a compulsory acquisition.
In your circumstances, CGT event C2 will happen when you enter into an agreement the public authority.
However, sections 118-240 to 118-260 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the CGT main residence exemption (section 118-110 of the ITAA 1997) is extended to cover a CGT event that is a compulsory acquisition or other involuntary realisation of land or structures that are adjacent to a main residence. This extended exemption applies where part of a main residence, the part being some or all of its adjacent land or structures, is compulsorily acquired (or subject to a similar arrangement) without the dwelling itself being compulsorily acquired. The exemption also applies where certain rights over adjacent land are compulsorily created or varied, for example the grant of an easement.
In most circumstances, the extended exemption is conferred automatically - there is no choice involved where all of the conditions to obtain the exemption are met. However in situations where the adjacent land associated with the property is greater than two hectares then you can choose whether or not to apply the exemption.
Where you make the choice to apply the extended exemption there is a reduction in the "maximum exempt area" of land available for any further applications of the main residence exemption. In other words, the two hectares of adjacent land normally exempted as a result of the main residence exemption is reduced by the area of land to which the exemption has already been applied.
In situations, where the property has been your main residence for only part of your ownership period, for example where you have rented the property out, only a partial exemption will apply. Any capital gain or capital loss will need to be calculated by applying the following formula;
Capital gain or loss amount x number of non main residence days Total days in your ownership period |
In your situation, you have chosen to apply the extended exemption to your circumstances. As you rented the property for a period of time, the property was your main residence for only part of your ownership period and accordingly you will only be entitled to a partial exemption. Any capital gain or capital loss will need to be using the above formula.
Further information in relation to calculating a capital gain or capital loss is available on our website at www.ato.gov.au.