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Edited version of your written advice
Authorisation Number: 1051192134587
Date of advice: 28 February 2017
Ruling
Subject: Easement
Question 1
Does a capital gains tax (CGT) event happen in respect of the easement created on your residential property?
Answer
Yes.
Question 2
Can you include the market value of the easement land as part of the cost base?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 20YY
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You received a request from a business entity for an easement to be created on your residential property.
There is no transfer of property between parties. The residential property title has changed to include an easement registered with the local government body as agreed by both parties.
An easement has been created in the residential property in the 20XX/YY income year.
The easement was created as the business entity beside the residential property requested an easement for stormwater runoff away from the business entity.
The easement remains the property of the residential property.
The transaction was voluntary and there was no obligation on either party to improve stormwater runoff.
Consideration was a one-off payment.
There are no ongoing rights or obligations on either party after the creation of the easement. The easement land is unusable and will remain clear of any encumbrances.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 104-35
Income Tax Assessment Act 1997 Subsection 104-35(3)
Reasons for decision
A capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a CGT asset. Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. An easement is a right over someone else's land or property. Therefore, the easement over your property is a CGT asset.
CGT event D1 happens if a taxpayer creates a contractual right or other legal or equitable right in another entity (section 104-35 of the ITAA 1997). CGT event D1 will occur upon the creation of the easement. The time of the event is when you enter into the contract or create the easement.
It is considered that when event D1 occurs when granting an easement there is not a part disposal of land. Rather, there is the creation of a new asset/interest in the land.
A capital gain or capital loss is made at the time of the event. You make a capital gain if the capital proceeds received from the creation of the right are more than the incidental costs you incurred that relate to the event and similarly, you make a capital loss if those capital proceeds are less (subsection 104-35(3) of the ITAA 1997).
In your circumstances, the time of the D1 event was when the easement was granted. The capital proceeds are your share of the amount received as compensation.
As you are not disposing of a portion of your land the market value of the easement land is not included as part of the cost. Therefore, only the incidental costs of granting the easement (legal fees, accountancy fees, valuation fees etc.) can be included as part of the cost base of the easement.
Accordingly, you will make a capital gain on the granting of the right if the capital proceeds for the easement exceed your incidental costs and a capital loss if your capital proceeds are less than your incidental costs.