Edited version of private advice

Authorisation Number: 1051769632194

Date of advice: 20 October 2020

Ruling

Subject: Water entitlements and Division 855 of the Income Tax Assessment Act 1997 (ITAA 1997)

Question

Are the Group's New South Wales water entitlements 'real property situated in Australia' and therefore taxable Australian real property (TARP) for the purposes of section 855-20 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

A specified period

The scheme commences on:

A specified date

Relevant facts and circumstances

Group structure

·   X Company (X Co) is a foreign tax resident.

·   X Co is the ultimate holding company of Y Limited (Y Ltd), an Australian company.

·   X Co holds 100% of all of the issued shares in Y Ltd

·   X Co holds the Y Ltd shares on capital account. The tax cost base of the Y Ltd shares is $x million.

·   Y Ltd is an Australian tax resident and the head company of the Y Ltd tax consolidated group (Y Ltd Group).

·   The Y Ltd Group includes Y Ltd and wholly owned Australian subsidiaries.

·   The Y Ltd Group operates in the agricultural sector. It has operations in NSW, where it carries on its business in Australia through its Australian subsidiaries.

·   The Y Ltd Group's assets include land, fixed plant and equipment, water entitlements and other assets (inventory, cash, moveable fixed plant and equipment, trade receivables).

·   An independent valuation (supplied with the private ruling request) valued the land and water entitlements held by the Y Ltd Group as follows:

-   Land assets = $x million

-   Water entitlements = $x million

-   Collective value = $x million

Water Entitlements:

·   Water entitlements in NSW are governed by the Water Management Act 2000 (NSW) (WMA). A Water Access Licence (WAL) is generally required to extract water from rivers or aquifiers to use for irrigation, commercial or industrial purposes.

·   The WMA manages NSW water resources through water sharing plans of which the Y Ltd Group is one of multiple WAL holders that have the ability to draw water from the same source.

·   Section 56 of the WMA entitles a holder of a WAL to specific shares/allocations in available water and to take water at specified times and rates within a water management area or from a specified source. It does not confer exclusive access to water.

·   The Y Ltd Group owns and leases a diverse portfolio of over x megalitres of water entitlements across NSW for use in its agricultural operations.

·   The WAL's held by Y Ltd Group consist of three categories (collectively the 'water entitlements' which are issued and governed by the WMA:

-   Regulated Surface Water;

-   Unregulated Surface Water; and

-   Groundwater.

·   The water sharing plans set out the rules for the sharing of a water source between water users and the environment and the rules for trading water from a particular water source.

·   The Y Ltd Group's water entitlements are separately tradeable and transferable and do not confer exclusive right or possession of the land adjoining the water source.

·   A sale of the Y Ltd shares would not affect future water allocations which accrue to the WAL, allowing the holder to sell water in their water allocation account that is surplus to their immediate needs or buy water to meet a short-term requirement.

·   The Y Ltd Group does not own the land on which a water source (which it holds a water entitlement in) is located, where the source is a river or stream.

·   Where the source is an aquifer and the Y Ltd Group owns the land above, it does not own the underlying water source.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 855-15

Income Tax Assessment Act 1997, section 855-20

Income Tax Assessment Act 1997, paragraph 855-20(a)

Income Tax Assessment Act 1997, paragraph 855-20(b)

Reasons for decision

Division 855 allows an entity to disregard a capital gain if they are a 'foreign resident' and a CGT event happens in relation to a CGT asset that is not 'taxable Australian property'.

The table at section 855-15 sets out five categories of CGT assets that are 'taxable Australian property':

1.            taxable Australian real property (section 855-20);

2.            a CGT asset that is an indirect Australian real property interest (section 855-25), and is not covered by item 5;

3.            a CGT asset used in carrying on a business through an Australian permanent establishment (PE);

4.            an option or right to acquire a CGT asset covered by items 1, 2 or 3 above; and

5.            a CGT asset that is covered by subsection 104-165(3) - where a choice is made to disregard a capital gain or loss on ceasing to be an Australian resident.

The relevant item of the Table for the purposes of this private ruling is Item 1. Section 855-20 states that:

A *CGT asset is taxable Australian real property if it is:

(a) real property situated in Australia (including a lease of land if the land is situated in Australia); or

(b) a mining, quarrying or prospecting right to minerals, petroleum or quarry materials situated in Australia.

On the facts provided, the Commissioner's view is that the Y Ltd Group's water entitlements issued under the New South Wales Water Management Act 2000 are not 'real property situated in Australia' for the purposes of paragraph 855-20(a). The water entitlements held by Y Ltd do not meet the definition of a 'mining, quarrying or prospecting right' in section 995-1, and accordingly paragraph 855-20(b) is not applicable. Therefore, the Y Ltd Group's water entitlements are not TARP for the purposes of section 855-20 of the ITAA 1997.