Have you considered Capital Gains Tax when Granting Easements?
April 19, 2023
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On 31 October 2018, the Australian Taxation Office (“ATO”) finalised Tax Determination 2018/15 (“Determination”). The Determination considered whether or not a Capital Gains Tax (“CGT”) event arises if a taxpayer grants an easement or license over an asset.
It is now clear that the ATO considers the granting of an easement as the creation of rights in respect of an asset and a trigger for CGT Event D1.
Example from TD 2018/15:
Lisa bought a property on 1 January 1985 (pre capital gains tax). On 1 December 2017 she granted an easement over the property to her neighbour and received $40,000 for doing so. Lisa incurred $1,000 in legal expenses in relation to the grant of the easement.
Lisa will make a capital gain of $39,000 in respect of the grant of the easement [capital proceeds $40,000 less incidental costs $1,000]. The capital gain is not a discount capital gain.
Even though Lisa acquired the land over which the easement was granted prior to 20 September 1985, she cannot disregard the capital gain from the grant of the easement. Further, Lisa could not disregard the capital gain even if the property was her main residence.
As a result of the Determination, the following are important points to remember in regards to easements:
- No part of the asset’s cost base can be taken into account in working out the amount of the capital gain or loss. This means that the underlying cost base of the property in the above example is not relevant;
- A capital gain or loss from the grant of the easement cannot be disregarded merely because the underlying asset was a pre CGT asset. In the above example, CGT is still payable despite the underlying property being a pre CGT asset;
- The capital gain from the grant of the easement is not a “discount capital gain” meaning there is no relief from tax and ordinary discounts or concessions afforded for other CGT Events do not apply; and
- There is no exemption from CGT even if the asset over which the easement is created is a main residence. In the above example, the property being a main residence would be irrelevant.
It is also important to note that TD 2018/15 confirms that the Determination applies to years of income commencing both before and after its date of issue.
Therefore, if you have granted an easement prior to or post 31 October 2018, you ought to ensure you have accounted for any capital gains appropriately.
If you require assistance with any easements or easement related disputes, please contact us on (08) 9321 5451 or by email at phil@bailiwicklegal.com.au.
For further information about our legal services, please visit our website: https://www.bailiwicklegal.com.au
The above information is a summary and overview of the matters discussed. This publication does not constitute legal advice and you should seek legal or other professional advice before acting or relying on any of the content.
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