On Wed 31.10.2018, the ATO issued Taxation Determination TD 2018/15 on the CGT consequences of granting an easement, profit à prendre or licence over an asset.

In the Commissioner’s view, CGT-event D1 happens (under s104-35 of the ITAA97) when the right is created, rather than it being a s104-10 CGT-event A1 for a partial disposal of underlying asset (eg. the land leased, the land over which the easement has been granted or the land from which the right to extract minerals has been granted).

This is a similar approach taken to granting a lease, except that it has its own CGT-event: F1.

This D1 event, characterisation is not a great result for taxpayers the consequences of CGT-event D1 happening are that:

  • no part of the underlying assets cost base can be used in calculating the capital gain on creating this right (even if the taxpayer has given up some of the rights of ownership (eg. when granting an easement) or some of the physical contents of the underlying asset (eg. minerals in your land, removed under the profit à prendre right granted). The ‘capital gain’ for a D1 event, is calculated with a cost base that is limited to only the “incidental costs [ … ] incurred that relate to the event” (s104-35(3)).
  • the ‘discount capital gain’ provisions in Div 115 of the ITAA97, don’t apply (s115-25(3)(a)). This is under the provision that says that the ‘discount’ is only available on assets held for at least 12 months, and it is consistent with the approach that the relevant asset is the right just created. However, to put the matter beyond doubt ss(3)(a) expressly excludes gains under CGT-event D1.
  • the main residence exemption is not available. This is because the CGT-events, from which a capital gain could be relevantly ‘disregarded’ are set out in a list in s118-110(2(a), and D1 is not among them. The rationale is not entirely clear from the list of Events that are included, but it is probably parallel reasoning to granting leases (because the F1 event is not included either).
  • there is no CGT exemption if the right is created over a pre-CGT asset (the idea being that the gain relates to an asset being the right recently created). This is because the exemptions, in s104-35(5), where the pre-CGT exemption is found for other CGT-events, has no provision for rights created over pre-CGT underlying assets.

Neither is it clear that the Commissioner is right about the construction he adopts in this ruling.

  • the grant of some of these rights do represent a part disposal of the underlying land. A right to come onto land, sever and remove trees, involves the loss of the trees (a ‘change of ownership’ which is a ‘disposal’). This is the disposal of a part of the land, because the trees are affixed to the land. It might even be that this is the sale of the trees, as goods (not as part of the land) as the Commissioner appears to argue (in quite a contrary manner) in para 19.
  • so, which of CGT-events A1 and D1 should apply? The CGT provisions say that it is the “the [CGT-event] you use is the one that is the most specific to your situation” (s102-25(1)). The Commissioner’s ruling does not identify this issue, much less assess the correct outcome.
  • Likewise, a contract to sell land creates ‘rights’ also (a prima-facie D1 event). Why are all sales not treated as D1 events with no cost base? The answer is that s104-35(5)(b) defines a D1 event, as not happening, when “the right requires you to do something that is another *CGT event that happens” (viz: the disposal of an asset or a part of an asset). That is why the sale of land is not taxed as a D1 event (because there isn’t one). So, the issue ought be the same – why is a part disposal of the land (the trees affixed to the land), also, not a D1 event? Again, this issue is not dealt with the the Ruling.

DATE OF EFFECT: before and after its date of issue.

Withdrawn rulings

TD 2018/15 is a “refresh” of Ruling IT 2561 (Capital gains: grants of easements, profits à prendre and licences), which was withdrawn on and with effect from Wed 31.10.2018. TD 2018/15 also consolidates the following Taxation Determinations, all of which were also withdrawn:

  • TD 93/79 – Capital gains: if a taxpayer owns pre-CGT land and trees and after 19 September 1985 the taxpayer cuts the trees, are there any CGT consequences arising from the subsequent sale of the timber by the taxpayer?
  • TD 93/81 – Capital gains: a taxpayer owns pre-CGT land and trees. The taxpayer sells timber according to two post-CGT contracts: over a period of time and remove timber as and when required; and a contract for the sale of the uncut timber. How is the sale treated for CGT purposes?
  • TD 93/235 – Capital gains: how are grants of easements treated for the purposes of the CGT provisions of the ITAA 1936?
  • TD 93/236 – Capital gains: does the principal residence exemption apply to the amount received for the granting of an easement or profits à prendre over land adjacent to a dwelling?
  • TD 96/35 – Capital gains: when does a person, who on or after 21 September 1989 grants to another a right to cut and remove timber from the grantor’s land, dispose of the right? Is it when the right is granted or when the trees are felled?

[ATO website: TD 2018/15; LTN 210, 31/10/18; Tax Month – November 2018]

FJM 17.11.18


CPD questions (answers available)

  1. Does the Commissioner say that the grant of a ‘profit à prendre’ should be taxed as a CGT-event A1 or D1?
  2. Which treatment is generally more favourable?
  3. Does a CGT-event D1 happen if you create rights?
  4. Does the grant of a ‘profit à prendre’ also result in a change in ownership of the (say) trees?
  5. What CGT-event happens when there is a change of ownership?
  6. If you create rights, that requires you to create another CGT event, does a D1 event happen?
  7. Why?
  8. If two CGT-events happen, which applies (has precedence)?


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