27 February 2009

Capital Gains Tax Relief for Transformation of Water Rights

The Assistant Treasurer, Chris Bowen MP, today announced that the Government will provide capital gains tax (CGT) roll‑over relief for irrigators who transform their entitlement to water under an irrigation right held against an irrigation infrastructure operator into an individual water entitlement.

This roll‑over will facilitate transformation arrangements allowed under the new water market rules that will be made under the Water Act 2007 by deferring the CGT consequences of the transformation for irrigators until they subsequently deal with their individually held water entitlement. This change will apply to CGT events that happen on and after 1 July 2008.

Transformation is a voluntary process by which an irrigator permanently transforms their entitlement to water under an irrigation right against an irrigation infrastructure operator into a water access entitlement that is held by someone other than the operator, including an individual water entitlement held by the irrigator.

In the absence of this roll‑over, irrigators who choose to transform their entitlement to water under their irrigation right would typically incur immediate CGT consequences on the transformation. However, the roll‑over will not be available where the entitlement to water under an irrigation right against an irrigation infrastructure operator is transformed into the hands of a third party (rather than the irrigator).

The Government will also allow termination and exit fees to be recognised when calculating a capital gain or loss on an asset by including these costs in the asset's cost base. This change, also applying to CGT events that happen on and after 1 July 2008, will be available for all assets and not just those relating to the irrigation industry.

Initial consultation will be undertaken on the design of these amendments — a consultation paper providing further information about this proposal is available on the Treasury website. An exposure draft of the legislation will be released for consultation on the Treasury website after the initial consultation.