Easements are granted over Queensland agricultural land for a variety of reasons, such as access from land-locked blocks, utility infrastructure (water, power, gas and telecommunications), mining operations, water flow and access, fencing, grazing, and lately, for wind and solar farm operators to establish their footprint.
Whether involuntary (most often Government-driven), or voluntary, private agreements, compensation is ordinarily paid to the landholder.
In deciding if and how to proceed, a few critical commercial questions need to be borne in mind:
In Queensland, the creation, grant and issue of an easement is an ‘acquisition of a new right’ that is a dutiable transaction (with ‘land’ as the underlying dutiable property) and must be assessed for transfer duty.
While duty is typically levied on the higher of the consideration paid or market value, easements granted for nil consideration are generally exempt.
The transfer of an existing easement is a transfer of land, and not the acquisition of a new right (since it already exists), and will also attract duty. This means that if one or more assignments of an easement are contemplated, a series of transfer duty payments may have to be made, while the servient land has not attracted a single dutiable transaction.
Amounts received by a Landholder for granting an easement, a licence, or a profit a prendre (the right to take timber etc) could be ordinary income or capital but can produce significantly different tax outcomes. While amounts that are periodic, regular or recurrent, are more likely to be ordinary income, if the amounts are paid to compensate the landholder, and to make good the estimated decrease in the value of the land, the courts have said that these payments were capital amounts (and not ordinary income, rent, licence fees, or royalties).
The ATO have published several rulings declaring that amounts received voluntarily for granting easements are classed as CGT Event D1, and involuntary grants (such as government easements or resumptions) are classed as CGT Event A1 (Tax Determination TD 2018/15 replacing IT 2561 and TD 93/235).
One result of voluntary easements granted by Landholders being classed as CGT Event D1, is that any capital gain the landholder makes cannot be considered pre-CGT, even if the underlying land is pre-CGT. Secondly, no 50% discount is available for the gain even if the underlying land has been held more than 12 months.
In fact, the only possibility of applying tax concessions to the payments received is for those Landholders who can access the Small Business CCT concessions, if the turnover of the group is less than $2 million (or the net assets are less than $6 million – for owner operators), or where the capital gains might be sheltered by previously unavailable capital losses.
If an amount of compensation is received by a taxpayer wholly in respect of permanent damage or reduction in the value of a post-CGT underlying asset (such as the land), and there is no disposal of that underlying asset at the time of the receipt, and no separate asset is created (such as an easement, restrictive covenant or profit a prendre) the ATO consider that the amount represents a recoupment of all or part of the total acquisition costs of the asset.
In these cases, the compensation payment is not assessable. Instead, the CGT cost base of the land is reduced by the compensation payment, and the amount is essentially converted into a future capital gain (or reduced capital loss), that may attract various CGT concessions (Taxation Ruling TR 95/35 para. 6 ff.).
If your business is considering the impacts of an easement over your land, and you want to examine options as you move into the future, please contact your usual Exant Adviser or alternatively one of our specialists on 07 3218 3900 or via the form below.
Authors: Dean Rallison & Tim Mouritz