Tax Tip 256: CGT on granting an easement

Discussion in 'Accounting & Tax' started by Terry_w, 4th Dec, 2019.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Granting an easement or right of way can result in a CGT being triggered as it is considered to be CGT even D1. This is the case even if the property was the main residence.

    CGT D1 is covered by section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997).


    Example

    Homer owns a property which is his main residence and he grants an easement to a neighbour to allow them easier access to their property located at the rear. The neighbour pays Homer $40,000 for this easement and this entitles them to be able to use a driveway up the side of Homer’s place.

    Homer has a $40,000 capital gain now, less the cost base – which would probably be just the legals.


    See TD 2018/15

    Income tax: capital gains: does CGT event D1 happen if a taxpayer grants an easement, profit à prendre or licence over an asset? Legal Database
     
  2. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes its a area which upsets people when they find out
    1. The home (land) is subject to CGT and
    2. There is no discount

    profit à prendre : An interesting concept which seems to have no english name despite its common law application. So veins of gold are found on my house lot. BHP Billiton offer me a sum of $1m to excavate under my house and mine the gold.

    Examples of profit à prendre include rights to do the following on another persons land:
    • graze stock
    • plant and harvest crops
    • quarry stone, sand or gravel, or
    • take timber.

     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I am no property lawyer, but seem to remember, vaguely from law school, that you don't own deep down under the soil, that belongs to the crown. You also don't own too far up in the air either.
    But a mining company could give you compensation for subsidence under your house. But not sure on the tax treatment of that off the top of my head.

    I think you examples of the profit à prendre would be the most common ones. e.g. Bart buys a 100 acres of forest and then sells Barney the right to come and harvest the trees for $20,000.
     
  4. Scott No Mates

    Scott No Mates Well-Known Member

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    @Terry_w - has Homer granted an easement or a Right of Way, totally different usages and meanings (I just a pedant :oops:)

    Does the CGT event arise if the property is pre-Sept 1985 (ie pre CGT)?
    Does it become a CGT event because it is a dealing with the land (and this will ultimately affect the sale price of the land by a reduction in the sale price in the future and reduced CGT at that point in time) or should it be treated as income for a one-off event?

    This also leads on to a more current topic of RMS compulsory acquistion of stratums below properties (eg around West-connex, North-connex, M12, M5 etc) where no compensation is payable to the owner as the Land Acquisition (JTC) Act 1991 for the taking of land which is not disturbed in the course of the works however it will result in a dimunition of the owner's value.
     
    Last edited: 4th Dec, 2019
  5. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Compulsory full or partial acquisitions are dealt with are a different CGT event. The right of way / easement occurs at the time the right is granted so a pre-CGT asset is affected. The CGT asset is the right, not the land. ie D1 is a creation of a right. The gain is the capital proceeds from creating the right less the incidental costs of creating the right. And its not discounted since the right is granted "today"

    "it will result in dimunition" probably isnt always true.
     
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  6. Scott No Mates

    Scott No Mates Well-Known Member

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    If you had a choice between two identical properties, one had a restriction due to a subterranean stratum and the other didn't have such impediment, there would be a difference in value for the 'percieved' loss even if the statum was 40m below the land.
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    From a tax point of view it doesn't matter I think. A right of way could be an equitable easement too. Not a property lawyer so can't say too much on this.
     
  8. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    IDK...Our office now has a motorway approx 50-65metres below it (NorthConnex) that is yet to open. We are on solid sydney sandstone. No noise, no vibration, no emissions near us. When Pennant Hills Rd goes underground it will get quieter here (most trucks are obliged to use tunnel) and the tunnel wont have any effect. I believe it will be a quieter main road and enhance values. Loads of new resi builds are going up based on this. The large Macca's opposite the Head Office is slated to close or rebuild smaller with the lost traffic - Thats a plus.

    The title has no notations on it regarding the tunnels - too deep.

    I would not want a shallow tunnel or entry ramp etc of course. Or a motorway across the road. Agree that will impact.
     
  9. Scott No Mates

    Scott No Mates Well-Known Member

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    upload_2019-12-4_14-49-18.png

    If you look hard enough, you will find it.

    As for the price effect, it may be of benefit not to have the traffic going near the property.
     
  10. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Interesting. Just checked the title. Nothing. Maybe some depth limit ? I checked and its approx 75metres below. Oh and this is strata with a basement carpark. Time delay for it going to title ?
    The value effect here is up. But others I would agree will be down. I recall a thread here for a site backing the M1 motorway that was adjacent to where the tunnel exists. It would be badly affected.
     
  11. Scott No Mates

    Scott No Mates Well-Known Member

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    @[email protected] There are a couple of other citations on the CT which are shown below.

    upload_2019-12-4_17-10-28.png

    As for stratum below the strata block, I daresay that you would need to search the common property lot but @bmc would probably steer us all in the right direction.

    My solicitor did say that it is not easy to find that there is a subterranean stratum as it is not always apparent on a search.

    Not sure about a delay in notification, this was notified in May 19 for Westconnex and is already showing, Pennant Hills Road/North Connex goes back a few more years and may predate the latest amendments to the Act (so stratum acqusisition without compensation was not envisaged at the time).
     
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