Capital gains tax: Water rights - statutory licence rollover

Is the statutory licence rollover provided by section 124-140 of the Income Tax Assessment Act 1997 (ITAA 1997) available, when the taxpayer's water licence under Division 3 of Part 2 of the Water Act 1912 (NSW) (Water Act) is replaced with equivalent entitlements under the Water Management Act 2000 (NSW) (WMA)?

Yes. The statutory licence rollover provided by section 124-140 of the ITAA 1997 is available, when the taxpayer's water licence under Division 3 of Part 2 of the Water Act is replaced with equivalent entitlements under the WMA.

The taxpayer held a water licence under Division 3 of Part 2 of the Water Act. The WMA replaced the Water Act. Under the WMA, the taxpayer's licence under the Water Act expired, and was then replaced with equivalent entitlements.

The expired licence was replaced with an access licence and, to the extent necessary to preserve underlying rights, a water management work approval and a water use approval: • To the extent that the expired licence allowed the taking of a specified quantity of water, it was replaced with an access licence for the same quantity of water. • To the extent that it allowed the use of a water management work, it was replaced with a water management work approval for the same work. • To the extent to which the rights under the expired licence were not covered by an access licence and a water management work approval, it was replaced with a water use approval allowing the use of water on the land to which the expired licence related, subject to similar restrictions.

Section 124-140 of the ITAA 1997 provides for rollover relief in specified cases where a statutory licence is renewed or extended.

The taxpayer's licence expired under subclause 9(1) of Schedule 9 of the WMA. This expiry fell within paragraph 104-25(1)(c) of the ITAA 1997 as a CGT event C2. The licence under the Water Act was then replaced under the same sub-clause with equivalent entitlements which, being statutory rights, also satisfied the definition of 'CGT asset'.

Rollover of any gain arising under CGT event C2 is available if paragraphs (a) and (b) of subsection 124-140(1) of the ITAA 1997 are satisfied, and the licence is a statutory licence, as defined in subsection 124-140(3) of the ITAA 1997. The licence in this case meets this definition. The definition of 'statutory licence' also covers access licences, water management work approvals and water use approvals that are issued under the WMA.

The expiry of the licence under the Water Act satisfies paragraph 124-140(1)(a). The new statutory licences under the WMA are granted in respect of the same underlying activity on substantially similar terms. Ownership of the expired statutory licence is the main reason for its renewal under the WMA (paragraph (b) of subsection 124-140(1) of the ITAA 1997).

Therefore, the taxpayer qualifies for rollover relief under Subdivision 124-A of the ITAA 1997 by satisfying the conditions set out in section 124-140 of the ITAA 1997.