Capital gains tax: Water rights - permanent transfer of share and extraction components of access licence - CGT event A1

Does the permanent transfer by the taxpayer of rights in accordance with section 71D of the Water Management Act 2000 (NSW) (WMA), in relation to the share and extraction components of an access licence, constitute a CGT event A1 within the terms of subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The permanent transfer by the taxpayer of rights in accordance with section 71D of the WMA, in relation to the share and extraction components of an access licence, constitutes a CGT event A1 within the terms of subsection 104-10(1) of the ITAA 1997.

The taxpayer holds an access licence under section 63 of the WMA. The access licence consists of share and extraction components as defined in subsection 56(1) of the WMA.

The taxpayer permanently transfers 100% of the value of the share and extraction components in accordance with section 71D of the WMA to the holder of another access licence. The share and extraction components of the taxpayer's access licence are of zero value after the transfer.

Subsection 104-10(1) of the ITAA 1997 states that CGT event A1 happens if you dispose of a CGT asset. Under subsection 104-10(2) of the ITAA 1997, you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

Under subsection 108-5(1) of the ITAA 1997, the term 'CGT asset' is defined as: (a) any kind of property; or (b) a legal or equitable right that is not property.

Under subsection 108-5(2) of the ITAA 1997, the term 'CGT asset' includes part of, or an interest in, an asset referred to in subsection 108-5(1) of the ITAA 1997.

Under subsection 960-100(1) of the ITAA 1997, an entity is defined as any of the following: (a) an individual; (b) a body corporate; (c) a body politic; (d) a partnership; (e) any other unincorporated association or body of persons; (f) a trust; (g) a superannuation fund.

The permanent transfer of legal rights from the taxpayer to another entity in accordance with the procedure set out in section 71D of the WMA, constitutes a change in the ownership of those rights. The legal rights themselves are CGT assets within the terms of subsection 108-5(1) of the ITAA 1997. It follows that CGT event A1 happens pursuant to the permanent transfer of those rights.