Income tax: capital gains: does CGT event D1 in section 104-35 of the Income Tax Assessment Act 1997 happen if you receive money or property for withdrawing an objection against a proposed land development?

Yes. If you receive money or property for withdrawing your objection against a proposed land development, and the receipt is not for permanent damage or reduction in value caused to your property by the development, CGT event D1 (about the creation of contractual or other rights) happens in section 104-35 of the Income Tax Assessment Act 1997 .

In undertaking not to exercise your right to object, you create a legal or equitable right in the developer.

The replacement explanatory memorandum to the Taxation Laws Amendment Bill (No 4) 1992 provides examples where subsection 160M(6) of the Income Tax Assessment Act 1936 (which section 104-35 replaces) applies. One such example is if a person agrees to 'withdraw an objection to a town-planning application'.

Taxation Ruling TR 95/35 outlines the capital gains tax consequences for a person who receives compensation for permanent damage or reduction in value caused to their property by a development. Compensation can include monetary amounts and benefits in kind.

Mary plans to construct units on her property, which is in Bill's neighbourhood. No damage or reduction in value will be caused to Bill's property by the development but Bill has lodged an objection against it. Mary enters into a contract with Bill to withdraw the objection and pays Bill $1,000. Event D1 happens.

Company A plans to commence a commercial development next door to Samantha's investment property. It proposes to build a 20 foot wall that will be aesthetically unappealing and will permanently reduce the value of Samantha's property. Samantha lodges an objection against Company A's proposal. Company A pays Samantha $15,000 to withdraw her objection. The 'look through' approach in Taxation Ruling TR 95/35 would be adopted to identify the most relevant asset to which the receipt relates. If the receipt can be characterised as compensation for the permanent reduction in value of the underlying asset, Samantha's property, section 104-35 does not apply to assess the $15,000 payment. Rather, a cost base reduction would be made in relation to Samantha's property in accordance with TR 95/35. If the receipt can be characterised as a receipt for withdrawing the objection, CGT event D1 happens.