Avoiding the flood — tax issues with water rights in agribusiness

The recognition of water as a valuable resource in Australia has led to a proliferation of statutory licensing schemes throughout our many states and territories. In lots of scenarios, a water license will function as a substantial asset of the standard key production business. Furthermore, main producers are increasingly getting to be involved in transactions and dealings involving water rights. These contain, by way of example, the sale of water licenses as element of an overarching land and enterprise sale, the trading of water rights or even the transfer of water rights concerning associated entities during the course of restructuring private groups.

It is actually as a result crucial for advisers acting for principal producers to get an comprehending of the broader legislative regime governing water rights, in addition to the specific taxation treatment method afforded to water rights beneath the revenue tax legislation.

Legal framework

Prevalent law

Historically, landowners have had common law rights to use the water flowing on to their land, to extract water from underground sources and from rivers or streams flowing by means of or adjacent to their land (recognized as “riparian water rights”).two These rights had been inseparable in the land and have been always transferred upon the conveyance with the land. The only limitation over the sum of water that can be extracted was not to interfere with the realistic usage of other landowners possessing such rights. Moreover, a landowner could have no greater correct to water than their interest within the land allowed.

Water rights didn’t exist as being a distinct legal concept and have been as an alternative component with the bundle of rights connected to land ownership.3

Statutory licenses

The frequent law continues to be largely replaced by legislation in all states and territories4 that give thorough statutory schemes for the regulation of water resources by the issuing of water licenses. This consists of water resources in main river methods which include the Murray-Darling Basin and even more localized water resources for instance aquifers and lakes.

Generally terms, the holder of a water license has the appropriate to extract a specific volume of water from a specified water resource to get a prescribed use to the terms and disorders of your license. These water assets may well involve a water program, ground water, springs, dams together with other water operates.

Pertinent state and territory government departments preserve water registers that record and keep information about water rights and their ownership. Nonetheless, as opposed to property registers, there isn’t any overarching notion of infeasibility of title utilized to water rights registered on the water register.

Water trading

The volume of water which can be extracted from a particular water supply is surely an important term of your license. This volume is expressed as the water entitlement, becoming the long lasting entitlement to a certain volume of water. The proportion on the entitlement that the license holder might use within a water yr is known as the allocation. The allocation is topic to change, based on water availability, environmental flow needs and appropriate state and federal laws. The allocation, entitlement and/or water license are all trade ready. In New South Wales, Victoria and South Australia, water rights can be bought and offered on a long lasting or short-term basis by the two landowners and non-landowners.

Water trading is most notable inside the Murray-Darling Basin, and that is Australia’s most lively water industry. A variety of water exchanges have now emerged providing a platform on which water rights is usually traded inside of the basin with ease.

Water rights as legal residence

The separation of water rights from true home presents a basis for water rights to become thought to be legal house.five Without a doubt, the legislation in some jurisdictions is highly instructive on this situation. By way of example, in South Australia, the two water licenses and water allocations are deemed for being:

“personal residence and could pass to an additional in accordance with the provisions of your [Natural Sources Management Act 2004] or, subject to this Act, in accordance with every other law to the passing or house.”6

The brand new South Wales legislation, despite the fact that not especially stating that water rights are home, supplies for any program that treats water rights inside a method similar to actual house. For instance, the brand new South Wales legislation permits for mortgages and caveats to become registered towards water licenses.7 Equivalent provisions exist in each South Australia and Victoria, but the related provisions in South Australia are, as on the date of writing, nonetheless to commence.

The recognition of water rights as obtaining a separate legal existence through the land to which those rights relate is fundamental for the taxation therapy of water rights beneath the cash flow tax legislation, which is explored under.

Taxation implications

Revenue or capital account

The capacity for license holders to engage in water trading activities necessitates an assessment of no matter whether gains made from the sale or transfer of water rights may well give rise to income gains instead of capital gains.

Revenue gains are possibly assessable as ordinary earnings beneath s 6-5 on the Earnings Tax Assessment Act 1997 (Th) (IT AA 1997) and naturally would not qualify for any in the current concessions applicable to capital gains, together with the common 50% discount.8

There also remains the chance that licenses and allocations could possibly be handled as trading stock if transactions have been particularly regular. It’s not inconceivable that a taxpayer associated with standard and systematic water trading actions may be regarded as conducting a company of dealing in water entitlements. There has become considerable growth during the marketplace of public companies, fund managers and also other significant organizations purchasing and promoting water rights. Despite the fact that a substantial proportion of those assets may very well be leased, some are turned above inside the program of trading.

It could also be attainable for an isolated transaction involving the acquisition of a water entitlement with an intention to revenue on its sale to give rise to ordinary income.9

To the most component, having said that, water rights owned by primary producers are probable to be thought to be held on capital account and should therefore only give rise to taxation beneath the capital gains tax (CT) regime.