Avoiding the flood — tax issues with water rights in agribusiness

Background

The popularity of water as a treasured useful resource in Australia has led to a proliferation of statutory licensing schemes all through our numerous states and territories. In lots of circumstances, a water license will characteristic as a major asset of a typical main manufacturing enterprise. Furthermore, main producers are more and more changing into concerned in transactions and dealings involving water rights. These embrace, for instance, the sale of water licenses as a part of an overarching land and enterprise sale, the buying and selling of water rights or the switch of water rights between associated entities in the middle of restructuring non-public teams.

It’s due to this fact crucial for advisers performing for main producers to have an understanding of the broader legislative regime governing water rights, in addition to the actual taxation therapy afforded to water rights beneath the earnings tax laws.

Authorized framework

Widespread regulation

Traditionally, landowners have had widespread regulation rights to make use of the water flowing on to their land, to extract water from underground sources and from rivers or streams flowing via or adjoining to their land (often known as “riparian water rights”).2 These rights had been inseparable from the land and had been essentially transferred upon the conveyance of the land. The one limitation on the quantity of water that could possibly be extracted was to not intrude with the cheap utilization of different landowners possessing such rights. Furthermore, a landowner might haven’t any higher proper to water than their curiosity within the land allowed.

Water rights didn’t exist as a definite authorized idea and had been as a substitute a part of the bundle of rights related to land possession.3

Statutory licenses

The widespread regulation has been largely changed by laws in all states and territories4 that present complete statutory schemes for the regulation of water assets by the issuing of water licenses. This consists of water assets in main river programs such because the Murray–Darling Basin and extra localized water assets comparable to aquifers and lakes.

On the whole phrases, the holder of a water license has the proper to extract a sure quantity of water from a specified water useful resource for a prescribed use on the phrases and circumstances of the license. These water assets would possibly embrace a water course, floor water, springs, dams and different water works.

Related state and territory authorities departments preserve water registers that file and preserve details about water rights and their possession. Nonetheless, not like property registers, there isn’t a overarching idea of infeasibility of title utilized to water rights registered on a water register.

Water buying and selling

The amount of water that may be extracted from a selected water supply is a crucial time period of the license. This quantity is expressed because the water entitlement, being the everlasting entitlement to a sure quantity of water. The proportion of the entitlement that the license holder could use in a water 12 months is known as the allocation. The allocation is topic to vary, relying on water availability, environmental stream necessities and related state and federal legal guidelines. The allocation, entitlement and/or water license are all commerce in a position. In New South Wales, Victoria and South Australia, water rights may be bought and bought on a everlasting or non permanent foundation by each landowners and non-landowners.

Water buying and selling is most notable inside the Murray–Darling Basin, which is Australia’s most energetic water market. A lot of water exchanges have now emerged offering a platform upon which water rights may be traded inside the basin with ease.

Water rights as authorized property

The separation of water rights from actual property gives a foundation for water rights to be considered authorized property.5 Certainly, the laws in some jurisdictions is very instructive on this situation. For instance, in South Australia, each water licenses and water allocations are deemed to be:

“private property and should go to a different in accordance with the provisions of the [Natural Resources Management Act 2004] or, topic to this Act, in accordance with another regulation for the passing or property.”6

The New South Wales laws, though not particularly stating that water rights are property, gives for a system that treats water rights in a fashion much like actual property. As an example, the New South Wales laws permits for mortgages and caveats to be registered in opposition to water licenses.7 Comparable provisions exist in each South Australia and Victoria, however the related provisions in South Australia are, as on the date of writing, but to start.

The popularity of water rights as having a separate authorized existence from the land to which these rights relate is key to the taxation therapy of water rights beneath the earnings tax laws, which is explored under.

Taxation implications

Income or capital account

The flexibility for license holders to have interaction in water buying and selling actions necessitates an evaluation of whether or not features constructed from the sale or switch of water rights could give rise to income features moderately than capital features.

Income features are probably assessable as peculiar earnings beneath s 6-5 of the Earnings Tax Evaluation Act 1997 (Th) (IT AA 1997) and naturally wouldn’t qualify for any of the current concessions relevant to capital features, together with the final 50% low cost.8

There additionally stays the likelihood that licenses and allocations could possibly be handled as buying and selling inventory if transactions had been notably frequent. It’s not inconceivable {that a} taxpayer concerned in common and systematic water buying and selling actions could possibly be considered conducting a enterprise of dealing in water entitlements. There was appreciable progress within the market of public corporations, fund managers and different giant organizations shopping for and promoting water rights. Though a major proportion of these belongings could also be leased, some are turned over in the middle of buying and selling.

It might even be attainable for an remoted transaction involving the acquisition of a water entitlement with an intention to revenue on its sale to provide rise to peculiar earnings.9

For essentially the most half, nonetheless, water rights owned by main producers are prone to be considered held on capital account and will due to this fact solely give rise to taxation beneath the capital features tax (CT) regime.