National water trading and taxation - Australian Water Summit - November 2004

For those who are interested in water trading in Australia, the Australian Taxation Office has a speech on its website regarding tax laws with respect to trading of water entitlements.

Points of interest:

• When water entitlement is leased, this is characterised as a form of rent.


• there would be insufficient nexus between the income derived from a temporary transfer of water entitlements and the produce of the primary production business i.e. not primary production income


• if whole of water entitlement is leased, then person is not carrying out a primary production business (but what if the land is turned into grazing instead?)


• compensation padi by government for cancellation of water entitlements is ordinary income, since it replaces loss of production from land. But if owner wasn't using the water entitlement for income producing activities, then this might be treated as CGT

Tax laws wouldn't have to be so complex if there aren't so many industry-specific tax-breaks. In particular look at how sometimes compensation from water trading is treated as Capital Gains while at other times it is ordinary income.