Tradeable water rights and arrangements in relation to tradeable water rights will be excluded from the definition of a "derivative" in Chapter 7 of the Corporations Act 2001 (Cth), if the proposal in the exposure draft Corporations Amendment (Water Trading Exemptions) Regulation 2013 is accepted, giving greater certainty to the regulatory regime applicable to trading water rights.

A "derivative" is an arrangement under which a party to the arrangement may be required to provide consideration at a future time, and the amount of the consideration may change by reference to something else.

The effect of a water right being a derivative is that it would be regulated under the Corporations Act as a "financial product", and regulation of services (such as carrying on a business of advising, broking, dealing, making a market or operating a market) provided in relation to the water rights as "financial services".

The tradeable water rights which the amendments will cover include:

  • water access licences: a right or permission granted by the Crown to withdraw a unit of water which is available in circumstances where the withdrawal or harvesting of the water would otherwise be prohibited; and
  • water allocations: a volume of water credited to a water access licence allocation account for a particular year.

Currently, careful analysis is needed to determine if the trading of a water allocation or the water licence to which it relates is a derivative.

Excluding tradeable water rights, and arrangements in relation to them, from the definition of a "derivative" will remove any uncertainty about whether a water right is subject to regulation under the Corporations Act.

Treasury has asked for submissions in relation to the proposed amendments to be lodged by Friday, 7 June 2103.

In addition to the issue as to whether a tradeable water right may be a derivative, it is usually also necessary to consider whether a tradeable water right constitutes an interest in a "managed investment scheme", particularly where the water allocations are managed by a third party for the benefit of the holder of the tradeable water right.

Clayton Utz will be making a submission to Treasury that the proposed amendment go further, to exclude tradeable water rights from the regulation of managed investment schemes. This would require the making of a further regulation providing, for the purposes of paragraph (n) of the definition of "managed investment scheme" in section 9 of the Corporations Act, that a scheme is not a "managed investment scheme" by reason of paragraph (a) of its definition in section 9 of the Corporations Act where the rights acquired to benefits of the scheme are "tradeable water rights" or arrangements in relation to them.