Aphrodite the problem I had was instead of going transparent it went black like it shows in the png. However, that did help me find the solution.
So the solution was I create a layer and set it to a solid colour. Then set the blend mode to source atop. Then I add a sprite to that layer with the blend mode set to source out. What this does is cut holes out of solid colour to show what is below.
This maybe not the best way to do it as I found it by trial and error. So if anybody knows how to do it better then do let me know.
If anybody is interested I am using this technique to solve tile map gap problem when scaling. I basically fill a layer with the colour I want to appear in the gap. Then put the tile map on top. NICE!