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  • Claiming a deduction for carbon sink forest expenses

    Carbon sink forests are established for the primary and principal purpose of carbon sequestration. Carbon sequestration is the process by which trees absorb carbon dioxide from the atmosphere for greenhouse gas abatement.

    If you're establishing or have acquired a carbon sink forest, you may be eligible to claim a deduction for expenditure incurred in establishing the trees.

    On this page:

    Eligibility conditions

    To be eligible to claim a deduction you need to meet the following conditions:

    • You are carrying on a business.
    • At the time, you hold the interest or rights in the land or trees that is most specific to the carbon sequestration activities.
    • You use the land and the forest for the primary and principal purpose of carbon sequestration by the trees.
    • Your purposes in using the land do not include felling the trees or using the trees for commercial horticulture.
    • You or another entity incurred expenditure for establishing the trees in the income year or an earlier income year.
    • You did not incur the expenditure under a managed investment scheme (MIS) or a forestry MIS.
    • The trees you are establishing in the carbon sink forest  
      • meet the requisite forestry characteristics
      • adhere to certain environmental and natural resource management guidelines.

    See also:

    What you can claim

    You may be able to claim a deduction for the establishment expenditure, which is expenditure that is of a capital kind and cannot be claimed on a one-off basis. The establishment expenditure includes expenses incurred in:

    • acquiring the trees or seeds
    • raising tree seedlings in pots and potting mixtures
    • grafting trees and germinating seedlings
    • allowing seeds to germinate (whether by broadcasting, deliberate regeneration or planting seeds directly)
    • preparing the area for planting (for example, ploughing, scarifying, contouring, top dressing, fertilising, weed spraying, stone removal and top soil enhancement)
    • planting the trees or seeds
    • surveying the planted area.

    What you can't claim

    You can't claim deductions for expenditure that is not part of the establishment expenditure. The excluded expenditure includes expenses related to:

    • rights that allow you to access the land to establish the forest (for example forestry rights)
    • the land, rather than the establishment of the trees (for example, expenditure related to purchasing the land for the establishment of the trees)
    • draining swamps or low-lying land, or clearing land
    • assets separate from the trees, such as  
      • fencing
      • water facilities for the trees
      • roads within the forest
      • fire breaks
    • establishing other plants for another purpose (for example, trees for felling or horticultural plants). However, you can deduct the expenses incurred in establishing the other plants if they are used for purposes associated with carbon sequestration, such as companion planting
    • carbon credits to be traded in the future (for example carbon sequestration rights).

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    Work out how much to deduct

    You can deduct the expenditure at a rate of 7% per year for a period of 14 years and 105 days. The period starts from the first day of the income year in which the trees are established.

    The trees are considered established when the tree seedlings are permanently planted in the ground. The tree seedlings can be either:

    • grown in pots and then transplanted to the land
    • deliberately regenerated on-site from natural seed sources.

    The amount you can deduct is worked out as follows:

    • Establishment expenditure × write-off rate (7% per year)

    You apply this same formula for each of the first 14 years. For the 15th year (the 105 days) you deduct the remaining amount.

    If you stop using the land for carbon sequestration within the 14 years and 105 days period, you work out your deduction for that final year based on the number of days when the land was being used for carbon sequestration.

    Example

    Nativ established a carbon sink forest in September 2015. He worked out that the establishment expenses were $20,000.

    The first year he can claim a deduction is the 2015–16 financial year. For the first year he can claim 7% of his establishment expenditure:

    • $20,000 × 7% = $1,400

    He can claim the same amount ($1,400) for the following 13 years, as long as he continues to use the land for carbon sequestration. In the 15th year he can claim the remaining amount, which is $20,000 − ($1,400 × 14) = $400.

    End of example

    Claiming the deduction

    To claim a deduction for establishing the trees in a carbon sink forest you must complete the form Notice of establishment of trees in a carbon sink forest (NAT 72196).

    The form must be completed either when you lodge your tax return or five months after the end of the income year, whichever comes first.

    The completed form must include all the information we need to determine whether you are eligible to claim the deduction, including:

    • the Australian business number (ABN) of your business
    • the latitude and longitude of a central point and boundary points of the area occupied by the trees
    • a description of the shape and size of the area occupied by the trees
    • the species of trees established
    • the estimated number of trees per hectare
    • the details of how the establishment of the trees meets the environmental and natural resource management guidelines for carbon sequestration
    • the expenditure of establishing the trees.

    If you have acquired a carbon sink forest you may ask the previous rights or interest holder for information you need to claim your deduction.

    Next step:

      Last modified: 13 Nov 2019QC 19574