• Claiming conservation covenant concessions

    A conservation covenant is an agreement entered into to protect areas of high conservation value. Land owners who enter into a conservation covenant may be entitled to tax concessions. A conservation covenant over land is an agreement that:

    • restricts or prohibits certain activities on the land that could degrade the environmental value of the land
    • is permanent and registered on the title to the land – if registration is possible
    • is approved in writing by, or is entered into under a program approved in writing by, the Environment Minister.

    If a land owner enters into a conservation covenant and they:

    • receive some capital proceeds for entering into the covenant (and they enter the covenant on or after 15 June 2000), they may qualify for concessional capital gains tax (CGT) treatment
    • do not receive any money, property or other material benefit for entering into a conservation covenant (and they enter the covenant on or after 1 July 2002) they may be able to claim    
      • a tax deduction
      • concessional CGT treatment.
       

    Qualifying

    To qualify for an income tax deduction for entering a conservation covenant, the land owner must meet all of the following conditions:

    • The covenant must be entered into on or after 1 July 2002.
    • The covenant must be entered into over land that they own – leased property is not eligible.
    • The covenant entered into must be perpetual.
    • They must not receive money, property or any other material benefit for entering into the covenant.
    • The covenant must be entered into with a DGR; the Commonwealth, a state, a territory or a local governing body; or an authority of the Commonwealth, a state or a territory.
    • The market value of the land must decrease as a result of the land owner entering into the covenant.
    • The change in the market value of the land must be more than $5,000 due to the covenant. If the decrease in value of the land is less than $5,000, they will only be eligible for a deduction if they acquired the land not more than 12 months before entering into the covenant and they meet all the above conditions.

    Amount

    The amount the land owner can claim as a deduction is the difference between the market value of the land just before they entered into the covenant and its decreased market value just after that time, but only to the extent that the decrease is attributable to them entering into the covenant.

    Claiming

    The land owner claims the deduction in the tax return for the year in which they entered into the covenant.

    They cannot use the deduction to add to or create a tax loss.

    Spreading the tax deduction

    Although the land owner cannot use the deduction add to or create a tax loss, they can elect to spread the tax deduction over a five year period. To arrange this, they must fill in the apportionment election form available from the Secretary of the Australian Government Department of the Environment before they lodge their tax return for the income year in which they entered into the covenant.

    Land owners must state on this form how much of the deduction they will claim in each year over a period up to five years.

    This statement can be varied at any time before the income tax return for the first income year to which the variation applies is lodged. The variation can only apply to the percentage to be deducted in income years for which a tax return has not been lodged. A copy of the variation must be given to the Secretary before the tax return is lodged for the first income year to which the variation applies.

    Example – Spreading deductions

    On 25 November 2009, Ben enters into a conservation covenant and receives a deduction of $5,000. The first income year in which he can claim a portion of the deduction is 2009–10.

    Ben decides to spread the deduction for the conservation covenant over three income years in the following manner:

    • 2009–10 he claims 50%
    • 20010–11 he claims 25%
    • 2011–12 he claims 25%
    • 2012–13 he claims 0%
    • 2013–14 he claims 0%.

    Because Ben has elected to spread the deduction over three years, he cannot claim the whole amount as an allowable deduction in the income year in which he entered into the conservation covenant. Instead, he can deduct the corresponding percentage specified in the apportionment election form for each of the income years over which the deduction is spread.

    End of example

    Next step:

    If the land owner chooses to spread the deduction, they should obtain the Apportionment election form by visiting the Department of the Environment website Apportionment of deductionsExternal Link.

    Seeking a valuation

    The land owner must seek a valuation of the change in the market value of the land. To obtain a valuation from us, they need to:

    • lodge the Request for valuation – conservation covenant program form
    • pay a    
      • non-refundable application fee, which will be credited against the total fee for the valuation
      • fee for carrying out a valuation. After we have received their form and application fee, we will advise them in writing of the estimated charge for the valuation. The fee is the actual cost of the valuation, including all costs of the Commissioner in obtaining the valuation.
       

    When we have completed the valuation of the donated property we will provide the landowner with a Valuation certificate.

    Next step:

    To obtain a valuation from us, complete the Request for valuation – conservation covenant program (PDF 224KB) form.

    See also:

    CGT concessions

    The CGT concessions provide comparable treatment between land owners who enter into conservation covenants and land owners who sell part of their land.

    If the land owner enters into a conservation covenant, they calculate their capital gain by comparing their capital proceeds from the grant of the covenant with a portion of the cost base of the entire land over which the covenant is granted.

    The conservation covenant affects the value of the entire land. So, to calculate the cost base apportioned to the covenant, the land owner uses the cost base of the entire land even if the covenant specifically states within its terms that the land use restrictions only apply to part of the land.

    The relevant portion of the cost base or reduced cost base is calculated using this formula:

    Cost base of land   x

    Capital proceeds from entering into the covenant
    Those capital proceeds plus the market value of the
    land just after the land owner enters into the covenant

    Similarly, the land owner calculates their capital loss by comparing their capital proceeds from the grant of the covenant with a portion of the reduced cost base of the entire land over which the covenant is granted.

    If the land owner is entitled to an income tax deduction, the capital proceeds from the event are equal to the amount that they can deduct.

    Capital gains made from entering into a conservation covenant will qualify for:

    • pre-CGT exemption, if the land was acquired before 20 September 1985
    • the CGT discount, for those entities that qualify if the land was owned for at least 12 months before the grant of the conservation covenant
    • the small business CGT concessions, where the relevant criteria are met including that the land is an active asset.

    See also:

    Example – CGT concession

    Katy enters into a conservation covenant with a deductible gift recipient for no capital proceeds. The covenant covers 25% of the land she owns. Katy acquired the land on 17 May 1995 and uses it to run a farming business. For the purposes of the CGT small business concessions, the net value of Katy's CGT assets is less than $6 million and the land is an active asset.

    Katy uses the following figures to calculate the capital gain made from entering into the covenant.

    Cost base of the entire land 900,000

    Market value of the entire land before the covenant 1,600,000

    Market value of the entire land after the covenant 1,200,000

    The deduction amount that can be claimed is:

    Market value of the entire land before the covenant 1,600,000

    less the market value of the entire land after the covenant deduction 1,200,000

    Deduction 400,000

    Cost base of the covenant 225,000

    900,000 x

    400,000

     

    400,000 + 1,200,000

    The net capital gain is:

    Capital gain (400,000 - 225,000)     175,000

    less CGT discount (50%)     87,500

    less 50% small business reduction     43,750

    Net capital gain     43,750

    The result for Katy is a deduction of $400,000 and a capital gain of $43,750.

    End of example
    Last modified: 14 Oct 2015QC 16456