• Claiming conservation covenant concessions

    This information is for those who:

    • own land with high natural, cultural or scientific value, and
    • may wish to enter into a conservation covenant to protect that value.

    A conservation covenant:

    • is an agreement to protect land of high conservation value made between the land owner and a covenant scheme provider, such as a deductible gift recipient (DGR), government agency or local council.
    • 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 possible
    • is entered into under an approved program or otherwise approved the Environment Minister.

    On this page:

    See also:

    Qualifying for a deduction under a conservation covenant

    If you as a land owner enter into a conservation covenant and:

    • do not receive any money, property or other material benefit as a result, you may be able to claim
      • a tax deduction, and
      • concessional capital gains tax (CGT) treatment.
       

    To qualify for an income tax deduction for entering a conservation covenant you must meet all of the following conditions.

    • The covenant must be over land that you own – leased property is not eligible – and entered into on or after 1 July 2002.
    • The covenant entered into must be perpetual, that is it is binding on you as the current land owner as well as all future owners of the land.
    • You 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 your land must decrease as a result.
    • The decrease in the market value of the land must be more than $5,000 or you must have acquired the land not more than 12 months before entering into the covenant.

    If you receive money, property or other material benefit as a result of entering into a conservation covenant you will not be able to claim a tax deduction, but you may be able obtain a CGT concession.

    Claiming

    You claim the deduction in the tax return for the year in which you entered into the covenant.

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

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

    Seeking a valuation

    You must seek a valuation to determine the change in the market value of the land. You can phone us on 1300 130 248 for information about the valuation process.

    To request a valuation from us, you 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.

    After we have received the form and application fee, we will advise you in writing of the estimated cost for the valuation.

    When we have completed the valuation we will provide you with a Valuation certificate.

    Next step:

    Spreading the tax deduction

    You can elect to spread the tax deduction over a five year period.

    To arrange this, you must fill in the Conservation covenant deductions apportionment election form available from the Department of the Environment, before lodging your tax return for the income year in which you entered into the covenant.

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

    The apportionment can be varied at any time before your income tax return for the first income year to which the variation applies is lodged by completing another Conservation covenant deductions apportionment election form and sending it to the Department of the Environment.

    A variation can only apply to the percentage to be deducted in income years for which a tax return has not been lodged.

    Next step:

    See also:

    Example – Spreading deductions

    On 25 November 2015, 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 2015–16.

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

    • 2015–16 he claims 50%
    • 20016–17 he claims 25%
    • 2017–18 he claims 25%
    • 2018–19 he claims 0%
    • 2019–20 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 2015–16.

    End of example

    CGT concessions

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

    When you enter into a conservation covenant, you calculate your capital gain by comparing your capital proceeds from entering into the covenant with a portion of the cost base of the entire land that is attributable to the covenant.

    The conservation covenant affects the value of the entire land. So, to calculate the cost base apportioned to the covenant, you use 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:

    The ‘Capital proceeds from entering into the covenant’ should be divided by the sum of ‘The Capital proceeds from entering into the covenant’ and ‘The market value of the land just after the covenant is entered into. Multiply the result by ‘The cost base of the land’.

    Similarly, you calculate your capital loss by comparing your capital proceeds from entering into the covenant with the portion of the reduced cost base of the entire land that is attributable to the covenant.

    If you are entitled to an income tax deduction, the capital proceeds are equal to the amount you can claim as a tax deduction for entering into the covenant.

    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 qualifying taxpayers 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.

    Example – CGT concession

    Katy enters into a conservation covenant with a deductible gift recipient for no capital proceeds (money, property or other material benefit). 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

    $1,200,000

    Deduction

    $400,000

     

    The cost base of the covenant is calculated as:

    Deduction

    $400,000

    divided by the sum of the Deduction plus the Market value of the entire land after the covenant ($400,000 + $1,200,000)

    $1,600,000

    multiplied by Cost base of the entire land

    $900,000

    Cost base of the covenant

    $225,000

    The net capital gain is:

    Capital gain ($400,000 − $225,000)

    $175,000

    less 50% CGT discount

    $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

    See also:

      Last modified: 25 Jul 2017QC 16456