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Taxation of Australian carbon credit units for primary producers

Work out tax for primary producers receiving Australian carbon credit units (ACCUs) from carbon reduction activities.

Last updated 4 July 2023

Australian carbon credit units

Australian carbon credit unitsExternal Link (ACCUs) are issued by the Clean Energy RegulatorExternal Link (CER) for carbon abatement activities (eligible offsets projects). This is as part of the Australian Government’s Emissions Reduction FundExternal Link.

ACCUs may be issued to primary producers under the Carbon Credits (Carbon Farming Initiative) Act 2011 for eligible offsets projects. They may also be acquired from a third party such as a carbon credit service provider that holds such units.

You are taken to hold the unit from the date it is registered in your name.

How ACCUs held by you as a primary producer are taxed will depend on whether you:

General tax treatment of ACCUs

Where you as a primary producer are not eligible for concessional treatment for ACCUs you hold, the general rules relating to the taxation of ACCUs set out in Division 420 of the Income Tax Assessment Act 1997 (ITAA 1997) apply. These rules are different to the tax treatment for carbon credits generated and sold under an informal carbon credit scheme (non-registered units).

Under Division 420:

  • You can deduct certain costs of becoming the holder of an ACCU in the year you start to hold it.
  • If the value of the ACCUs you hold at the end of an income year is more than the value of the ACCUs you held at the beginning of the year, you must include the increase in the value of the ACCUs in your assessable income.
  • If the value of the ACCUs you hold at the end of an income year is less than the value of the ACCUs you held at the beginning of the year, you claim a deduction equal to the decrease in value of the ACCUs.
  • For the year you first become the holder of the ACCU, you take its value to be nil at the start of the income year.
  • Any proceeds received from the disposal of an ACCU is assessable income. It is non-primary production income in the year of disposal. You can deduct costs you incur for ceasing to hold an ACCU in the year of disposal.

Concessional tax treatment for eligible primary producers

If you are an eligible individual primary producer you will receive concessional tax treatment for any:

  • eligible ACCUs you start to hold on or after 1 July 2022 as a result of an eligible offsets project associated with your primary production business
  • income attributable to eligible ACCUs you receive from a partnership or trust that carries on a primary production business
  • eligible ACCUs or eligible income you received from a qualifying arrangement with a carbon service provider.

The concessions are available only to eligible individuals, and the conditions you need to meet depend on whether:

  • you are carrying on a primary production business as a sole trader, or as a partnership
  • you are the beneficiary of a trust that is carrying on a primary production business
  • an arrangement with a carbon service provider (CSP) is involved.

If you are an eligible individual primary producer you can access the following concessional tax treatment for your ACCUs:

  • for the purposes of the Farm Management Deposit (FMD) Scheme and accessing the income tax averaging rules
    • the proceeds from the sale of eligible ACCUs will be treated as primary production income
    • related deductions for expenses you incur in becoming the holder, holding or disposing of eligible ACCUs will be treated as primary production deductions
     
  • you are not assessed on the change in value of eligible ACCUs you started hold on or after 1 July 2022 each year. You will only be assessed on the proceeds from the sale of these eligible ACCUs first held on or after 1 July 2022.

When concessional tax treatment is not available

The concessional tax treatment does not apply in working out the taxable income of ineligible entities, including:

  • companies (as they do not need the benefit of FMDs or income averaging)
  • trusts (the benefit flows through to the beneficiary).

The concessional tax treatment also does not apply to ineligible ACCUs, including units:

  • acquired by primary producers prior to 1 July 2022
  • purchased from a third party (other than those acquired under an eligible arrangement you have with a carbon service provider)
  • issued to primary producers by the Clean Energy Regulator (CER) for projects not connected to their primary production business.

For example, concessional tax treatment is not available for an ACCU disposed of by a primary producer, which is later acquired by a new holder or reacquired by the same primary producer.

All ineligible ACCUs or ineligible entities are subject to the general tax treatment that applies to ACCUs under Division 420.

Eligibility for concessional tax treatment

Tax concessions may be available for:

Individual primary producers who are sole traders

An individual primary producer who holds ACCUs may be eligible for concessional tax treatment.

For an ACCU to be eligible for concessional tax treatment, that is, to be considered a primary producer registered emissions unit (PPREU), the units held must meet the following basic conditions:

  • You first hold the ACCU on or after 1 July 2022.
  • Either  
    • the unit is issued to the you under the Carbon Credits (Carbon Farming Initiative) Act 2011 in relation to an eligible offsets project, or
    • under an arrangement with a CSP, the ACCU was transferred to you by the CSP and was issued to the CSP under the Carbon Credits (Carbon Farming Initiative) Act 2011 in relation to an eligible offsets project on or after 1 July 2022.
     
  • At all times while the eligible offsets project is carried on, you carried on a primary production business in the same area as the offsets project or in an area connected to where the offsets project is carried on.

Income received by a primary producer under an arrangement with a carbon service provider is discussed below.

Partners in a partnership

Individual partners in a partnership that carries on a business of primary production are eligible for concessions for their share of the partnership income attributable to ACCUs if:

  • The holding partner(s) first held the ACCU on or after 1 July 2022.
  • The partnership is comprised solely of individuals.
  • The ACCU is held in the name of all the partners, or are held on behalf the partnership by one or more of the partners.
  • Either  
    • the unit is issued to the holding partner(s) under the Carbon Credits (Carbon Farming Initiative) Act 2011 in relation to an eligible offsets project, or
    • under an arrangement with a CSP the unit was transferred to the holding partner(s) by the CSP, and was issued to the CSP under the Carbon Credits (Carbon Farming Initiative) Act 2011 in relation to an eligible offsets project on or after 1 July 2022.
     
  • At all times while the eligible offsets project is carried on, the partnership carries on a primary production business in the same area as the offsets project or in an area connected to where the offsets project is carried on.

Income received by a partnership carrying on a primary production business under an arrangement with a carbon service provider are discussed below.

See the following examples of eligibility for ACCUs acquired by a primary producer partnership.

Start of example

Example: ACCUs held on behalf of a partnership

Peter and Paulina run a primary production business in a partnership, breeding goats. They have been undertaking eligible offsets projects on the same land they breed their goats.

On 31 March 2023 they are issued ACCUs by the CER. These ACCUs are held by Paulina as the holding partner. On 30 June 2023 the ACCUs are sold.

Although Paulina held the ACCUs she does so on behalf of the partnership. The share of the partnership's net income from the sale of the ACCUs will be primary production income for both Peter and Paulina in the year of disposal.

End of example
Start of example

Example: ACCUs not held on behalf of a partnership

Peter carries on an eligible offsets project on land he owns separate to the partnership and unrelated to the primary production business he carries on as a partnership. The land is several hundred kilometres away from the land on which the primary production business is carried on by the partnership.

On 1 January 2023 Peter is issued ACCUs relating to this project. Peter sells them on 1 April 2023. Peter had held the ACCUs as an individual and not on behalf of the partnership. The land on which the eligible offsets project was carried on was not land that Peter carried on a primary production business. As such he is not eligible for the concessional treatment of these ACCUs.

End of example

Trusts and beneficiaries of trusts

A trust that carries on a primary production business and holds ACCUs is not eligible for concessional tax treatment.

However, individuals who are beneficiaries of a trust that carries on a primary production business and that also carries on an eligible offsets project may be eligible for concessional tax treatment. These beneficiaries can treat their share of the net income of the trust attributable to the disposal of ACCUs held by the trust as primary production income if:

  • You are taken to carry on a primary production business for the purposes of the FMD or income averaging provisions because you are the beneficiary of the trust that is carrying on a primary production business.
  • The ACCUs to which the share of the net income of the trust is attributable would have been eligible PPREUs had you started to hold, held and ceased to hold them, instead of the trust. This includes ACCUs transferred to the trust by a CSP and was issued to the CSP under the Carbon Credits (Carbon Farming Initiative) Act 2011 in relation to an eligible offsets project on or after 1 July 2022.

The trust is not entitled to concessional tax treatment for any ACCUs it holds. As such, the general tax treatment that applies to ACCUs under Division 420 of the ITAA 1997 applies to the trust. That is, the change in value of the ACCU between the beginning and end of the income year must either be:

  • included in the trust's assessable income (where the value of the ACCU increases)
  • a deduction (where the value of the ACCU decreases).

This is for each income year in which the ACCU is held.

If you are the beneficiary of a trust, you cannot treat your share of the net income of the trust attributable to the increase in the value of an ACCU held by a trust as primary production income.

Start of example

Example: trust income from sale of ACCUs

The Saunderson family sets up a family trust in 2005, the Saunderson Family Trust. The family trust carries on a primary production business of cattle farming. Bill Saunderson and his 2 children are beneficiaries of the Saunderson Family Trust. The beneficiaries do not personally carry on a primary production business separate to the trust.

The Saunderson Family Trust has been conducting an eligible offsets project on the same land as their farming activities and register this as a project with the CER.

On 1 August 2022 the CER issue the Saunderson Family Trust ACCUs for the eligible offsets project. On 30 May 2023 the Saunderson Family Trust sells the ACCUs.

As beneficiaries of the Saunderson Family Trust, Bill and his 2 children receive distributions from the trust that include proceeds from the sale of the ACCUs.

Bill and his 2 children are eligible to access concessional tax treatment for their share of the net income of the Saunderson Family Trust attributable to the sale of the ACCUs. That is, they can treat it as primary production income for the purpose of the Farm Management Deposit Scheme and income tax averaging rules.

This is because:

  • Bill and his children are beneficiaries of the Saunderson Family Trust and are taken to be carrying on a primary production business for the purpose of the income tax averaging rules.
  • The ACCUs were first held after 1 July 2022.
  • The ACCUs were issued by the CER to the Saunderson Family Trust under the Carbon Credits (Carbon Farming initiative) Act 2011 as the Saunderson Family Trust conducted an eligible offsets project.

The ACCUs to which the share of the net income of the trust is attributable would have been eligible PPREUs had Bill and his 2 children started to hold, held and ceased to hold them, instead of the trust.

End of example

Carbon service providers

A carbon service provider (CSP) is an entity that carries on the business of providing services wholly or mainly relating to eligible offsets projects including carrying out the project as its proponent.

A primary producer may enter an arrangement with a CSP to undertake an eligible offsets project in the area they carry on their primary production business. This may result in the CSP being issued ACCUs and these being then transferred to the primary producer or an amount being paid to them as a result of the arrangement.

Income and deductions in relation to arrangements with CSPs

Income of an eligible primary producer attributable to an arrangement with a CSP will be treated as primary production income and expenditure incurred in relation to the arrangement with the CSP will be treated as a primary production deduction, if:

  • the arrangement involves the CSP starting to hold, holding or ceasing to hold an ACCU
  • the arrangement with the CSP is not a rental or lease agreement
  • the ACCUs, the subject of the arrangement, would have been eligible PPREUs if the primary producer, rather than the CSP, had started to hold, held and ceased to hold the ACCUs.
Start of example

Example: when ACCUs from a CSP are primary production income

Rhonda runs a pig and sheep farm and is a primary producer. Rhonda enters into an agreement with a carbon service provider, Environment Great, to undertake an eligible offsets project on her land.

Environment Great and Rhonda have an agreement that she will receive 50% of any ACCUs issued to Environment Great as a result of the project, plus 10% of Environment Great's profit on the sale of the remaining units. The agreement is not a lease agreement.

On 1 September 2022 the Clean Energy Regulator issues Environment Great with 300 ACCUs.

On 2 September 2022 Environment Great transfers 150 of the ACCUs to Rhonda. In March 2023 Environment Great disposes its 150 remaining ACCUs. As per the agreement, Environment Great pays Rhonda 10% of its profits on the disposal of the ACCUs.

The 150 ACCUs received by Rhonda are eligible ACCUs and she in entitled to concessional tax treatment on them. Rhonda can also treat the proceeds she received from Environment Great upon the disposal of the ACCUs they held as primary production income.

End of example
Start of example

Example: when ACCUs from a CSP are not primary production income

Jai is a primary producer who carries on a business of growing grain. Jai enters into a lease agreement with Green Global to lease part of the land on which he grows his crops.

Green Global enters into the agreement so they can undertake an offsets project on this leased land. As part of the lease agreement Jai receives lease income, paid in cash.

The receipt of the lease income from Green Global is not eligible for concessional tax treatment as the arrangement between Jai and Green Global is a lease agreement. This means the income received by Jai is not primary production income.

End of example

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