Water and carbon sequestration rights
Tradeable water rights
Water rights, such as licences and water allocations, are capital gains tax (CGT) assets. The permanent trade of a water right is a disposal of a CGT asset. A temporary trade of a water right is also a CGT event.
Exactly which CGT event will depend on the facts of each case, so you should seek advice from a tax professional.
Whether there are general income tax consequences as a result of trading a water right depends on your particular circumstances. If you are uncertain, request a private ruling on how the tax laws apply to your situation.
Carbon sequestration rights
Farmers and other landowners may manage or plant forests to participate in carbon sequestration activities. These activities which contribute to greenhouse gas abatement are enabled by state legislation, and are governed by rules under relevant state legislation, regulations and rules.
A carbon sequestration right is a CGT asset. There are CGT consequences of trading in carbon sequestration rights, which will depend on the facts and the manner in which your trade is carried out. For example, selling a carbon sequestration right to another entity before the end of a contract will trigger a CGT event as the sale will result in a change of ownership.
A carbon sequestration right, as defined in NSW legislation, is considered to be inherently connected with a primary producer’s land and can be an active asset. Therefore any capital gain made by a primary producer from the granting of that right may qualify for the small business concessions if the conditions for those concessions are satisfied.
If you dispose Australian Carbon Credit Units (ACCU) as opposed to carbon sequestration rights, you should be aware the income produced from it is not treated as a capital gain and is assessable under Division 420 of the Income Tax Assessment Act 1997.
Water and carbon sequestration rights are capital gains tax (CGT) assets and there are CGT consequences of trading these rights.