You may be entitled to claim a tax deduction and concessional capital gains tax (CGT) treatment if you have entered into a conservation covenant over land you own, and certain conditions are met.
The conservation covenant must:
- restrict or prohibit certain activities on the land that could degrade the environmental value of the land
- be permanent and if possible be registered on the title to the land.
- be approved by the Environment MinisterExternal Link.
To qualify for an income tax deduction for entering a conservation covenant you must meet all the following conditions:
- You must not receive money, property or any other material benefit.
- The covenant must be
- over land that you own (leased property is not eligible)
- entered on or after 1 July 2002
- perpetual, that is, it is binding on you as the current landowner as well as all future owners of the lands
- entered into with a deductible gift recipient (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 the covenant.
You will receive a material benefit where:
- you seek a benefit
- there is a direct and substantial connection with entering the conservation covenant
- the benefit is material.
Example – No material benefit
John enters a conservation covenant over his land with a State government authority.
John receives no money or property for entering the conservation covenant. John didn't enter the covenant to:
- meet any legal requirement
- prevent regulatory action, or
- obtain a commercial advantage.
John doesn't receive a material benefit for entering the conservation covenant.End of example
If the benefit is very minor, it may not count as a material benefit.
Example – Benefit received but not material
Katie enters a conservation covenant over land she owns with a DGR. The land is worth $1 million.
Katie doesn't receive any money or property for entering the covenant, but the DGR agrees to reimburse Katie up to $500 for the legal costs she incurs for entering the covenant.
Katie receives some benefit for entering the covenant, being the reimbursement of legal costs. Although it is a benefit, it is regarded as minor in the circumstances and therefore not considered to be a material benefit for entering into the covenant.End of example
If the benefit for entering a conservation covenant is material, you can't claim a tax deduction.
Example – Material benefit received
A mining company enters a conservation covenant over its land to satisfy conditions under State and Commonwealth environmental approvals to undertake a mining project.
Entering the conservation covenant allows the mining company to continue the mining project, with the intention to:
- make profit
- avoid environmental regulatory action and consequences (such as penalties) they would be exposed to under the legislation for granting the approvals.
The mining company can't claim a tax deduction because they receive a material benefit for entering the conservation covenant.End of example
You claim an eligible deduction for a conservation covenant in the tax return for the year in which you entered the covenant.
The amount you can claim is the difference between:
- the market value of the land just before you entered the covenant
- its decreased market value just after that time, but only to the extent the decrease is attributable to entering 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. The form will require you to declare you meet the conditions to qualify for a deduction. If you are unsure about whether you meet the conditions, you should seek advice from a tax professional or you can apply for a private ruling.
- 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.
Spreading the tax deduction
You can elect to spread the tax deduction over a 5 year period by apportioning your deductionExternal Link.
To arrange this, you must fill in the Conservation covenant deductions apportionment electionExternal Link 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 5 years.
The apportionment can be varied at any time before your 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.
Example – Spreading deduction
On 25 November 2018, 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 2018–19.
Ben decides to spread the deduction for the conservation covenant over 3 income years in the following manner:
- 2018–19 he claims 50%
- 2019–20 he claims 25%
- 2020–21 he claims 25%
- 2021–22 he claims 0%
- 2022–23 he claims 0%
Because Ben has elected to spread the deduction over 3 years, he cannot claim the whole amount as an allowable deduction in 2018–19.End of example
Material benefit where no money or property received for entering the covenant
If you receive a material benefit, but do not receive any money or property for entering the conservation covenant:
- you claim a capital loss for the incidental costs (such as legal fees) that relate to entering the covenant
- there are no CGT concessions available.
Where you claim a tax deduction or receive money or property for entering the covenant
Calculate your capital gain by comparing your capital proceeds from entering the conservation covenant with a portion of the cost base of the entire land that is attributable to the covenant.
The CGT treatment when you enter a conservation covenant is comparable to landowners who sell part of their land.
Our Guide to capital gains tax explains this in more detail.
The conservation covenant affects the value of the entire land.
You must use the cost base of the entire land, even if the covenant's terms specifically state that the land use restrictions only apply to part of the land.
Part of cost base
The relevant portion of the cost base, or reduced cost base, is calculated using this formula:
Cost base of land × Capital proceeds from entering the covenant ÷ (Capital proceeds from entering into the covenant + Market value of the land just after the covenant is entered into).
Calculate your capital loss by comparing your capital proceeds from entering the covenant, with the portion of the reduced cost base of the entire land that is attributable to the covenant.
Capital proceeds and tax deductions
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 the covenant.
Capital gains made from entering a conservation covenant may 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 – small business CGT concession
Wanja enters a conservation covenant with a DGR and doesn't receive any money, property or other material benefit. The covenant covers 25% of the land she owns. Wanja 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 Wanja's CGT assets is less than $6 million and the land is an active asset.
Wanja uses the following figures to calculate the capital gain made from entering the covenant:
- Cost base of the entire land is $900,000.
- Market value of the entire land before the covenant is $1,600,000.
- Market value of the entire land after the covenant is $1,200,000.
The deduction amount that can be claimed is:
- the market value of the entire land before the covenant of $1,600,000
- less the Market value of the entire land after the covenant of $1,200,000.
This equals the deduction of $400,000.
The cost base of the covenant is calculated as:
- a deduction of $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, which is $900,000.
So, the cost base of the covenant $225,000.
The net capital gain is calculated as:
- the capital gain ($400,000 − $225,000) of $175,000
- less the 50% CGT discount of $87,500
- less the 50% small business reduction of $43,750.
So, the net capital gain is $43,750
Wanja claims a deduction of $400,000 and a capital gain of $43,750.End of example