Farmers and other landowners may manage or plant forests to participate in carbon sequestration activities. The carbon sequestration activities which contribute to greenhouse gas abatement are enabled by state legislation. Rules governing how these activities are carried out are provided for by the relevant state legislation, related regulations and operating rules.
There are capital gains tax consequences of trading in carbon sequestration rights. A carbon sequestration right is a CGT asset. The exact CGT consequences will depend on the facts and the manner by 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 this will result in a change of ownership. A carbon sequestration right, as defined in the 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.
You are not a primary producer if you plant, manage or establish trees for the sole purpose of carbon sequestration activities and those trees are not intended to be felled in a business of forestry operations (see Who is a primary producer?).
Where you plant and maintain forests in the ordinary course of forestry activities, you may be entitled to a general deduction for the costs of planting and maintaining the forests. You are a primary producer for income tax purposes if you are engaged in 'forest operations' and those activities constitute the carrying on of a business. Taxation Ruling TR 95/6 - Primary production and forestry outlines the various deductions available to primary producers engaged in forest operations. The deductibility of these expenses is not altered by the fact that you also derive income from carbon sequestration activities that are carried on in conjunction with forestry activities.
Where you plant trees with the sole purpose of participating in carbon sequestration activities and those trees are not intended to be felled in a business of forestry, a general deduction is not allowed for these costs. This is because the cost of planting in these circumstances is capital expenditure. Capital expenditure for planting trees may receive other income tax treatment, depending on the context in which the expenditure is incurred:
- For trees that are regarded as horticultural plants (that is, trees used for the sale of their products or parts), the costs of establishment are written off by reference to the effective life of the plant.
- Trees which are used solely for carbon credit arrangements, are not cultivated or propagated for any of their products or parts and do not constitute horticultural plants for the purpose of applying the horticultural plant deduction under section 40-515 of the Income Tax Assessment Act 1997.
- For trees planted or established as a landcare operation (for example, to combat land degradation) an immediate deduction for establishment costs is available where the costs are incurred primarily and principally for such a landcare purpose.
- For trees and shrubs whose function is purely ornamental, capital expenditure may be deductible under the project pooling provisions based on the project life.
The uniform capital allowance provisions do not otherwise provide a deduction for capital expenditure for planting or establishing trees or have regard to the trees as depreciating assets.