ATO Interpretative Decision

ATO ID 2004/322 (Withdrawn)

Income Tax

• This ATO ID has been withdrawn and replaced by ATO ID 2004/714.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer entitled to a deduction under section 40-630 of the Income Tax Assessment Act 1997 (ITAA 1997) for capital expenditure incurred in revegetating an area of their rural landholding?

Decision

Yes. The taxpayer, is entitled to a deduction under section 40-630 of the ITAA 1997 for capital expenditure incurred in revegetating an area of their rural landholding.

Facts

The taxpayer is a landholder and conducts a business of cattle farming on more than 400 hectares of land.

The taxpayer has revegetated 20 hectares of land with indigenous species to encourage the return of native wildlife and ameliorate land degradation. The taxpayer has spent a significant amount of money in revegetating (that is, seedlings and fencing), with the intention of selling the carbon sequestration rights that will be generated to recover some of these costs.

The taxpayer has entered into a profit a prendre agreement with an entity for the sale of the carbon sequestration rights relating to the 20 hectares of land.

Reasons for Decision

Capital expenditure on a landcare operation is deductible for the income year in which it is incurred, under section 40-630 of the ITAA 1997, provided the operation is for:

•

Australian land you use for carrying on a primary production business; or

•

rural Australian land you use for carrying on a business for a taxable purpose from the use of that land (except mining or quarrying).

The taxpayer will satisfy these conditions because they are carrying on a primary production business on the land. Therefore, a deduction will be available to the taxpayer under section 40-630 of the ITAA 1997 where the expenditure is for a 'landcare operation' as defined in section 40-635 of the ITAA 1997.

The revegetating of the 20 hectares will come within the definition of 'landcare operation' under subparagraph 40-635(1)(e)(iii) if it is an operation primarily and principally for the purpose of preventing or fighting land degradation (except by erecting fences on the land).

Whether the revegetation was done primarily and principally to prevent or fight land degradation is a question of fact which can only be answered by reference to the facts of each particular case and the intention of the taxpayer. In this case, the primary intention of the taxpayer in revegetating the land was to ameliorate land degradation, with the sale of the rights to the carbon sequestered by the trees being only an ancillary consideration, rather than the main purpose of the revegetation. Therefore, a deduction is allowable in accordance with section 40-630 of the ITAA 1997 for the capital expenses incurred in revegetating the land.

Year of income:  30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 40-630
   section 40-635
   paragraph 40-635(1)(e)(iii)

Related ATO Interpretative Decisions
ATO ID 2004/320
ATO ID 2004/321
ATO ID 2004/323

Keywords
Carbon sequestration rights
Afforestation expenses
Environmental protection expenses
Landcare operations

Business Line:  Business and Personal Taxes Centre of Expertise

Date of publication:  8 April 2004

ISSN: 1445-2782