ATO Interpretative Decision
ATO ID 2004/323 (Withdrawn)
Income Tax
Carbon sequestration rights: rights trading - deduction for costsFOI status: may be released
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This ATO ID withdrawn and is replaced by ATO ID 2004/718This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the taxpayer, a state forestry management body, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the costs of planting and maintaining forests where those forests are planted and maintained for the purpose of trading in the carbon sequestered in the trees?
Decision
Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the costs of planting and maintaining forests, where those forests are planted and maintained for the purpose of trading in the carbon sequestered in the trees.
Facts
The taxpayer is a state forestry management body. The taxpayer has acquired several thousand hectares of land and has forested the land for the purpose of selling the rights to the carbon sequestered in the trees. The taxpayer intends to continue acquiring land on a regular ongoing basis for this purpose.
The taxpayer enters into contracts for the sale of the carbon sequestration rights with various third parties who require the rights to offset carbon dioxide emissions from their business operations. The taxpayer regularly enters into these contracts as it acquires more land for this purpose.
The contracts require the taxpayer to maintain the trees for the duration of the contracts.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing the taxpayer's assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are necessarily incurred in gaining or producing exempt income.
The activities conducted by the taxpayer have a significant commercial purpose and character, they are conducted with both the purpose and prospect of profit, and are conducted on a regular basis. These factors along with the size, scale and permanency of the operation indicate that the taxpayer is conducting a business of trading in carbon sequestration rights (see note). As such, receipts from the sale of the carbon sequestration rights will not be capital in nature but will be assessable income of the taxpayer under section 6-5 of the ITAA 1997.
Expenditure incurred in the planting and maintaining of the forests will therefore be deductible under section 8-1 of the ITAA 1997 as these expenses were incurred for the purpose of producing assessable income.
Year of income: 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
section 8-1
section 6-5
Related Public Rulings (including Determinations)
Taxation Ruling TR 97/11
ATO ID 2004/320
ATO ID 2004/321
ATO ID 2004/322
Keywords
Carbon sequestration rights
Afforestation expenses
ISSN: 1445-2782
| Date: | Version: | |
| 5 March 2004 | Original statement | |
| You are here | 31 August 2004 | Archived |