ATO Interpretative Decision
ATO ID 2004/714
Income tax
Capital Allowances: landcare operation - revegetation expenditure - carbon sequestration rightsFOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 entitled to a deduction under section 40-630 of the Income Tax Assessment Act 1997 (ITAA 1997) for capital expenditure incurred on revegetating an area of their rural land they used in carrying on a business of primary production?
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 land they used in carrying on a business of primary production.
Facts
The taxpayer is a landholder of some 400 hectares on which they conduct a business of cattle farming.
The taxpayer decided to revegetate 20 hectares of land with indigenous species for the specific purpose of ameliorating land degradation. The taxpayer spent a significant amount of money on revegetating by planting seedlings on those 20 hectares. As a secondary consideration, the taxpayer also intends selling any 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:
- •
- land in Australia you use at the time for carrying on a primary production business; or
- •
- rural land in Australia you use at the time for carrying on a business for a taxable purpose from the use of that land (except a business of mining operations).
The taxpayer satisfies these conditions because they are carrying on a primary production business on the land. Therefore, a deduction is available to the taxpayer under section 40-630 of the ITAA 1997 if the expenditure is on a 'landcare operation' as defined in section 40-635 of the ITAA 1997.
The revegetating of the 20 hectares comes 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).
The meaning of primarily and principally in this context is explained in Taxation Determination TD 94/9. Paragraph 3 of that taxation determination states:
Where the expenditure is incurred for a dual purpose, the 'primarily and principally' test does not require a consideration of the subjective or objective purpose or motives of the taxpayer in incurring the expenditure. The test requires an examination of the primary and principal function or purpose of the result produced by incurring the expenditure.
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. In this case, the primary and principal objective in revegetating the land was to ameliorate land degradation. The sale of the rights to the carbon sequestered by the trees is only an ancillary consideration, rather than the primary and principal purpose of the revegetation. Therefore, a deduction is allowable in accordance with section 40-630 of the ITAA 1997 for the capital expenditure incurred on revegetating the land.
Date of decision: 18 August 2004Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
section 40-630
section 40-635
subparagraph 40-635(1)(e)(iii)
Related Public Rulings (including Determinations)
Taxation Determination TD 94/9
ATO ID 2004/320
ATO ID 2004/321
ATO ID 2004/323 ATO Interpretative Decisions overturned by this decision
ATO ID 2004/322
Keywords
Afforestation expenses
Carbon sequestration rights
Environmental protection expenses
Landcare operations
Date reviewed: 23 October 2017
ISSN: 1445-2782
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