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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012224949620

Ruling

Subject: Credit Trading Agreement

Questions and Answers

Will a capital gains tax (CGT) event happen when you enter into the Credit Trading Agreement (CTA)?

Yes.

Does the CGT event happen at the time that you enter into the CTA?

Yes.

Will a CGT event happen when you dispose of the vegetation credits (herein referred to as the credits) that you acquire by entering into the CTA?

Yes.

Can the expenditure that you incur in entering into the offset scheme, such as payments to accountants and lawyers for advice related to the CTA be included in the cost base of the conservation covenant?

Yes.

Will the annual payments that you receive as a result of entering into the CTA be assessable income?

No.

If you allocate part of the annual payment as compensation 'for the management works required to meet the obligations of the Agreement' will this influence how the Australian Taxation Office (ATO) considers that amount for tax purposes?

No.

Will a CGT event happen if the land to which the CTA relates is sold to a third party within the 10 year period of the CTA?

Yes.

Are you able to claim a deduction for the expenditure that you incur in entering into the offset scheme, such as payments to accountants and lawyers for advice related to the CTA?

No.

Is expenditure incurred by you in implementing the CTA, such as managing the offset area as required by the management plan, able to be deducted in the income year in which the expenditure is incurred?

No.

Will a capital gain made from CGT event D4 and CGT event A1 qualify for the small business concessions where the land is an active asset and the other relevant requirements in Division 152 of the ITAA 1997 are met?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You own an interest in a farm. You acquired your interest in the farm some time after 20 September 1985.

You do not live on the farm, are not a primary producer and are not registered for the Goods and Services Tax (GST).

Your relative is the majority owner of the farm. They are a primary producer who has an Australian Business Number (ABN) and is registered for GST.

The farm contains remnant grassland with animal and plant species listed as endangered under Commonwealth legislation.

Some time in the 2012 income year, your relative registered the farm with an organisation as part of a Vegetation Offset Program.

Your relative did this with the aim of obtaining a conservation offset over remnant grassland on the farm that would provide you and your relative with annual income over 10 years.

After registering your farm, the organisation gave your brother copies of drafts of a Memorandum of Understanding (MOU) and CTA as the agreements to be used should you be able to provide an offset area that meets the requirements of a land developer.

Your relative has provided copies of these agreements and they are to be read in conjunction with, and form part of, this private ruling.

The MOU is used to confirm that the developer, landowner and the organisation agree to work towards the signing of a CTA.

The CTA defines the legal basis on which the offset is created and how payment is made, as well as other rights and responsibilities.

The main points of the CTA are as follows:

By signing the agreement, a landowner agrees to (amongst other things):

The purchaser pays the Agreed Price to the organisation, upon the presentation of a tax invoice from the organisation usually after the execution of the Conservation Covenant by the landholder.

The organisation registers the Conservation Covenant that is applied to the Offset area to secure the Offset. After receiving payment of the amount equivalent to the Agreed Price, the organisation holds that money minus certain fees on behalf of the landholder (the 'Payment to Owner' amount) in an interest bearing account, and makes annual payments to the landholder over the following 10 years until the 'Payment to Owner' plus interest is paid to the landowner.

For the purpose of this agreement, a Conservation Covenant is defined as "an encumbrance registered on the title to the Subject Land in favour of the organisation, executed in furtherance of the purposes of the organisation under the Act. It includes any Management Plan or other document which the Owner is required to comply with under the Conservation Covenant including this agreement".

Schedule 1.4 contains an "Optional Breakdown of Payment to Owner". This table contained in this schedule may be completed by the Owner to illustrate the financial value to the Owner of each component of the payment. Those components are: compensation for decreased land values caused by establishing a conservation covenant; compensation for conducting required management works as part of the agreement; and compensation for managing risks and liability caused by the agreement. However, this schedule also states that completing the table in the schedule is done "without prejudice to the legal obligations created by the Agreement".

The Owner agrees to ensure that any new Owner gives effect to the Agreement and executes a deed agreeing to be bound by the terms of the Agreement.

The Agreement ends after 10 years.

The Agreement does not provide any specific right for the Owner who signs the Agreement to any money held by the organisation after that owner sells or otherwise transfers ownership of the Offset area to a new Owner.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 103-10,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 104-47,

Income Tax Assessment Act 1997 Subsection 104-47(4),

Income Tax Assessment Act 1997 Section 108-5,

Income Tax Assessment Act 1997 Section 110-25,

Income Tax Assessment Act 1997 Section 110-35,

Income Tax Assessment Act 1997 Subsection 112-30(3),

Income Tax Assessment Act 1997 Section 115-5,

Income Tax Assessment Act 1997 Section 115-10,

Income Tax Assessment Act 1997 Section 115-15,

Income Tax Assessment Act 1997 Section 115-20,

Income Tax Assessment Act 1997 Section 115-25,

Income Tax Assessment Act 1997 Section 115-100,

Income Tax Assessment Act 1997 Section 116-20,

Income Tax Assessment Act 1997 Section 116-30,

Income Tax Assessment Act 1997 Section 152-10,

Income Tax Assessment Act 1997 Section 152-35 and

Income Tax Assessment Act 1997 Section 152-40.

Reasons for decision

Entering into the CTA

Section 104-47 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event D4 happens if you enter into a conservation covenant over land that you own. The time of the event is when you enter into the covenant.

If the capital proceeds from entering into the covenant are more than the part of the cost base of the land that is attributed to the covenant, you make a capital gain. If the capital proceeds are less than the part of the reduced cost base of the land attributable to the covenant, you make a capital loss.

The capital proceeds from entering into the CTA is the amount received or entitled to be received under the agreement. The amounts that are applied in respect of entering into the covenant and the annual payments are amounts that you will receive or are entitled to receive.

The part of the cost base and reduced cost base of the land that is apportioned to the conservation covenant is worked out using the following formula:

Example:

The cost base and reduced cost base also includes any application fees and fees to consultants or legal advisers that you incur.

In your case, CGT event D4 applies to the total payment for entering into the CTA including any annual payments that you are expected to receive in subsequent years.

As the annual payments that you will receive are considered to be capital proceeds in respect of CGT event D4, they will not be assessable income.

You are able to apply the CGT 50% discount to any capital gain made from CGT event D4 happening as the land was acquired at least 12 months before entering into the agreement and the other conditions are met.

Sale of Vegetation Credits

A vegetation credit is a CGT asset as defined by section 108-5 of the ITAA 1997.

In accordance with section 104-10 of the ITAA 1997, CGT event A1 will happen when you dispose of your Vegetation Credits that you receive under the CTA.

The capital proceeds from the disposal of your Vegetation Credits is the money or the market value of property that you receive or are entitled to receive in respect of the disposal of the credits. The money that you receive or are entitled to receive does not include the amount (the total fund deposit) that the buyer is required to pay the Trust for Nature. If you do not receive any money or property, the capital proceeds will be the market value of the credits disposed of.

The first element of the cost base of the Vegetation Credits is the money that you will pay or are required to pay in respect of acquiring the credits. This is the amount specified in the CTA as having been applied in respect of the issue of the Vegetation Credits (provided for in schedule 1 as the "offset management plan"). This may be an amount that the Trust for Nature applies on your behalf in respect of the acquisition of the Vegetation Credits.

Sale of land to third party

The conservation covenant and the land itself are two separate CGT assets. CGT event A1 happens when you dispose of a CGT asset.

Therefore if the land to which the CTA relates is sold to a third party CGT event A1 will happen.

You are able to apply the CGT 50% discount to any capital gain made from CGT event A1 happening as the land was acquired at least 12 months before entering into the agreement and the other conditions are met.

Deductibility of expenses

Section 8-1 of the ITAA 1997 provides that you can claim a deduction for expenses that you incur in gaining or producing assessable income unless the expenses are private, domestic or capital in nature.

The expenses that you have incurred in entering into the CTA, such as payments to accountants and lawyers are capital in nature and, as previously advised, are included in the cost base of the Vegetation Credits.

As the annual payments that you will receive will be capital in nature, the expenses that you incur in respect of managing the offset area in accordance with the management plan are not able to be deducted as they are not expenses that you have incurred in gaining or producing your assessable income.

Small business concessions

Division 152 of the ITAA 1997 provides CGT concessions that are available to a small business entity provided that certain conditions are met.

Section 152-10 of the ITAA 1997 provides that a capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded if the following basic conditions are satisfied:

Active asset

The asset disposed of must satisfy the active asset test under section 152-35 of the ITAA 1997 and must not be excluded from being an active asset under subsection 152-40(4).

A CGT asset satisfies the active asset test if:

The period in subsection (2):

A CGT asset is an active asset at a time if, at that time;

In your situation, as you are not using the land in carrying on the business of farming, you do not qualify for the small business concessions and will not be able to apply them.


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