Edited version of your written advice

Authorisation Number: 1012927800595

Date of advice: 16 December 2015

Ruling

Subject: Disposal of Australian Carbon Credit Units

Question 1

Is the income from the sale of the Australian Carbon Credit Units (ACCUs) assessable under section 420-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the income from the sale of the ACCUs considered to be primary production income of the grazing business you conduct?

Answer

No

Question 3

Does the sale of the ACCUs give rise to a capital gain under the capital gains tax provisions in Division 3 of the ITAA 1997?

Answer

No

Question 4

If the answer to question 3 is affirmative, do the small business concessions apply to the sale of the ACCUs?

Answer

N/A

This ruling applies for the following period

Year ended 30 June 20YY

The scheme commenced on

1 July 20XX

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• Private Ruling application

• Copy of Project Development and Agency Agreement

• Contract for Sale of Land

• Copy of the ACCU Settlement Statement

• Details of the Project from the Australian Government Clean Energy Regulator website (www.cleanenergyregulator.gov.au).

Since the time of purchase, you have operated a primary production partnership business on the property.

The business turns over less than $2 million each year. The three individuals are not affiliates of each other and each individual satisfies the $6 million maximum net asset value test (for worldwide assets).

During the 20XX/YY financial year you have sold Australian Carbon Credit Units (ACCUs).

You (The Leaseholder) have entered into a Project Development and Agency Agreement (PDA) with a company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 420

Income Tax Assessment Act 1997 Subdivision 420-E

Income Tax Assessment Act 1997 Section 420-10

Income Tax Assessment Act 1997 Section 420-12

Income Tax Assessment Act 1997 Subsection 420-15(4)

Income Tax Assessment Act 1997 Section 420-25

Income Tax Assessment Act 1997 Section 420-42

Income Tax Assessment Act 1997 Subsection 420-60(3)

Income Tax Assessment Act 1997 Section 420-70

Income Tax Assessment Act 1997 Subsection 420-70(4)

Income Tax Assessment Act 1997 Subsection 118-15(1)

Income Tax Assessment Act 1997 Subsection 118-15(3)

Reasons for decision

Summary

The income from the sale of the ACCUs is specifically included in your assessable income under section 420-25 of the ITAA 1997.

You are entitled to deduct expenses incurred in preparing or lodging an application for a certificate of entitlement or an offsets report as part of the process of becoming the holder of ACCUs.

The deductions you incur in undertaking the actual eligible offsets project (the growing/maintaining of the trees) are generally determined under the normal income tax provisions.

The income from the sale of the ACCUs is not subject to any capital gain and therefore the small business capital gain concessions.

The income from the sale of the ACCUs is not primary production income from the partnership grazing business.

Detailed reasoning

You have sold Australian Carbon Credit Units (ACCUs), as evidenced by the ACCU Settlement Statement provided. The payment relates to the Leaseholders (you and joint owners) share of the total payment made for the ACCUs sold.

You have not sold the Carbon Sequestration Rights which are attached to the property. You have undertaken an "eligible offsets project" under the Carbon Farming Initiative Act, with a company acting as your agent.

To be able to enter into such a project you have to have:

(a) the legal right to carry out the project on the land; and

(b) you have to hold the applicable carbon sequestration right (present and future benefit).

At the end of each reporting period for the project you can apply to the government Regulator for the issue of certificates of entitlement to ACCUs in respect of the project. It is these ACCUs that have been sold, you still hold the carbon sequestration rights attaching to the property. This allows you to continue undertaking the eligible offsets project.

The income from the sale of the ACCUs is specifically included in your assessable income under section 420-25 of the ITAA 1997. This section is within a special Division that was enacted to prevent complexities and uncertainties that would result from applying the existing income tax law to emission units. The discrete income tax provisions specify the income tax treatment of units registered on the Australian National Registry of Emission Units. The ACCUs are such emission units (section 420-10 of ITAA 1997).

The Carbon Farming Initiative (CFI) is a carbon offset scheme that will allow project managers that are recognised offset entities to generate ACCUs through the abatement of greenhouse gases.

ACCUs represent abatement of greenhouse gases achieved as a result of offsets projects that either, remove carbon from the atmosphere and store it in soils or trees - for example, by growing trees.

The income/deductions tax consequences of you undertaking the actual eligible offsets project (the growing of the trees) are generally determined under the normal income tax provisions. The activities are effectively regarded as directed towards establishing an eligible offsets project rather than towards producing ACCUs. However, there are special rules in Division 420 of the ITAA 1997 that apply to your dealings in ACCUs that are registered on the Australian National Registry of Emissions Units.

You must include as assessable income the amounts you are entitled to receive when you sell or otherwise dispose of an ACCU arising from your eligible offsets project. You are entitled to deduct expenses incurred in preparing or lodging an application for a certificate of entitlement or an offsets report as part of the process of becoming the holder of ACCUs (subsection 420-15(4)).

If the value of the ACCUs you hold at the end of an income year has changed from the value of the ACCUs you held at the beginning of the income year, you will either include an amount in your assessable income or be entitled to a deduction. The cost of ACCUs issued to you by the clean Energy Regulator for the purpose of determining your closing value at the end of an income tax year is the market value just after they were issued to you (subsection 420-60(3)).

Section 420-10 includes in the meaning of registered emission units an Australian carbon credit unit (ACCU). The meaning of holding a registered emissions unit is provided in section 420-12 as: if you are the entity in whose Registry account (within the meaning of the Australian National Registry of Emissions Units Act 2011) there is an entry for the unit. The copy of the agreement between yourself and Terra Carbon Pty Ltd and the information on the Regulators website indicate that you are the holder of ACCUs on this registry.

You have disposed of a number of these units, therefore section 420-25 will apply to include these amounts in your assessable income in the year of disposal. Deductions for expenses incurred in ceasing to hold a registered emissions units are allowed under section 420-42.

Subdivision 420-E sets out the law relating to the exclusivity of this Division in relation to deductions and income. The income from the disposal of ACCUs is dealt with specifically in subsection 420-70(4). This states that: An amount is not to be included in your assessable income under any provision of this Act outside this Division because an Australian carbon credit unit was issued to you in accordance with the Carbon Credits (Carbon Farming Initiative) Act 2011.

Note 1: A capital gain or capital loss you make from a registered emissions unit is disregarded (subsection 118-15(1)).

Note 2: A capital gain or capital loss you make from a right to receive an Australian carbon credit unit is disregarded (subsection 118-15(3)).

This clearly shows that the income from the sale of ACCUs will not give rise to any capital gain and therefore there will be no application of the small business concessions for capital gains tax.

Primary Production Income

Your assessable income from and deductions attributable to an eligible offsets project are not income or deductions incurred in relation to a primary production business.

An amount of income may be regarded as income from carrying on a primary production business where the income arises from the use of the assets of a business of primary production and the particular use is a recognised incident of carrying on that sort of business.

Your primary production business activity is one of livestock grazing and income would be derived from the sale of these animals or their bodily produce. This is clearly primary production income within the income tax legislation.

The ultimate income from the eligible offsets project is from the sale of the ACCUs. This income is assessable under Division 420 of the ITAA and not assessable under any other section of the ITAA 1997, under the exclusivity provisions of Sub-division 420-E.

The growing of trees not for the purpose of selling the timber, part of the tree or fruit of the tree does not fall within the definition of primary production.

Taxation Ruling IT 225 contemplates that the short term hiring of plant from one primary producer to another would be a recognised incident of carrying on a business of primary production and thus income from the occasional short term hire to other primary producers would be income from carrying on a primary production business. Similarly, Taxation Ruling IT 210 - application of averaging provisions - income from hire of farm plant, suggests that income derived from occasional hire of plant by one primary producer, as an incidental part of carrying out his/her primary production business, to another primary producer would be income from carrying on a primary production business. However, where a separate hiring business is being operated by a primary producer or where hiring is done on a regular basis, the income from the hire of plant would not be income from carrying on a primary production business.

The eligible offsets project and the eventual sale of the ACCUs can be distinguished from these types of activities. The eligible offsets project description is: The protection of native forests through the prevention of clearing and clear felling harvesting activities. It does not fall within the definition of a primary production as there is no intention to harvest the trees or part of the trees. In fact it is the opposite, as the trees are to be preserved. The Emissions Reduction Fund requires sequestration projects to choose a permanence period of either 25 or 100 years. Once you have nominated a permanence period you will not be able to vary that period. In your case you have nominated a period of 100 years. The eligible offsets project is not something happening on an occasional basis in association with the primary production business that is carried on. It is a separate activity of substantial scale in terms of the amount of income derived from the sale of ACCUs, it cannot be considered a primary production business and the income derived from the sale of ACCUs is not primary production income.