Edited version of private advice

Authorisation Number: 1051548258252

Date of advice: 26 July 2019

Ruling

Subject: Capital gains Tax and GST - Carbon credits - Income tax - Capital Gains Tax

Question

Is your right to receive the carbon credit income considered to be a separate capital gains tax (CGT) asset from the Land for capital gains purposes?

Answer

No.

Goods and Services Tax

Question

Are you required to be registered for goods and services tax (GST)?

Answer

No, you are not required to register for GST.

This ruling applies for the following periods:

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2018

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 are not registered for GST.

You are the owner of a substantial farm (the Land).

You hold the Land under a perpetual leasehold. The Land was transferred to You after your parent's death some 15 years ago.

You and your spouse conduct a sheep grazing business on the Land as a partnership and have done so for many years including for some time prior to the transfer of the Land to You from your parent. The partnership is registered for GST.

The partnership pays for land rates and other associated costs of the land. You do not receive any lease payments or similar from the partnership.

Recently, and after an extended drought, You and your spouse decided to look for other income options as You have lost most of your sheep and your income will be significantly affected moving forward.

Subsequently, You signed a Product Development Agreement with a Carbon Credit Company (the Company) for the purposes of carrying out carbon sequestration offsets projects on the Land. At this stage there has been no income received and there is no expectation of income until sometime in the future. There have been a few visits to the Land by the Company and the wheels have been put in action.

Under the Product Development Agreement, the person who legally owns the Land receives the income from the Australian Carbon Credit Units (ACCU) which at this point would mean that all the income is in your name and can't be split with your spouse. This will require You to establish separate books, possibly register for GST and prepare and lodge separate Business Activity Statements for income You see as being partnership joint income. At this stage, the income to be generated is uncertain.

More recently, You obtained a property valuation as You are considering transferring half of the Land to your spouse and partner in the partnership. The market value of the Land is given in the valuation. This includes a specific amount as the net present value of the Carbon Credits.

In addition to the Carbon Credits, a value was placed on the Land which has been used in the partnership for the sheep grazing business since transfer from your parent. There is also a dwelling which has always been your principle residence. The valuation also mentions support buildings (shearing shed) and stock yard. The sheds and stock yards were placed on the Land at the expense of the partnership many years ago and claimed in that entity.

The only costs incurred by You to date are legal costs in relation to the Company contract.

You created the Profit a Prendre (as required under the Product Development Agreement) naming the Company as transferee acknowledging receipt of consideration of $1.00 on the 01TH Form formally granting the Profit a Prendre.

Under the Profit a Prendre, the Company is granted the carbon sequestration rights for the Land including the right to the legal, commercial or other benefit of carbon sequestration by any existing or future tree or forest on the Land. The Company is also granted other interests in the Land such as the right to enter the Land, construct and maintain roads and erect new boundary and internal fencing. The term of the transfer is for 25 years. Under the transfer, both parties agree to perform their obligations under the PDA.

Under the terms of the PDA, the Company is responsible for and has the legal right to carrying out the project and is the Project Proponent for the purposes of the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act).

The net proceeds from the sale of ACCUs is split XX% to the Company and YY% to You.

There is no expectation of receipt of income from the project until at least next year. The amount of future income to be generated is uncertain at this stage.

Assumptions

For the purpose of this ruling it is assumed that:

·        You will transfer a one-half share in the Land to your spouse during the period of the ruling, and

·        Any depreciating assets are 'held' by the partnership.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 Section 188-15

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20

A New Tax System (Goods and Services Tax) Act 1999 Section 188-25

Reasons for decision

Issue 1 - Income tax - Capital Gains Tax

Summary

Your right to receive the carbon credit income is not considered to be a separate CGT asset from the Land for capital gains purposes.

Detailed reasoning

CGT event D1 happened with the creation of the Profit a Prendre in favour of the Company as You granted legally enforceable rights to them. (See Taxation Determination TD 2018/15)

You have also acquired rights under the Product Development Agreement as the owner of the Land. The issue here is whether or not those rights held by You are treated as a separate CGT asset for capital gains purposes.

The Commissioner uses the 'look through' approach to determine the most relevant asset when applying the capital gains provisions. Under the 'look through' approach, a right is not considered to be a separate asset if it is intimately linked to an underlying asset. The exception is where the right is severed from the underlying asset.

In this case, it is not possible to break the link between the rights You own under the Product Development Agreement and your ownership of the Land. Therefore, these rights are not separate assets for capital gains purposes.

That means You will only be transferring one CGT asset to your spouse being a one-half interest in the Land.

Issue 2 - Goods and Services Tax

Summary

You are not required to register for GST as your GST turnover does not meet the registration turnover threshold.

Detailed reasoning

Section 23-5 of the GST Act provides that You are required to be registered for GST if You are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

You conduct in partnership with your spouse, a sheep grazing business on the Land. Paragraph 9-20(1)(c) of the GST Act, provides that an enterprise includes an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

By allowing the partnership to operate a sheep grazing business on your Land, You are providing to the partnership an interest in the Land. However, under paragraph 9-20(2)(c) of the GST Act, an enterprise does not include an activity, or series of activities, done by an individual without a reasonable expectation of profit or gain.

The partnership pays the rates and other associated costs of the Land on your behalf. There are no other regular rental payments made to You by the partnership. Therefore, it is considered that You do not have a reasonable expectation of profit or gain and You are not carrying on an enterprise in connection with providing an interest in the Land to the partnership.

You have granted to the Company a Profit a Prendre in respect of the Land for $1. Under this transfer, the Company is granted the carbon sequestration rights for the Land including the right to the legal, commercial or other benefit of carbon sequestration by any existing or future tree or forest on the Land. The Company is also granted other interests in the Land such as the right to enter the Land, construct and maintain roads and erect new boundary and internal fencing. The term of the transfer is for 25 years. Under the transfer, both parties agree to perform their obligations under the PDA.

It is considered that the granting of the Profit a Prendre satisfies paragraph 9-20(1)(c) of the GST Act, in that it is an activity done on a regular or continuous basis in the form of a grant of an interest in property.

We consider that the consideration for this supply is the $1 stated consideration on the 01TH form and the future right to part of the proceeds from the sale of the ACCUs. The right to part of the future proceeds from the sale of the ACCUs indicates that You have a reasonable expectation of profit or gain and therefore are considered to be carrying on an enterprise with respect to the granting of the Profit a Prendre to the Company.

As you are carrying on an enterprise, You will be required to be registered for GST if your GST turnover from carrying on your enterprise meets the registration turnover threshold.

The registration turnover threshold is currently $75,000.

You have aGST turnoverthat meets a particular turnover threshold if:

(a) your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold.

Section 188-15 of the GST Act sets out what to include and how to calculate your current GST turnover, which is your turnover for the current month and the previous 11 months. Section 188-20 of the GST Act sets out what to include and how to calculate your projected GST turnover, which is your turnover for the current month and the next 11 months.

Any supply made, or likely to be made, by You by way of transfer of ownership of a capital asset of yours is to be disregarded when working out your projected GST turnover (refer to section 188-25 of the GST Act).

Based on the facts that You have provided, your current GST turnover does not meet the GST registration turnover threshold of $75,000.

In regards to your projected GST turnover, You intend to transfer 50% of the land to your spouse such that the land becomes a partnership asset. Income, or in GST terms, consideration, from the transfer of the Profit a Prendre to the Company may start to be received after the end of the year. At this time, assuming You proceed with your plan to transfer 50% of the land to your spouse, this will be income of the partnership and therefore can be excluded from the calculation of your GST projected turnover. You will also cease to carry on an enterprise at this time.

Therefore, your projected GST turnover (which is your turnover for the current month and the next 11 months) also does not meet the GST registration turnover threshold of $75,000. You are therefore not required to be registered for GST and the transfer of the 50% interest in the land to your spouse will not be a taxable supply. You are also not making taxable supplies to the Company in respect of the supply of the Profit a Prendre.

However, as the current and projected GST turnover in any given month is calculated by reference to your turnover for the current month and the previous or next (whichever is relevant) 11 months, You will need to regularly monitor your GST turnover to ensure that You are not required to register for GST in the future.

Should any of the facts change in the future for example, this could impact on your requirement to register for GST and possible liability for GST in respect of the supply of the Profit a Prendre to the Company.