Edited version of private advice

Authorisation Number: 1051976577326

Date of advice: 27 April 2022

Ruling

Subject: Small business CGT concessions - biodiversity credits

Question 1

Are the credits issued by the Entity a capital gains tax (CGT) asset?

Answer

Yes.

Question 2

Will a CGT event occur when you enter into the Agreement?

Answer

Yes

Question 3

Are you taken to have acquired the credits at the time you enter into the agreement?

Answer

Yes.

Question 4

Can credits be active assets under the small business CGT concessions?

Answer

Yes.

This private ruling applies for the following periods:

Year ending DD/MM/YYYY

Year ending DD/MM/YYYY

The scheme commences on:

DD/MM/YYYY

Relevant facts and circumstances

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

You have been operating a farming business since the XXXX-XX financial year. The business has always operated on the same land.

Approximately X acres is owned by you and a further X acres is leased for farming.

The farming operation is a mixture of livestock grazing as well as more recently growing crops.

Since commencement of the farming operation a substantial amount of money has been invested into sheds, fencing, water tanks and bore infrastructure.

Due to drought in the area and a decline in prices you have recently diversified operations to include growing crops.

The farming business satisfies the aggregated annual turnover test for the small business CGT concessions.

You are proposing to enter into an Agreement with another Entity.

As part of the agreement, a stewardship site would be established on part of your land.

The Agreement is a statutory covenant recording the establishment of a stewardship site registered on the land (binding future successors in title). The agreement is between X and the landowner and is in force in perpetuity.

According to the agreement, you will carry out land management actions (such as replanting approved local trees, clearing weeds, managing pest species and refraining from farming activities on the stewardship site) and certain reporting obligations.

In exchange you will receive credits and may be entitled to payments from the Entity.

The Agreement specifies the amount that the landowner is entitled to receive on signing that agreement. This amount is satisfied in full by the creation of the credits.

Payment is by way of an initial deposit and then the landowner will receive an annual payment from the Entity.

This payment is subject to the landowner completing the management actions set out in the Agreement.

Once the credits have been issued to you, they may be sold at your discretion to another party or retained.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-47

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 paragraph 108-5(1)(a)

Income Tax Assessment Act 1997 subsection 116-20(1)

Income Tax Assessment Act 1997 section 152-10

Reasons for decision

Question 1

Subsection 108-5(1) defines a CGT asset as:

a)    any kind of property; or

b)    a legal or equitable right that is not property.

Credits fall would fall within the definition of CGT asset under paragraph 108-5(1)(a) of the ITAA 1997.

Question 2 and 3

CGT event D4 happens if you enter into a conservation covenant over land you own (subsection 104-47(1) of the ITAA 1997).

The time of the event is when you enter into the covenant (subsection 104-47(2) of the ITAA 1997).

Subsection 31-5(5) of the ITAA 1997 provides that a conservation covenant over land is a covenant that:

a)    restricts or prohibits certain activities on the land that could degrade the environmental value of the land; and

b)    is permanent and registered on the title to the land (if registration is possible); and

c)    is approved in writing by or is entered into under a program approved in writing by, the Environment Minister.

It is recognised that entering into the agreement satisfies the definition of a conservation covenant under subsection 31-5(5) of the ITAA 1997. Consequently, CGT event D4 will happen at the time when you execute the agreement. For CGT purposes, the credits are acquired on the date the agreement is executed.

Question 4

CGT event A1 happens on the disposal of a CGT asset. A CGT asset is disposed of when there is a change of ownership, whether because of some act or event or by operation of law (section 104-10 of the ITAA 1997).

In this case CGT event A1 will occur if you enter contracts with a purchaser for the sale of biodiversity credits. Section 152-40 of the ITAA 1997 states:

(1) A CGT asset is an active assetat a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a * business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

(b) if the asset is an intangible asset-you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

It must be demonstrated that, under paragraph 152-40(1)(b) of the ITAA 1997, the credits, as an intangible asset, are inherently connected with the farming business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

The conservation covenant is a permanent burden on the land, that would also burden the purchaser should the land be sold at a future point in time.

The credits would not be received but for the conservation covenant on the land, which is used in the farming business. The credits are therefore inherently connected with that business and the land it uses to undertake that business. As the land is used in the farming, it is an active asset for the purposes of Section 152-40 of the ITAA 1997.

As a result, the credits will be active assets under paragraph 152-40(1)(b) of the ITAA 1997 for the purpose of the small business CGT concessions.

The remaining relevant requirements in Division 152 of the ITAA 1997 must be met to qualify for the small business CGT concessions.