Tax deductions for carbon sink forests
Carbon sink forests are grown for the dedicated purpose of removing carbon dioxide from the atmosphere and are important in reducing Australia's greenhouse gas emissions. Dedicated carbon sink forests are generally established as small plantings integrated within existing agricultural land uses in less productive regions, and offer multiple benefits such as enhancing bio diversity, managing salinity and improving farm productivity through land diversification.
From 1 July 2007, growers can claim a tax deduction for the expense of establishing trees in a carbon sink forest under Subdivision 40-J of the Income Tax Assessment Act 1997. The introduction of this deduction is intended to encourage the establishment of forests for the dedicated purpose of absorbing carbon dioxide from the atmosphere.
Detailed information about the tax deduction for carbon sink forests is available from the Australian Taxation Office website.
Claiming the tax deduction
In order to claim a tax deduction for costs associated with establishing a carbon sink forest taxpayers must meet certain conditions including:
- you must be carrying on a business
- your primary and principal purpose of establishing the trees is carbon sequestration by the trees
- you did not incur the expenditure under a managed investment scheme or a forestry managed investment scheme, and
- the trees in the carbon sink forest meet certain forest characteristics and adhere to certain environmental and natural resource management guidelines.
In addition, only one taxpayer can claim a deduction for the expenditure incurred in establishing carbon sink forests on a given piece of land.
Taxpayers should seek further advice from authoritative sources (for example, the Australian Taxation Office or their tax accountant) in order to fully understand the requirements of the Income Tax Assessment Act 1997.
Forest characteristics
The carbon sink forest tax deduction may only be claimed for the expense of establishing trees that meet certain characteristics including:
- the trees occupy a continuous land area in Australia of 0.2 hectares or more
- at the time the trees are established it is more likely than not that they will attain a crown cover of 20 per cent or more and will reach a height of at least two metres, and
- on 1 January 1990 the area occupied by the trees was clear of other trees with these characteristics.
These conditions align with the criteria for carbon sink forest activities that can contribute to Australia's greenhouse gas target under the Kyoto Protocol. Note that the remote sensing capability of the National Carbon Accounting System can be used to establish the state of land cover in 1989.
Environmental and Natural Resource Management guidelines
To be eligible for the tax deduction, the establishment of trees in a carbon sink forest must also meet environmental and natural resource management guidelines. This helps ensure the integrity of carbon sink forests in meeting national objectives on natural resource management as well as climate change. The guidelines align with relevant established good practice environmental and natural resource management.
The guidelines set out four areas for achieving climate change and natural resource management outcomes, and provide guidance on how the outcomes can be met.
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Regionally applicable best practice approaches
This guideline aims to ensure that carbon sink forests are established using regionally applicable best practice approaches for achieving multiple land and water environmental benefits. For example, carbon sink forests should be established in ways that enhance, or limit significant negative impacts on, water availability and salinity mitigation.
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Regional natural resource management plans
This guideline aims to ensure that carbon sink forest activities are consistent with regional natural resource management plans, and that potential cumulative environmental impacts are assessed at a catchment scale.
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Government regulatory requirements
This guideline aims to ensure that the establishment of carbon sink forests adheres to the application of Commonwealth, state and territory legislation, and local and regional regulations.
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Registration of carbon sequestration rights
This guideline aims to ensure the legal rights concerning carbon sequestration are registered on the land title to establish ownership over and rights regarding the sequestered carbon.
See the Environmental and Natural Resource Management Guidelines in relation to the establishment of trees for the purposes of carbon sequestration.
Deductible expenditure
Forest growers may deduct expenditure that is incurred in establishing the trees in a carbon sink forest. The establishment of the trees occurs when the plants are planted, grown from seed, or deliberately regenerated from natural seed sources in their long-term growing medium, in the ground and in a permanent way. Costs that growers are able to deduct under this tax provision may include the costs:
- of acquiring the trees or seeds
- of planting the trees or seeds
- of pots and potting mixtures where the potted plants are being nurtured prior to being established in their long-term growing medium, in the ground, in a permanent way
- incurred in grafting trees and germinating seedlings
- of allowing seeds to germinate (whether by broadcasting, deliberate regeneration or planting seeds directly)
- incurred on preparing to plant the trees or seeds, and
- incurred in surveying the planted area.
Costs which are not eligible for deduction under this tax provision include the costs:
- incurred on other plants (e.g. trees for harvesting or horticultural plants). However where the trees or plants are used for associated purposes, such as companion planting for the purpose of carbon sequestration, you can deduct the costs.
- incurred on assets separate from the trees such as fencing, water facilities for the trees, roads within the carbon sink forest and fire breaks
- incurred to drain swamps or low lying land, or on clearing land
- incurred on rights that allows you access to the land to establish the carbon sink forest or for carbon credits to be traded in the future, and
- of purchasing the land to be used for establishing the trees, and costs attributable to the land rather than to the establishment of the trees.
Timeframe for the deduction
During the period 1 July 2007 to 30 June 2012 a deduction may be claimed for costs incurred in establishing trees in a carbon sink forest in the income year the trees are established, if the trees are established wholly within the income year.
You may also claim a deduction for an income year if you incur expenditure in establishing trees for a carbon sink forest in the income year, or an earlier year, provided that the trees are established within 4 months after the end of that year.
From 1 July 2012 onwards a deduction may be claimed for costs incurred in establishing trees for a carbon sink forest from the start of the income year in which the trees are established and ending 14 years and 105 days later at a write-off rate of seven per cent.
Taxpayers are advised to seek further information about the tax deduction for carbon sink forests from the Australian Taxation Office or their tax accountant in order to fully understand the timeframe and deduction requirements.
More information and contacts
Read our guidance paper for further information on how to demonstrate that your carbon sink forest meets the eligibility conditions under subsection 40-1010(2) of the Income Tax Assessment Act 1997.