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Chapter 3 The Conservation Tillage Refundable Tax Offset

Commentary on Provisions

28 July 2011

Clean Energy (Consequential Amendments) Bill 2011

Department of Climate Change and Energy Efficiency

Outline of chapter

3.1   Schedule 2 to the Clean Energy (Consequential Amendments) Bill 2011 amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide a refundable tax offset (RTO) for certain new depreciating assets used in conservation tillage farming practices.

Context of amendments

3.2   The carbon pricing mechanism will not apply to agricultural emissions.

3.3   The Government's Clean Energy Future Plan includes an ongoing Carbon Farming Futures program ($429 million over the first six years) to help farmers and landholders benefit from carbon farming. Carbon Farming Futures will support research, measurement approaches and action on the ground to reduce emissions or store carbon, including support for conservation tillage equipment. The RTO forms part of the Carbon Farming Futures program.

3.4   Action to reduce greenhouse gases can improve farm productivity. Increasing soil carbon, for example, can improve soil structure and productivity, water use efficiency, soil biological activity and nutrient cycling. With improved soil quality, farmers will find it easier to cope with impacts of climate change such as higher temperatures and lower rainfall.

3.5   No-tillage farming encompasses practices whereby a crop is sown into untilled soil using narrow or knife points to minimise disturbance to soil and zero-till practices where a crop is sown with one pass with a disc seeder.

3.6   No-tillage practices aim to reduce soil disturbance, minimise damage to soil structure, increase nutrient availability and reduce water loss. With less than 20 per cent soil disturbance, the effect is improved soil structure and fertility. Stubble retention can also reduce soil surface temperature and evaporation losses, improving conservation of moisture for plant growth.

3.7   No-tillage practices also provide protection against wind erosion, particularly in dry seasons, and help to protect against land degradation. These practices can also help reduce the impacts of droughts and other severe climatic conditions, as they can help with water retention in the soil.

Summary of new law

3.8   A taxpayer will be entitled to an RTO of 15 per cent of the cost of an eligible asset that:

• they held during the income year;
• they started to use or had installed ready for use during the income year in the course of carrying on a primary production business; and
• had not previously been used or installed ready for use by the taxpayer or any other taxpayer (that is, the seeder must be new).

3.9   Only the following assets will be eligible for the RTO:

• Tine machines fitted with minimum tillage points to achieve minimum soil disturbance and less than full cut-out, including narrow points, knife points or inverted 'T' points.
• Disk openers (single, double or triple arrangements).
• Disc/tine and disc/blade hybrid machines.

3.10   The RTO will be available for assets which the taxpayer starts to use or has installed ready for use between 1 July 2012 and 30 June 2015 and will be claimable in the 2012-13, 2013-14 and 2014-15 income years.

3.11   A taxpayer will not be entitled to claim the RTO unless they hold a Research Participation Certificate evidencing that they have participated in research into the carbon sequestration properties of soil. Taxpayers will meet this participation requirement by filling out a survey.

Detailed explanation of new law

Refundable tax offset for conservation tillage

3.12   An entity is entitled to the 'conservation tillage offset' in the 2012-13, 2013-14 or 2014-15 income years if the entity meets certain eligibility criteria. The conservation tillage offset will be claimed through the entity's income tax return. [Schedule 2, item 27, paragraphs 385‑175(1)(b) and (g)]

3.13   The conservation tillage offset is a refundable tax offset subject to the common rules for tax offsets under Division 63 of the ITAA 1997 and the rules about refundable tax offset under Division 67 of the ITAA 1997.[Schedule 2, item 9]

3.14   An entitlement to claim the conservation tillage offset in respect of an asset does not affect an entity's ability to claim deductions for the decline in value of that asset under Division 40 of the ITAA 1997.

The asset must be an eligible no-till seeder

3.15   The conservation tillage offset is available for 15 per cent of the cost of a depreciating asset that is an eligible no-till seeder. The concept of a depreciating asset is defined in section 40-30 of the ITAA 1997. The cost of a depreciating asset is worked out in accordance with Subdivision 40-C of the ITAA 1997. [Schedule 2, item 27, paragraph 385‑175(1)(a) and section 385-180]

3.16 An eligible no‑till seeder is any of the following:

• Tine machines fitted with minimum tillage points designed to achieve minimum soil disturbance and less than full cut-out.
  • Minimum tillage points designed to achieve minimum soil disturbance and less than full cut-out include narrow points, knife points or inverted 'T' points.
• Disk openers with a single, double or triple disc arrangement.
• Disc/tine or disc/blade hybrid machine.

[Schedule 2, item 27, section 385-235]

3.17   The asset may be capable of existing in other forms, for example a tine machine may be fitted with wide points rather than narrow points. However, the asset must meet the definition of an eligible no-till seeder at the point it is installed ready for use or starts to be used in order to be eligible for the conservation tillage offset.

3.18   The conservation tillage tax offset is claimed in respect of individual assets. An entity can claim the conservation tillage tax offset in respect of more than one asset provided the eligibility criteria are satisfied in respect of each one.

3.19   An eligible no-till seeder must be new - that is, it must not have been previously used, or installed ready for use by the entity or any other entity. An asset will not have been previously installed ready for use if it was held as trading stock or held it ready for sale. [Schedule 2, item 27, subsection 385-175(2)]

The asset must be used in carrying on a primary production business

3.20   The entity must hold the eligible no‑till seeder at the particular time in the income year that the entity either:

• starts to use the eligible no-till seeder to carry on primary production business (without previously having the asset installed ready for use); or
• has the eligible no-till seeder installed ready for use to carry on a primary production business.

[Schedule 2, item 27, paragraphs 385-175(1)(c) and (d)]

3.21   That particular time must not occur before 1 July 2012 or after 30 June 2015. [Schedule 2, item 27, paragraphs 385-175(1)(e)]

3.22   Who holds a depreciating asset is determined in accordance with the table in section 40-40 of the ITAA 1997.

3.23   Under section 995-1 of the ITAA 1997 an entity carries on a primary production business if (among other things) they 'carry on a business of cultivating and propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things) in any physical environment.'

An entity must hold a Research Participation Certificate

3.24   An entity must have been issued with a 'Research Participation Certificate' for the income year in which they claim the conservation tillage tax offset. [Schedule 2, item 27, paragraph 385-175(1)(f)]

3.25   The Agriculture Secretary must issue the entity with a Research Participation Certificate for the income year if the entity has applied for the certificate and the Agriculture Secretary is satisfied that the entity has completed a 'conservation tillage survey' during the income year. [Schedule 2, item 27, subsections 385-190(1) and (2)]

3.26   Under section 995‑1 of the ITAA 1997, the Agriculture Secretary is the Secretary of the Agriculture Department being the department that:

• deals with matters arising under section 1 of the Farm Household Support Act 1992; and
• is administered by the Agriculture Minister (the Minister responsible for administering section 1 of the Farm Household Support Act 1992).

3.27   The Research Participation Certificate requirement ensures that the conservation tillage offset supports the Government's research efforts and the development of the methodologies in respect of the carbon sequestration properties of soil. This will help to identify opportunities to reduce emissions and to generate Australian Carbon Credit Units under the Carbon Farming Initiative.

The conservation tillage survey

3.28   An entity will participate in research by completing the conservation tillage survey - a survey conducted by the Agriculture Secretary relating to farming practices and climate change. [Schedule 2, item 27, subsections 385-190(3) and (4)]

3.29   The survey is expected to seek information about matters such as the entity's use of the eligible non-till seeder and associated benefits, their current farming system and management practices, as well as information around soil condition and soil management.

3.30 The information collected via the survey will be used to create a data set for further agricultural research, for research into soil carbon sequestration, and for useful information on the sustainability and impacts of farming practices.

3.31   Entities completing the survey may agree to be approached regarding additional research activities at a later time under the Carbon Farming Futures program. However, a claim for the conservation tillage offset is not conditional on the entity agreeing to be involved in any additional research activities. Subsequently declining to be involved in any additional research activities will not lead to the conservation tillage offset being clawed back from the entity.

Applying for a Research Participation Certificate

3.32   An entity may apply to the Agriculture Secretary for a Research Participation Certificate for an income year. The application must be in writing in a form approved by the Agriculture Secretary. [Schedule 2, item 27, section 385‑185]

A Research Participation Certificate may be denied or revoked

3.33   The Agriculture Secretary may decide not to issue a Research Participation Certificate. The Agriculture Secretary may also revoke a certificate if the Secretary is satisfied that the issue of the certificate was obtained by fraud or misrepresentation. [Schedule 2, item 27, section 385‑195 and subsection 385-200(1)]

3.34   Where a certificate is denied or revoked, the Agriculture Secretary must issue the entity with a written notice. That notice is to include the reasons for the decision not to issue a certificate or to revoke a certificate. [Schedule 2, item 27, section 385‑195 and subsection 385‑200(2)]

3.35   The written notice must also include a statement indicating the entity's ability to apply to the Administrative Appeals Tribunal either for a review of the decision or for a request of a statement related to the decision. This review mechanism is provided in light of the importance of a Research Participation Certificate to an entity's claim. [Schedule 2, item 27, sections 385‑210 and 385-215]

3.36   Once a certificate is revoked, it is taken never to have been issued. However, this does not apply in respect of a review of a decision to revoke a Research Participation Certificate by a court or the Administrative Appeals Tribunal. [Schedule 2, item 27, subsections 385-200(3) and (4)]

3.37   If a certificate issued to an entity is revoked after the time the entity has lodged its income tax return for the income year, then the entity's tax assessment can be amended to give effect to the revocation at any time during the 4‑year period starting immediately after the revocation is made. [Schedule 2, item 27, section 385‑220]

Worked examples

3.38   The following worked examples are intended to illustrate how an entity may go about satisfying the eligibility criteria and claiming a conservation tillage tax offset.

Example 2.1 Conservation Tillage Offset

Fred carries on a business of primary production.

On 10 July 2012, Fred goes into his local farm equipment and supplies store and buys a new tine machine fitted with narrow points.

The tine machine fitted with narrow points costs $100,000.

On 10 August 2012, the tine machine with narrow points is delivered to Fred's property and is ready to be hooked up to Fred's tractor (at that point the asset is installed ready for use).

After completing the research survey, Fred is issued a Research Participation Certificate by the Agriculture Secretary for the 2012-13 income year.

Fred owns the asset and therefore 'holds' the asset according to section 40-40 of the ITAA 1997.

Fred will be entitled to the conservation tillage offset for the 2012-13 income year. Fred is entitled to claim a $15,000 refundable tax offset as part of his 2012-13 tax return.

For the 2012-13 income year Fred's tax bill is $10,000 (he has no other outstanding tax liabilities). However, the $15,000 refundable tax offset will mean that Fred's tax payable is reduced to zero and he is entitled to a refund of $5,000.

Example 2.2 Conservation Tillage Offset

John is carrying on a business of primary production.

On 1 December 2013, John has his local farm supplier deliver his new disc opener to his property. The new disc opener costs $90,000. The disc opener needs substantial modifications before it can be hooked on to his older model tractor and used for the next sowing season.

On 2 July 2014, John makes the modifications to the disc opener which allow it to be hooked onto his tractor and starts sowing for the season (at this point in time the disc opener is installed ready for use).

After completing the research survey, John is issued a Research Participation Certificate by the Agriculture Secretary for the 2014-15 income year.

John owns the asset and therefore 'holds' the asset according to section 40-40 of the ITAA 1997.

John will be entitled to claim a conservation tillage offset of $13,500 as part of his tax return for the 2014-15 income year.

For the 2014-15 income year John is in a tax loss position. John will therefore receive a refund of $13,500 in respect of the conservation tillage offset (assuming he has no other outstanding tax liabilities).

Example 2.3 Research Participation Certificate

In August 2012, Sally completes the survey which details the eligible no-till seeder that she has bought and also contains information about her farming practices and information gathered in past soil testing about the nutrients in her soil.

Following completion of the survey Sally applies in writing in the approved form to the Agriculture Secretary for a Research Participation Certificate. The Agriculture Secretary is satisfied that Sally has completed the survey so must issue her with a Research Participation Certificate.

On 1 May 2013, Sally is issued with a Research Participation Certificate for the 2012-13 income year. Sally meets all of the other requirements to claim the conservation tillage offset.

Sally claims the conservation tillage offset in her income tax return for the 2012-13 income year.

In August 2013, the Agriculture Secretary decides to revoke Sally's Research Participation Certificate on grounds of serious misrepresentation.

Sally's assessment can be amended to give effect to the revocation of the certificate within four years of the date of revocation.

Sally may apply to the Administration Appeals Tribunal for review of the Agriculture Secretary's decision to revoke the certificate to be reviewed.

Information sharing and other administrative arrangements

3.39   The Agriculture Secretary and the Commissioner of Taxation (the Commissioner) each perform functions in respect of the conservation tillage offset. The Bill includes provisions that enable them to share information and facilitate the smooth administration of the offset.

Information the Agriculture Secretary must give the Commissioner

3.40   The Agriculture Secretary must give the Commissioner notice of the issuance or revocation of a certificate within 30 days of issuing or revoking the certificate. The notice to the Commissioner of Taxation will be accompanied by a copy of the certificate and specify:

• the income year for which the certificate was issued;
• the date on which the certificate was issued;
• the entity's Australian Business Number or Australian Company Number (if they have one); and
• any other information the Agriculture Secretary considers should be reported to the Commissioner.

[Schedule 2, item 27, section 385‑205]

3.41   Requiring the Agriculture Secretary to supply information to the Commissioner ensures that the Commissioner has the relevant, up-to-date information when assessing a taxpayer's claim for the conservation tillage offset.

Information the Commissioner may request of the Agriculture Secretary

3.42   The Commissioner may request that the Agriculture Secretary issue an evidentiary certificate as to whether a specified asset is an eligible minimum-till seeder. While not conclusive or binding on the Commissioner, an evidentiary certificate would be prima facie evidence of the asset's status in any legal proceedings. [Schedule 2, item 27, section 385‑225]

The Agriculture Secretary's power of delegation

3.43   The Agriculture Secretary has the power to, by writing, delegate any of his or her functions and powers in relation to the conservation tillage offset to an SES employee, or acting SES employee, in the Agriculture Department. [Schedule 2, item 27, section 385‑230]

3.44   This power of delegation is intended to facilitate the efficient and effective administration of the offset.

Application and transitional provisions

3.45   These amendments to the tax law are to apply from the same time as section 3 of the Clean Energy Bill 2011 (the main bill). Sections 3 to 312 of the main bill commence on the 28^th day after that Bill receives Royal Assent. However, those sections do not commence at all if the Acts listed in Item 2 of the table in section 2 of the main bill do not receive the Royal Assent on or before the 28th day after the main bill receives the Royal Assent. [Section 2]

2.46 As the conservation tillage offset is only available for three years, these amendments will be automatically repealed on 1 July 2015. [Schedule 2, items 74-77]