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Tax deductions for carbon sink forests

• Claiming the tax deduction
• Forest characteristics
• Environmental and Natural Resource Management guidelines
• Deductible expenditure
• Timeframe
• More information

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 biodiversity, 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 web site.

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 (e.g. 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% or more and will reach a height of at least 2 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 three areas for achieving climate change and natural resource management outcomes, and provide guidance on how the outcomes can be met.

1. 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.
2. 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.
3. 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.

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
• the costs of planting the trees or seeds
• the costs 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
• the costs incurred in grafting trees and germinating seedlings
• the costs of allowing seeds to germinate (whether by broadcasting, deliberate regeneration or planting seeds directly)
• the costs incurred on preparing to plant the trees or seeds, and
• the costs 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.
• 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
• the costs incurred to drain swamps or low lying land, or on clearing land
• the costs 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
• costs 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 7 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.

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