The Carbon Credits Act 2011 CFI (Carbon Farming Initiative) and supporting regulations have established a framework to allow projects, which remove carbon dioxide from the atmosphere or aim to avoid emissions of greenhouse gases to generate credits.
The projects are known as ‘offset projects’ and the credits are known as ‘Australian Carbon Credit Units’ or ACCUs.
A specific division within the tax act, ITAA 1997, has been written to capture the tax accounting for carbon – Division 420.
This division deals with amounts you can deduct, along with amounts included in your assessable income. Income from the sale of the ACCUs is specifically included in your assessable income and is not assessable primary production income from a primary production business.
The value of these units is compared at the start and the end of the income year, with any increase in value included in assessable income and any decrease allowed as a deduction, under Subdivision 420-D.
Deductible expenses can be incurred when preparing or lodging an application for a certificate of entitlement, or as an offsets report during the process of becoming the holder of ACCUs.
Section 40J is the section where the establishment costs are claimed. Under Section 40J, specific sections do allow the cost of establishing a qualifying carbon sink forest on the same basis as a horticultural plan at 7% over 14 years and 105 days.
Fred the farmer established a carbon sink in September 2021.
Costs included seed acquisition, establishing the seed in the pots, preparing the land for planting which included scarifying, top dressing and weed spraying.
He thought he could claim the fencing of the plot and fire breaks, but these are not eligible under this section.
Fred can claim this for the next 13 years, and then on the 15th year can claim a partial payment or the balance for 105 days.
Fred has to complete a NAT 72196 – The notice of establishment of trees in a carbon sink forest must be completed and lodged either when Fred lodges his tax return, or within five months of EOFY.
Fred can’t claim the fencing or water facilities for the trees, or the road and firebreaks with the forest under Section 40J.
The cost of maintaining the trees and running the sequestration business will be immediately deductible as operational expenses.
When selling an ACCU, the proceeds will be assessable income on the revenue account in the income year the ACCU is sold or surrendered.
A carbon sequestration right is a CGT (Capital Gains Tax) asset. For example, selling a carbon sequestration right to another entity before the end of the contract will trigger a CGT event as the sale will result in a change of ownership.
This area of taxation is complex, and we recommend you discuss it with your tax accountant before entering into any carbon related contract.