Issue
Does CGT event D1, under section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997), happen on the creation of a carbon sequestration right as defined in section 87A of the Conveyancing Act 1919 (NSW) (the Conveyancing Act)?
Decision
Yes. CGT event D1, under section 104-35 of the ITAA 1997, happens on the creation of a carbon sequestration right as defined in section 87A of the Conveyancing Act.
Facts
The taxpayer enters into a contract with a New South Wales landowner in relation to the acquisition of a carbon sequestration right as defined in section 87A of the Conveyancing Act.
According to the terms of the contract, the landowner is to set aside and maintain 50 hectares of forest for 25 years. The purpose of the contract is to allow the taxpayer rights to the legal and commercial benefits of carbon sequestered in the forest, so as to offset the taxpayer's carbon emissions.
Reasons for Decision
CGT event D1 happens under section 104-35 of the ITAA 1997 when a contractual or other legal or equitable right is created in favour of another entity.
Under subsection 960-100(1) of the ITAA 1997, an entity is defined as any of the following: (a) an individual; (b) a body corporate; (c) a body politic; (d) a partnership; (e) any other unincorporated association or body of persons; (f) a trust; (g) a superannuation fund.
A carbon sequestration right is defined in section 87A of the Conveyancing Act as follows: carbon sequestration right in relation to land, means a right conferred on a person by agreement or otherwise to the legal, commercial or other benefit (whether present or future) of carbon sequestration by any existing or future tree or forest on the land after 1990.
A carbon sequestration right is a legal right held by the taxpayer in accordance with the terms of the contract under which it was conferred.
Thus the creation of a carbon sequestration right by the landowner in favour of the taxpayer constitutes a CGT event D1 under subsection 104-35(1) of the ITAA 1997.
[Note: The same principle applies to the creation of carbon sequestration rights in the various Australian States].