Issue
Under section 40-515 of the Income Tax Assessment Act 1997 (ITAA 1997), are mallee trees that are planted and cultivated for the purposes of selling the carbon credits horticultural plants?
Decision
No. Under section 40-515 of the ITAA 1997 the carbon credits that are associated with those trees are not a product or a part of the tree as required by subsection 40-520(2) of the ITAA 1997.
Facts
The NSW State government has passed legislation which requires certain businesses to reduce their carbon dioxide emissions either by improving their manufacturing processes or by offsetting those emissions with the cultivation of trees.
The taxpayer intends to acquire some land in NSW, either by purchasing freehold title or by entering into long-term leases, so that they can plant and cultivate mallee trees that will generate carbon credits that they will sell to businesses that need to reduce their carbon dioxide emissions.
They are currently negotiating with some of those businesses to enter into carbon credit contracts. These businesses are unrelated parties.
The amount of carbon credits that will be produced by these trees will be determined by an independent manager who will be applying the provisions of the NSW legislation. The determination will be made on an annual calendar year basis. Essentially, the growth of the tree will determine the amount of carbon credits they have available to sell.
Reasons for Decision
Under section 40-515 of the ITAA 1997 you can deduct an amount equal to the decline in value for the income year of a 'horticultural plant'.
The term 'horticultural plant' is defined in subsection 40-520(2) of the ITAA 1997 as meaning a live plant or fungus that is cultivated or propagated for any of its products or parts.
The term 'horticulture' is defined in subsection 40-535(1) of the ITAA 1997 as including: (a) propagation and cultivation of a 'horticultural plant' in any environment (whether natural or artificial) (b) propagation and cultivation of seeds, bulbs, spores and similar things, and (c) propagation and cultivation of fungi.
Although the items listed in subsection 40-535(1) of the ITAA 1997 are not intended to be an exhaustive list, there are certain features common to them. In particular, all of the products or parts listed are severable from the plant, extracted from the plant in some way or result in the partial or total displacement of the plant.
An element of the carbon sequestration regime is that the trees must be maintained and not harvested, or have any part of them severed or extracted.
Section 73ID of the Electricity Supply (General) Regulation 2001 associated with the Electricity Supply Amendment (Greenhouse Gas Emission Reduction) Act 2002 No 122 (ESAA 2002) stipulates the period for which carbon sequestration activity is to be maintained; it states that: An accredited abatement certificate provider who creates an abatement certificate in respect of a carbon sequestration activity must ensure the continued storage, by means of planted forests on eligible land, of the quantity of carbon dioxide stored by the activity in respect of which the certificate is created (calculated in accordance with the greenhouse gas benchmark rules) for a period of 100 years after the certificate is created.
The Greenhouse Gas Benchmark Rule (Carbon Sequestration) No. 5 of 2003 (Benchmark Rule) that commenced on 3 October 2003 is part of the relevant NSW legislation, and complements the ESAA 2002. Clause 7.3 of the Benchmark Rule states that: In accordance with this Standard, the harvesting or physical loss of any part of an Eligible Forest must be accounted for as an emission in the year in which that part of the Eligible Forest was harvested or suffered physical loss.
The mallee trees used in the carbon credit arrangements are not cultivated or propagated for any of their products or parts and do not constitute horticultural plants for the purpose of applying section 40-515 of the ITAA 1997.