ATO ID 2004/714: Capital Allowances: landcare operation - revegetation expenditure - carbon sequestration rights
Date of decision: 18 August 2004
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
Is the taxpayer entitled to a deduction under section 40-630 of the Income Tax Assessment Act 1997 (ITAA 1997) for capital expenditure incurred on revegetating an area of their rural land they used in carrying on a business of primary production?

Decision
Yes. The taxpayer is entitled to a deduction under section 40-630 of the ITAA 1997 for capital expenditure incurred in revegetating an area of their rural land they used in carrying on a business of primary production.

Facts
The taxpayer is a landholder of some 400 hectares on which they conduct a business of cattle farming. The taxpayer decided to revegetate 20 hectares of land with indigenous species for the specific purpose of ameliorating land degradation. The taxpayer spent a significant amount of money on revegetating by planting seedlings on those 20 hectares. As a secondary consideration, the taxpayer also intends selling any carbon sequestration rights that will be generated to recover some of these costs. The taxpayer has entered into a profit a prendre agreement with an entity for the sale of the carbon sequestration rights relating to the 20 hectares of land.

Reasons for decision
Summary: Capital expenditure on a landcare operation is deductible for the income year in which it is incurred, under section 40-630 of the ITAA 1997, provided the operation is for: The taxpayer satisfies these conditions because they are carrying on a primary production business on the land. Therefore, a deduction is available to the taxpayer under section 40-630 of the ITAA 1997 if the expenditure is on a 'landcare operation' as defined in section 40-635 of the ITAA 1997. The revegetating of the 20 hectares comes within the definition of 'landcare operation' under subparagraph 40-635(1)(e)(iii) if it is an operation primarily and principally for the purpose of preventing or fighting land degradation (except by erecting fences on the land). The meaning of primarily and principally in this context is explained in Taxation Determination TD 94/9. Paragraph 3 of that taxation determination states: Where the expenditure is incurred for a dual purpose, the 'primarily and principally' test does not require a consideration of the subjective or objective purpose or motives of the taxpayer in incurring the expenditure. The test requires an examination of the primary and principal function or purpose of the result produced by incurring the expenditure. Whether the revegetation was done primarily and principally to prevent or fight land degradation is a question of fact which can only be answered by reference to the facts of each particular case. In this case, the primary and principal objective in revegetating the land was to ameliorate land degradation. The sale of the rights to the carbon sequestered by the trees is only an ancillary consideration, rather than the primary and principal purpose of the revegetation. Therefore, a deduction is allowable in accordance with section 40-630 of the ITAA 1997 for the capital expenditure incurred on revegetating the land.

Legislative references: Income Tax Assessment Act 1997 section 40-630 section 40-635 subparagraph 40-635(1)(e)(iii)
Related public rulings and determinations: Taxation Determination TD 94/9
Related ATO interpretative decisions: ATO ID 2004/320 | ATO ID 2004/321 | ATO ID 2004/323
Subject references: Afforestation expenses Carbon sequestration rights Environmental protection expenses Landcare operations