ATO ID 2009/60: Capital Allowances: carbon sink forest - cost of land
Date of decision: 30 June 2009
Year of income: Year ended 30 June 2009
Business line: Public Groups and International

Issue
Is a deduction allowed for the cost of land as capital expenditure incurred for the establishment of trees under Subdivision 40-J of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. A deduction is not allowed for the cost of land under Subdivision 40-J of the ITAA 1997 because the cost is attributable to the land rather than to the establishment of the trees.

Facts
A company purchases 30 hectares of land suitable for growing trees for the purpose of sequestering carbon in the 2008-09 income year. In the same year the company incurs capital expenditure to establish trees on the land for the primary and principal purpose of carbon sequestration by the trees.

Reasons for decision
Summary: (All legislative references are to the ITAA 1997). Broadly speaking, Subdivision 40-J allows a deduction for capital expenditure incurred in establishing trees that meet the requirements for constituting a carbon sink forest. One of these requirements is that the trees must occupy a continuous land area in Australia of 0.2 hectares or more. A deduction may be allowed under subsection 40-1005(1) for an amount if you incur capital expenditure that is covered under section 40-1010 in relation to particular trees established in the income year. Under section 40-1010 expenditure is covered in relation to particular trees if, amongst other things: The Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No. 2) Bill 2008 (EM) states that establishment occurs when the trees are planted, grown from seed or deliberately regenerated from natural seed sources in their long term growing medium, in the ground, in a permanent way. It is therefore expenditure that is incurred to establish the particular trees in the ground rather than expenditure for the ground that is covered under the section. This is reflected in the type of expenditure that is set out in the EM as examples of expenditure that is for the establishment of the trees. Those types of expenditure are all related to establishing the trees in their long term growing medium which in the case of a carbon sink forest is the ground. This is also consistent with statements in the EM that expenditure for rights that allow access to land and expenditure on assets separate from the trees, such as: are not expenditure to establish the trees. The cost of purchasing land to be used for establishing trees in a carbon sink forest is not expenditure for establishing the trees, as the cost is attributable to the land rather than to the establishment of the trees. Accordingly, a deduction is not allowed for the cost of land, as capital expenditure incurred for the establishment of trees, under Subdivision 40-J of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 subsection 40-1005(1) section 40-1010 Subdivision 40-J
Related public rulings and determinations: Taxation Determination TD 2006/46
Other references: Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No. 2) Bill 2008
Subject references: Capital expenditure Carbon sequestration rights Establishment expenditure for horticultural plants Forestry