New tax law amendments have now been passed, treating carbon credit income as 'primary production income.'
Amendments to treat income from carbon credits as ‘primary production income’ have now been passed by Parliament. First announced by the Morrison Government, these amendments clarify a longstanding gap in primary production tax laws.
Pending Royal Assent, the amendments are likely but unconfirmed to be in effect from 1 July 2023.
What has changed with Australian Carbon Credit Units?
Australian Carbon Credit Units (ACCUs) issued to individual primary producers that relate to a carbon project undertaken in areas that are also used for, or connected with, primary production activities, are now referred to as ‘primary producer registered emissions units’. ACCUs first issued to a third party contracted by a primary producer to operate the carbon project and subsequently transferred to an individual, are also eligible.
The definition of ‘primary protection income’ now includes proceeds received by individuals from selling primary producer registered emissions units. A trust distribution comprising such amounts is also considered part of the definition.
A change has also been implemented in the rolling balance mechanism which imposes taxes on the increase in value of ACCUs held at the end of a financial year, or allows deductions for the decline in value of ACCUs held. This change now excludes primary producer registered emissions units owned by individuals from the ‘rolling balance mechanism’.
There is no change to the rolling balance taxation treatment of ACCUs for other entities, including:
- Superannuation funds
- Trusts or,
- Individual beneficiaries of trusts.
What does it mean for primary producers
This new law means an individual primary producer will not encounter adverse outcomes in relation to accessing primary production tax averaging, and farm management deposits. If non-primary production income is too high, eligibility to utilise these provisions is impacted.
Excluding primary producer registered emissions units from the rolling balance mechanism means that primary producers will only be taxed when the ACCU is sold.
There are specific tax laws that apply to ACCUs, but don’t apply to other types of carbon credits generated on primary production land in Australia, including:
- Verra Credit Units, or
- Carbon credits under the Gold Standard.
Individual primary producers undertaking carbon projects to give rise to other types of carbon credits are still left in doubt as to whether the income they derive is classified as primary production income. In our view, the tax laws applicable to ACCUs should be expanded to cover other types of carbon credits, including all credits which allow businesses to achieve carbon neutral certification under the Climate Active standards.
The limited application of the rolling balance mechanism change to individual primary producers alone is disappointing, as it creates annual tax implications when undertaking abatement projects in other structures.
Individual primary producers are still exposed to the $250,000 income cap for the non-commercial loss rules, which is crucial to consider, particularly if proceeds from selling ACCUs exceeds this amount.
If you have any questions about how this legislative change might affect you, contact your local BDO adviser for further guidance.