Australian Carbon Credit Units and Primary Producers
While many primary producers have already embraced the opportunities that come from actively undertaking carbon abatement projects on their properties and have received the benefits from the receipt and/or subsequent sale of Australian Carbon Credit Units (ACCU’s), like many new initiatives, the Government has realised changes need to be undertaken to encourage increased activity in this sector.
Treasury Laws Amendment (2023 Measures No. 2) Bill 2023 was passed in late June 2023, and will commence on a specified date after the legislation receives Royal Assent. This legislation enables a number of changes in the taxation treatment of ACCU’s issued by the Clean Energy Regulator under Carbon Credits (Carbon Farming Initiative) Act 2011 in relation to ‘eligible offset projects’ for eligible primary producers.
Why:
With the Government committed to a net zero future, the agriculture sector is seen as a significant driver of this result. The change in taxation treatment of ACCU’s is designed to assist and encourage individual primary producers to further invest in sustainable practices that benefit from the issue of ACCU’s.
When:
Changes will apply from 1 July 2022, but won’t be implemented until one of the following dates after the legislation receives Royal Assent – 1 January, 1 April, 1 July or 1 September.
Who:
The changes relate to primary production businesses undertaken by an individual in their own capacity, a trust where an individual is a beneficiary, or a partnership, where an individual is one of the partners. It is the individual primary producer who is eligible for the concessions.
What:
The changes apply to newly issued ACCU’s held in relation to farm carbon abatement activities, first held by the Eligible Primary Producer on or after 1 July 2022. Income received from farm abatement activities with carbon service providers in relation to units issued on or after 1 July 2022 will also be treated as primary production income under these changes.
An ACCU that qualifies for concessional tax treatment will be known as a primary producer registered emissions unit.
There are 3 major changes for Eligible Primary Producers:
- income from ACCU’s will be recorded at the point of sale under these changes. This differs with the current situation where tax is calculated based on the increase or decrease in value of the ACCU’s from one year to the next, which may result in a tax liability prior to sale. This change results in a deferral of the taxing point and may assist the cash flow of individual primary producers (note, this concession does not apply to companies and trusts holding ACCU’s – they still account for income each year based on the change in market value);
- the net proceeds from the disposal of ACCU’s (or the net income from another entity that holds the qualifying units) will be considered primary production income for Farm Management Deposit Scheme (FMDS) purposes (the FMDS allows farmers to regulate their income by claiming tax deductions when making deposits to the scheme in profitable years, and including any withdrawals from the scheme in their assessable income in later years - more than 12 months later - when they occur);
- the net proceeds from the disposal of ACCU’s (or the net income from another entity that holds the qualifying units) will be considered primary production income for Primary Production Averaging purposes;
Eligible Primary Producers include individual sole traders, individuals as part of a partnership and individual beneficiaries of a trust.
Farm Management Deposits can only be made by individuals (sole traders or partners) or trustees on behalf of individual beneficiaries, carrying on a primary production business. The primary producer making the deposit must have less than $100k of non primary production income for the year, and already have no more than $800k in the FMDS. No interest is paid on funds held in a FMDS account and an individual’s FMDS account can’t be used as security for a borrowing.
Primary Producers operating their businesses through a company structure don’t qualify for the FMDS.
Primary Production Averaging enables the smoothing of fluctuations in income over the current and previous four years for primary producers, enabling them to pay a rate of tax in each year that is reflective of a regular income stream rather than one suffering peaks and troughs which is part of the nature of primary production income. The benefits of this scheme are determined on a year by year basis.
Other Key Elements to the changes:
New ACCU’s
These changes only apply to new ACCU’s issued to eligible primary producers on or after 1 July 2022 – the sale and repurchase of ACCU’s or ACCU’s issued prior to this date do not qualify for these concessions.
ACCU Cost
The cost of an ACCU is unchanged by this legislation – it remains at the market value immediately after the holder begins to hold the unit.
Primary Production Essential
A primary production business must be carried on in the same area or a connected area at all times while the eligible offsets project is being carried on to qualify for these concessions.
Carbon Service Provider (CSP)
Those who provide services wholly or mainly relating to offset projects, including where they take the role of project proponent, with the responsibility and legal right to undertake the project.
CSP Arrangements
There may be a number of types of commercial agreements between the CSP and the eligible primary producer to share the income and meet the costs of undertaking the carbon abatement project.
Regardless of whether the eligible primary producer receives ACCU’s, regular payments or a portion of the proceeds on sale of the ACCU’s as part of the commercial arrangement, these income streams qualify for this concessional tax treatment from the time the CSP commences to hold, is holding or ceases to hold the ACCU.
These tax concessions don’t extend to where the arrangement between the primary producer and CSP is in the form of a lease or rental arrangement, as this is considered property, rather than primary production, income.
Other Entities – No Change
There will be no deferral in the taxing point for ACCU’s held by trusts, companies or other non individuals – tax will be calculated based on the increase or decrease in the ACCU’s value at the end of each financial year.
Non Qualifying ACCU’s
ACCU’s issued prior to 1 July 2022, those held by companies, or where primary production activities are not carried on (such as where the agriculture land is passively leased to a third party) will not qualify for these concessions.
Individual primary producers are able to stand in the place of a trustee or a CSP to determine whether the ACCU’s issued would qualify for these concessions.
Note, primary producers continue to be able to claim a deduction for the costs of establishing a carbon project, and all related project costs, under existing tax provisions, and continue to deduct the cost of preparing and lodging a ‘certificate of entitlement’ or an ‘offsets report’.
Overall, these changes may encourage eligible primary producers to diversify their on farm income streams to include the investment in securing ACCU’s. As a result of these changes an individual primary producer may have increased control over their taxable income from one year to the next (via the timing of sale of ACCU’s, increased deposits to FMDS and primary production income averaging), and from a finance perspective the improved cash flow outcome that comes from this increased level of control may strengthen their individual balance sheets and enable further on farm investment in sustainability measures.
June 2023
