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ATO Interpretative Decision

ATO ID 2004/391 (Withdrawn)

Income Tax
CGT small business concessions: active asset test - carbon sequestration right granted by landowner

Attention This ATO ID is withdrawn. Guidance relating to this issue can be found in Information for primary producers.
Attention This document has changed over time. View its history.
FOI status: may be released
Status of this decision: Decision withdrawn 5 May 2017.

CautionCAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.


Is a carbon sequestration right inherently connected with a primary producer's land under subsection 152-12(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?


Yes. A carbon sequestration right, as defined in section 87A of the Conveyancing Act 1919 (NSW) (the Conveyancing Act), is inherently connected with the primary producer's land under subsection 152-12(2) of the ITAA 1997. Any capital gain made by the primary producer from granting the right may qualify for the small business concessions if the other conditions for those concessions are satisfied.


The taxpayer, a primary producer, owns a property containing a 10 hectare forest. The taxpayer has always used the land in the course of carrying on a primary production business in New South Wales.

The taxpayer granted a carbon sequestration right, as defined in section 87A of the Conveyancing Act 1919 (NSW), to an investor, by entering into an agreement for 20 years. The agreement allows the taxpayer to continue grazing livestock in the forest. However, the taxpayer is prevented from cutting down any of the trees in the forest because, according to the terms of the agreement, all carbon sequestered by the trees belongs to the investor during the term of the agreement.

The agreement granting the carbon sequestration right is registrable as an interest in the land and will bind all future owners of the land for the period of the agreement. The taxpayer received a payment from the investor for granting the right, thus making a capital gain.

Reasons for Decision

CGT event D1, in section 104-35 of the ITAA 1997, happened when the primary producer entered into the agreement to grant the carbon sequestration right to the investor. The primary producer made a capital gain under subsection 104-35(3) of the ITAA 1997 because the capital proceeds received for granting the right exceeded the incidental costs incurred.

For the capital gain to qualify for the small business concessions contained in Division 152 of the ITAA 1997, the four basic conditions in subsection 152-10(1) of the ITAA 1997 must generally be satisfied:

  a CGT event happens in relation to a CGT asset of yours in an income year;
  the event would have resulted in the gain;
  you satisfy the maximum net asset value test; and
  the CGT asset satisfies the active asset test.

However, the effect of subsection 152-12(1) of the ITAA 1997 is that paragraphs 152-10(1)(a) and (d) of the ITAA 1997 do not apply in the case of CGT event D1. Instead subsection 152-12(2) of the ITAA 1997 requires that the right giving rise to CGT event D1 must be inherently connected with another CGT asset which satisfies the active asset test.

As the primary producer owns the land and has always used it in carrying on its business, the land satisfies the active asset test under section 152-35.

The carbon sequestration right which the primary producer has granted is registrable as an interest in the land and binding on future owners of the land. The right exists only in relation to the land and is permanent and inseparable from the land for the duration of the agreement. This satisfies the ordinary meaning of 'inherently connected', which is not otherwise defined in the ITAA 1997.

Therefore, the carbon sequestration right is inherently connected with the land and satisfies the condition in subsection 152-12(2) of the ITAA 1997. The small business concessions will be available for the capital gain if the other conditions are satisfied.

Note 1: The CGT discount is not available for capital gains made from CGT event D1 (subsection 115-25(3) of the ITAA 1997).
Note 2: CGT event D4, about conservation covenants, (section 104-47 of the ITAA 1997) does not happen on the granting of a carbon sequestration right.

Date of decision: 5 April 2004

Year of income:Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 104-35
   subsection 104-35(3)
   section 104-47
   subsection 115-25(3)
   Division 152
   subsection 152-10(1)
   paragraph 152-10(1)(a)
   paragraph 152-10(1)(d)
   subsection 152-12(1)
   subsection 152-12(2)
   section 152-35

Conveyancing Act 1919 (NSW)
   section 87A

Related ATO Interpretative Decisions
ATO ID 2004/163
ATO ID 2004/171
ATO ID 2004/172
ATO ID 2004/390

Active asset test
Capital gains tax
Carbon sequestration rights
CGT discount
CGT event D1-D3 - bringing into existence a CGT asset
CGT event D4 - entering into a conservation covenant
CGT small business relief

Siebel/TDMS Reference Number: 3936530; 1-5IQJ1XU; 1-AXRBIUD

Business Line: Private Groups and High Wealth Individuals

Date of publication: 7 May 2004
Date reviewed: 11 August 2014

ISSN: 1445-2782

ATO ID 2004/391 (Withdrawn) history   Top  
   Date   Version 
    5 April 2004   Original statement   
 You are here ®   5 May 2017   Withdrawn   


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