A land owner who receives some capital proceeds for entering into a conservation covenant on or after 15 June 2000, may qualify for concessional capital gains tax (CGT) treatment.
A land owner who does not receive any money, property or other material benefit for entering into a conservation covenant on or after 1 July 2002, may be eligible for:
To qualify for an income tax deduction, all of the following conditions must be met.
The covenant must be entered into on or after 1 July 2002.
The covenant must be entered into over land that you own – leased property is not eligible.
The covenant entered into must be perpetual.
You must not receive money, property or any other material benefit for entering into the covenant.
The covenant must be entered into with a deductible gift recipient (DGR); the Commonwealth or a state, territory or local governing body; or an authority of the Commonwealth or a state or territory.
The market value of the land must decrease as a result of you entering into the covenant.
The change in the market value of the land must be more than $5,000 due to the covenant. If the decrease in value of the land is less than $5,000, you will only be eligible for a deduction if you acquired the land not more than 12 months before entering into the covenant and you meet all the above conditions.
The amount you can claim as a deduction is the difference between the market value of the land just before you entered into the covenant and its decreased market value just after that time, but only to the extent that the decrease is attributable to you entering into the covenant. The deduction cannot add to or create a tax loss.
You can elect to spread the tax deduction over a five year period. To arrange this, you must fill in the apportionment election form available from the Secretary of the Department of Environment, Water, Heritage and the Arts - GPO Box 787, Canberra, ACT, 2601 - before you lodge your income tax return for the income year in which you entered into the covenant.
Land owners must state on this form how much of the deduction they will claim in each year over a period up to five years. This statement can be varied at any time. The variation can only apply to the percentage to be deducted in income years for which an income tax return has not been lodged. A copy of the variation must be given to the Secretary before the income tax return is lodged for the first income year to which the variation applies.
Forms are available from the Department of Environment, Water, Heritage and the Arts by phoning (02) 6274 1467 or by visiting www.environment.gov.au
Example
In the 2006-07 income year, Ben enters into a conservation covenant and receives a deduction of $5,000. The first income year in which he can claim a portion of the deduction is 2006-07.
Ben decides to spread the deduction for the conservation covenant over three income years in the following manner:
2006-07
2007-08
2008-09
2009-10
2010-11
50%
25%
25%
0%
0%
Because Ben has elected to spread the deduction over three years, he cannot claim the whole amount as an allowable deduction in the income year in which he entered into the conservation covenant. Instead, he can deduct the corresponding percentage specified in the apportionment election form for each of the income years over which the deduction is spread.
You must seek a valuation of the change in the market value of the land from the Commissioner of Taxation. This is arranged through the Australian Valuation Office (AVO). The AVO may charge you a fee for making the valuation. Expenses you incur in getting the valuation can be claimed as a tax deduction.
More information and help with arranging a valuation is available from the AVO by phoning (02) 6216 1978 or by visiting www.avo.gov.au
The capital gains tax (CGT) concessions provide comparable treatment between land owners who enter into conservation covenants and land owners who sell part of their land.
If you enter into a conservation covenant, you calculate your capital gain by comparing your capital proceeds from the grant of the covenant with a portion of the cost base of the entire land over which the covenant is granted.
The conservation covenant affects the value of the entire land. So, to calculate the cost base apportioned to the covenant, you use the cost base of the entire land even if the covenant specifically states within its terms that the land use restrictions only apply to part of the land.
The relevant portion of the cost base or reduced cost base is calculated using this formula:
cost base of land
x
capital proceeds from entering into the covenant
those capital proceeds plus the market value of the land just after you enter into the covenant
Similarly, you calculate your capital loss by comparing your capital proceeds from the grant of the covenant with a portion of the reduced cost base of the entire land over which the covenant is granted.
If you are entitled to an income tax deduction, the capital proceeds from the event are equal to the amount that you can deduct.
Capital gains made from entering into a conservation covenant will qualify for:
pre-CGT exemption, if the land was acquired before 20 September 1985
the CGT discount, for those entities that qualify if the land was owned for at least 12 months before the grant of the conservation covenant
the small business CGT concessions, where the relevant criteria are met including that the land is an active asset.
Example
Katy enters into a conservation covenant with a deductible gift recipient for no capital proceeds. The covenant covers 25% of the land she owns. Katy acquired the land on 17 May 1995 and uses it to run a farming business. For the purposes of the CGT small business concessions, the net value of Katy’s CGT assets is less than $6 million and the land is an active asset.
Katy uses the following figures to calculate the capital gain made from entering into the covenant:
Cost base of the entire land
900,000
Market value of the entire land before the covenant
1,600,000
Market value of the entire land after the covenant
1,200,000
The deduction amount that can be claimed is:
Market value of the entire land before the covenant
1,600,000
Less the market value of the entire land after the covenant deduction
1,200,000
Deduction
400,000
Cost base of the covenant
900,000 x 400,000
400,000 + 1,200,000
225,000
The net capital gain is:
capital gain (400,000 – 225,000)
175,000
less CGT discount (50%)
87,500
less 50% small business reduction
43,750
net capital gain
43,750
The result for Katy is a deduction of $400,000 and a capital gain of $43,750
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