Senate

Revised Explanatory Memorandum

Circulated by the authority of the Treasurer, the Hon Wayne Swan MP

Chapter 8 Capital expenditure for the establishment of trees in carbon sink forests

Outline of chapter

16.1 Schedule 8 to this Bill amends Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) to provide a deduction for capital expenditure for the establishment of trees in carbon sink forests.

Context of amendments

16.2 Carbon sink forests are forests which are established for the primary and principal purpose of sequestering carbon from the atmosphere. The carbon stored in the growing forest can then be used for greenhouse gas abatement purposes.

16.3 The costs of establishing trees in a carbon sink forest are capital in nature and income may be generated from exploiting rights over the carbon sequestered in the trees. Currently the costs of establishing trees in carbon sink forests are not deductible.

16.4 Capital expenditure for the establishment of trees in carbon sink forests will be inserted as a separate Subdivision in Division 40 of the ITAA 1997. Division 40 provides for a uniform capital allowances system. That system provides general rules that allow deductions for the decline in value of depreciating assets based on their effective lives. As well, Division 40 provides write-offs for certain other capital expenditures, which do not result in a taxpayer holding a depreciating asset, if that expenditure satisfies certain specific conditions.

16.5 Proposed Subdivision 40-J will be inserted to allow a deduction for capital expenditure for the establishment of trees in carbon sink forests.

Summary of new law

16.6 Establishment expenditure will be immediately deductible for trees established in carbon sink forests in the 2007-08 to 2011-12 income years (inclusive). After this initial period, establishment expenditure will be deductible over 14 years and 105 days at a rate of 7 per cent per annum.

Comparison of key features of new law and current law

Detailed explanation of new law

16.7 Proposed Subdivision 40-J will be inserted into Division 40 of the ITAA 1997 to allow deductions for establishment expenditure on trees in carbon sink forests.

Income years 2007-08 to 2011-12 (inclusive)

Who is entitled to the deduction?

16.8 Taxpayers carrying on a business can deduct capital expenditure incurred on establishing trees in a carbon sink forest. The requirement that taxpayers must be carrying on a business is sufficiently broad to allow those businesses who wish to abate their own greenhouse gas emissions via a carbon sink forest to be eligible for the deduction. [ Schedule 8, item 6, paragraphs 40-1010(1 )( a ) to ( c )]

16.9 The primary and principal purpose of establishing the trees must be for carbon sequestration and can not include the purposes of felling the trees or for using them in commercial horticulture. This deduction will only apply to those taxpayers who establish trees as part of a carbon sink forest. [ Schedule 8, item 6, paragraphs 40-1010(1 )( d ) and ( e )]

Example 16.1

A company acquires land and plants trees for the primary and principal purpose of carbon sequestration. The landholder also runs a tourism business, taking advantage of the spectacular location to run a bed and breakfast and accompanying hiking tours. The hiking routes run through the carbon sink forest to the edge of the property which takes in the panoramic views.

The company will be entitled to deductions for expenditure on establishing the carbon sink forest, as the primary and principal purpose is one of carbon sequestration and the secondary purpose of tourism is not an excluded purpose.

Example 16.2

A company specialises in the propagation of new species of trees for the purpose of commercial horticulture. The company acquires land and conducts 0.2 hectare test planting of a new species of waterless trees. They plan to tend the test planting for a number of years before the species will be ready for commercial sale. The trees in the test planting sequester carbon and the company decides to trade in carbon credits to supplement the tending costs.

The company will not be entitled to any deduction under the carbon sink forest provisions for establishing the trees as their primary and principal purpose was not one of carbon sequestration (see paragraph 40-1010(1)(d)). In addition, the purpose of commercial horticulture is excluded under subparagraph 40-1010(1)(e)(ii).

16.10 The deduction is not available for expenditure on establishing trees in a carbon sink forest incurred by a managed investment scheme or a forestry managed investment scheme. [ Schedule 8, item 6, paragraph 40-1010(1 )( f )]

16.11 This does not exclude a forestry manager entity from operating a separate business of trading in carbon offsets generated from an adjacent carbon sink forest.

16.12 A taxpayer can deduct the capital expenditure incurred on establishing trees for the primary and principal purpose of carbon sequestration if one of the following is satisfied:

•

the taxpayer owns the trees and any holder of a lease, lesser interest or licence relating to the land occupied by the trees does not use the land for carbon sequestration purposes [ Schedule 8, item 6, subsection 40-1005(5 ), item 1 in the table ];

•

the trees are attached to land that the taxpayer leases (from anyone), or holds under a quasi-ownership right granted by an exempt Australian or exempt foreign government agency, and the lease or quasi-ownership right entitles the taxpayer to use the land for carbon sequestration. Further, if there is another entity that holds a lesser interest or licence relating to the land, that entity must not use the land for carbon sequestration [ Schedule 8, item 6, subsection 40-1005(5 ), item 2 in the table ]; or

•

the taxpayer is the licensee relating to the land occupied by the trees and uses the land for carbon sequestration purposes as a result of that licence [ Schedule 8, item 6, subsection 40-1005(5 ), item 3 in the table ].

16.13 Together, these rules ensure that the taxpayer who can claim the deduction is the taxpayer with the least interest in the land who is using the land for the primary and principal purpose of carbon sequestration. This will ensure that only one taxpayer is entitled to a deduction under section 40-1005 in respect of capital expenditure in establishing trees in a carbon sink forest on a given area of land.

Example 16.3

A company enters into a lease agreement with a landowner so that the company can establish trees for the purpose of carbon sequestration. The company then incurs expenditure to establish trees which satisfy subsection 40-1010(2). There is no other taxpayer that has a lesser interest in that land who is using the land for the primary and principal purpose of carbon sequestration. The company is therefore eligible to claim a deduction for the trees established on that land.

Example 16.4

Company A enters into a lease arrangement over 25 hectares of land with a landholder. The lease enables company A to use the land for the primary and principal purpose of carbon sequestration. Company A also incurs capital expenditure on the establishment of trees on 15 hectares of the land for the primary and principal purpose of carbon sequestration.

Company A subsequently enters into an agreement with company B to establish trees in a carbon sink forest on the other 10 hectares of land. Under the agreement company B is granted a licence over those 10 hectares allowing it to use the land and the trees for the primary and principal purpose of carbon sequestration.

As company B is using the land and the trees for the primary and principal purpose of carbon sequestration and it has the least interest in the 10 hectares of land, company B satisfies the conditions in the table in subsection 40-1005(5).

Company B pays company A to establish the trees on the 10 hectares for which company B has the licence. The expenditure incurred by company B is capital in nature. The expenditure in relation to the trees is also covered under section 40-1010. As company B has the least interest in that land and is using the land for the primary and principal purpose of carbon sequestration, it satisfies the condition in the table in subsection 40-1005(5) for the trees, and company B is able to claim the deduction for the expenditure it incurred. Even if the expenditure incurred by company A on establishing trees in the carbon sink forest on the 10 hectares of land is capital in nature, company A is not eligible for the deduction under section 40-1005 for the establishment expenditure as company B has a lesser interest in the 10 hectares of land and uses that land for the principal and primary purpose of carbon sequestration by the trees.

The expenditure incurred by company A in relation to the trees on the 15 hectares is covered under section 40-1010. As company A has a lease over the land on which it has established the trees that enables it to use the land for the primary and principal purpose of carbon sequestration and there is no holder of a lesser interest in the land company A satisfies a condition in the table in subsection 40-1005(5). Company A is therefore able to claim the deduction for the expenditure it has incurred.

16.14 The amount of the deduction for an income year is the amount of the expenditure incurred on establishing the trees. [ Schedule 8, item 6, subsection 40-1005(2 )]

Condition for deduction

16.15 The deduction is only available for expenditure incurred on establishing trees in a forest that can achieve the characteristics of a carbon forest sink forest. [ Schedule 8, item 6, paragraph 40-1010(1 )( g )]

16.16 The trees, when established, must satisfy the following conditions:

•

at the end of the income year, the trees occupy a continuous land area in Australia of 0.2 hectares or more;

•

at the time the trees are established, it is more likely than not that they will:

-

attain a crown cover of 20 per cent or more; and

-

reach a height of at least two metres; and

•

on 1 January 1990, the area occupied by the trees was clear of other trees that:

-

attained, or were more likely than not to attain, a crown cover of 20 per cent or more; and

-

reached, or were more likely than not to reach, a height of two metres or more.

[ Schedule 8, item 6, subsection 40-1010(2 )]

Example 16.5

A company acquires 0.5 hectares of land suitable for growing trees for the purpose of establishing carbon sink forests in the 2008-09 income year. The company establishes a plot of trees covering a geographically connected 0.3 hectare land area and another geographically separated plot of trees covering a 0.1 hectare land area in the 2008-09 income year.

The plot of trees covering the 0.1 hectare land area does not satisfy the condition in paragraph 40-1010(2)(a). The plot of trees covering the 0.3 hectare land area does satisfy the condition in paragraph 40-1010(2)(a).

As a result, the company will be able to claim a deduction for the capital expenditure incurred on establishing the 0.3 hectares of trees (as long as the trees will satisfy the remaining conditions in subsection 40-1010(2)), but will not be able to claim a deduction for the second plot (the 0.1 hectares).

Example 16.6

Continuing Example 1.5, the company established the remaining 0.1 hectare of land in the 2009-10 income year. This planting will be geographically connected to the planting that occurred in the 2008-09 income year (the other 0.1 hectare of land referred to in Example 1.5). As a result, the 0.2 hectare of trees satisfy the condition in paragraph 40-1010(2)(a) and will be considered a carbon sink forest, assuming all other conditions in subsection 40-1010(2) are met, for the carbon sink forest.

The company will be entitled to a deduction under subsection 40-1005(1) for capital expenditure the company incurred on establishing the second plot (regardless of what year the costs were incurred).

The deduction for capital expenditure on establishing a carbon sink forest will not be available until subsection 40-1010(2) is satisfied.

16.17 Australia is a party to the Kyoto Protocol to the United Nations Framework Convention on Climate Change . Australia has a target under the Kyoto Protocol to limit emissions to 108 per cent of 1990 levels over the period 2008 to 2012, and follows internationally agreed rules in accounting for progress towards this target. The conditions in paragraphs 40-1010(2)(a) to (c) align with the criteria for carbon sink forest activities that can contribute to Australia's greenhouse gas target. This ensures that the tax deduction encourages the establishment of forests that can contribute to Australia's target.

16.18 The establishment of the trees must meet the requirements of the Environmental and Natural Resource Management Guidelines issued by legislative instrument, by the 'Climate Change Minister' (see paragraph 8.43). [ Schedule 8, item 6, paragraph 40-1010(2 )( d ) and subsection 40-1010(3 )]

When the deduction is available

16.19 For trees established wholly within an income year, the deduction is available in the income year the trees are established and if subsection 40-1010(2) is met. [ Schedule 8, item 6, paragraphs 40-1010(1 )( a ) to ( g )]

16.20 Where some or all of the trees are established after the end of the income year, but within the first four months of the following income year, expenditure incurred in the previous income year is immediately deductible. [ Schedule 8, item 6, subsection 40-1005(3 )]

16.21 Expenditure incurred in the four months from the end of the income year will be deductible in the year it is incurred. [ Schedule 8, item 6, subsection 40-1005(1 )]

16.22 Deductions for any prepayment of expenditure that would be incurred in the four months from the end of the income year are still subject to Subdivision H of Division 3 of the Income Tax Assessment Act 1936 .

Example 16.7

A company acquires 0.5 hectares of land suitable for growing trees for the purpose of establishing carbon sink forests in the 2008-09 income year. The company establishes a plot of trees covering a geographically connected 0.3 hectare land area and another geographically separated plot of trees covering a 0.1 hectare land area in the 2008-09 income year.

The plot of trees covering the 0.1 hectare land area does not satisfy the condition in paragraph 40-1010(2)(a), at the end of the income year. The plot of trees covering the 0.3 hectare land area does satisfy the condition in paragraph 40-1010(2)(a).

However, in the four months after the 2008-09 income year, the company completes the 0.1 hectares that connects both the first 0.1 hectare and the 0.3 hectare plantings, resulting in a total of the 0.5 hectares as one planting. As such, all costs incurred until the end of the 2008-09 income year are deductible in the 2008-09 income year. The costs incurred in the four months after the end of the income year are deductible at the end of the 2009-10 year.

Example 16.8

A company acquires 0.5 hectares of land suitable for growing trees for the purpose of establishing carbon sink forests in the 2008-09 income year. The company establishes a plot of trees covering a geographically connected 0.3 hectare land area and another geographically separated plot of trees covering a 0.1 hectare land area in the 2008-09 income year.

The plot of trees covering the 0.1 hectare land area does not satisfy the condition in paragraph 40-1010(2)(a). The plot of trees covering the 0.3 hectare land area does satisfy the condition in paragraph 40-1010(2)(a).

The remaining 0.1 hectare is established after the four-month period at the end of the 2008-09 income year (ie, late in the 2009-10 income year) and therefore does not satisfy the four-month rule. This leads to the 0.1 hectare established up until the 2008-09 income year and the new 0.1 hectare just planted, satisfying subsection 40-1010(2) at the end of the 2009-10 income year.

The costs incurred in the 2008-09 income year on the 0.1 hectares as well as the additional 0.1 hectares established in the 2009-10 income year, will be deductible at the end of the 2009-10 income year.

16.23 Where a deduction has been claimed because trees are established in the first four months of a new income year and further trees are established before the end of that same income year, the initial planting must be ignored for the purposes of calculating whether the trees occupy the size requirement in paragraph 40-1010(2)(a). [ Schedule 8, item 6, subsection 40-1005(4 )]

Example 16.9

A company acquires three hectares of land suitable for growing trees for the purpose of establishing carbon sink forests in the 2008-09 income year. The company establishes a plot of trees covering a geographically connected 0.1 hectare land area in the 2008-09 income year.

However, in the four months after the 2008-09 income year, the taxpayer completes a further 0.1 hectares that connects the 0.2 hectares as one planting. As such, all costs incurred until the end of the 2008-09 income year are deductible in the 2008-09 income year. The costs incurred in the four months after the end of the income year are deductible at the end of the 2009-10 income year.

Over the remaining months in the income year, the company establishes the remaining 2.8 hectares. The costs of the final 2.8 hectares are deductible in the 2009-10 income year. This final 2.8 hectares is considered to be a separate planting for the purposes of the 0.2 hectare requirement in paragraph 40-1010(2)(a).

Notice of establishment

16.24 The owner of the trees must give a notice to the Commissioner of Taxation (Commissioner) providing all information necessary to determine whether all conditions in subsection 40-1010(2) are met. [ Schedule 8, item 6, paragraph 40-1010(1 )( h )]

16.25 The notice must be given to the Commissioner no later than the earlier of:

•

the lodgment of the taxpayer's income tax return; or

•

five months after the end of the income year.

[ Schedule 8, item 6, subsection 40-1010(4 )]

16.26 The notice may include, but is not limited to:

•

the Australian Business Number of the entity that gives the form to the Commissioner;

•

the latitude and longitude of a central point within the area occupied by the trees, as determined by reference to the Geocentric Datum of Australia;

•

the species of trees established;

•

the estimated number of trees established per hectare of the area occupied by the trees;

•

the rationale for the probability of meeting subsection 40-1010(2); and

•

the amount of expenditure incurred in establishing the trees on the woodlot.

16.27 This notice will allow the Commissioner to seek confirmation from the Secretary to the Department of Climate Change (Climate Change Secretary - see paragraph 8.43) that the trees established will be able to achieve the characteristics of a carbon sink forest. [ Schedule 8, item 6, subsection 40-1010(8 )]

16.28 However, the Climate Change Secretary must give the Commissioner a notice if the Climate Change Secretary is satisfied that one or more characteristics of a carbon sink forest has not been met or may not be met [ Schedule 8, item 6, subsection 40-1010(5 )]. The characteristics of a 'carbon sink forest' are defined in paragraphs 8.15 to 8.18.

16.29 No deduction can be claimed if the Climate Change Secretary is not satisfied that subsection 40-1010(2) has been, or will be, met and has given the Commissioner a notice stating this. [ Schedule 8, item 6, subsections 40-1010(5 ) and ( 6 )]

16.30 A taxpayer may apply to the Administrative Appeals Tribunal for a review of a decision taken by the Climate Change Secretary in relation to the notice provided to the Commissioner. [ Schedule 8, item 6, subsection 40-1010(7 )]

16.31 The Climate Change Secretary is required to provide the taxpayer a copy of the notice under section 27A of the Administrative Appeals Tribunal Act 1975 .

16.32 This notice will ensure that a deduction is only available in respect of trees that can achieve the characteristics of a carbon sink forest.

Establishment expenditure

16.33 Establishment expenditure is expenditure incurred on establishing trees for the purpose of carbon sequestration. [ Schedule 8, item 6, paragraph 40-1010(1 )( d )]

16.34 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.

16.35 Carbon sequestration by a tree or forest means the process by which the tree or forest absorbs carbon dioxide from the atmosphere [ Schedule 8, item 6, section 40-1015 ]. An amendment to subsection 995-1(1) is also made to include this definition [ Schedule 8, item 8, definition of ' carbon sequestration' in subsection 995-1(1 ) of the ITAA 1997 ].

16.36 The costs of establishing trees for the purpose of carbon sequestration may include the following:

•

the costs of acquiring the trees or seeds;

•

the costs of planting the trees or seeds;

•

the costs of pots and potting mixtures where the potted plants are being nurtured prior to being established in their long term growing medium, in the ground, in a permanent way;

•

the costs incurred in grafting trees and germinating seedlings;

•

the costs of allowing seeds to germinate (whether by broadcasting, deliberate regeneration or planting seeds directly);

•

any costs incurred on preparing to plant which may, in some cases, include that part of the costs of ploughing, scarifying, contouring, top dressing, fertilising, weed spraying, stone removal, and top soil enhancement that is for the purpose of establishing trees for carbon sequestration; and

•

the costs of surveying the planted area.

16.37 Establishment expenditure incurred on establishing trees for the purpose of carbon sequestration does not include expenditure on other plants (eg, trees for felling, horticultural plants). However where trees are used for associated purposes, for example, companion planting for the purpose of carbon sequestration, then expenditure incurred in establishing those trees will fall within the operation of proposed Subdivision 40-J.

16.38 Establishment expenditure does not include expenditure incurred in draining swamps or low-lying land or on clearing land. [ Schedule 8, item 6, section 40-1020 ]

16.39 Expenditure on assets separate from the trees is not considered to be establishment expenditure. Examples of this include:

•

fencing;

•

water facilities for the trees in the carbon sink forest;

•

roads within the forest; and

•

fire breaks.

16.40 Expenditure incurred on rights that allow access to land or for carbon credits to be traded in the future is not considered to be establishment expenditure. Even though this expenditure may be incurred at the time of establishment, it is not considered to have a sufficient nexus for a direct expense to be incurred on establishing the trees. Examples of these costs include the costs of acquiring a right to enter land and establish the forest (commonly known as forestry rights) and the costs of acquiring the right to create a carbon credit (commonly known as carbon sequestration rights).

16.41 Nothing in this measure denies a taxpayer access to other provisions in the tax law that may provide deductions for expenditure on failed projects.

Non-arm's length transactions

16.42 The amount of capital expenditure on which a deduction is based cannot exceed the market value of what the expenditure was for, if any of the parties to an arrangement under which the expenditure is incurred are not dealing at arm's length. [ Schedule 8, item 6, section 40-1025 ]

Climate Change Minister and Climate Change Secretary

16.43 An amendment is made to subsection 995-1(1) to include a definition for the 'Climate Change Minister' and the 'Climate Change Secretary'. The Climate Change Minister is the Minister administering the National Greenhouse and Energy Reporting Act 2007 . The Climate Change Secretary is the Secretary of the Department that administers the National Greenhouse and Energy Reporting Act 2007 . [ Schedule 8, items 9 and 10, definition of ' Climate Change Minister' and ' Climate Change Secretary' in subsection 995-1(1 ) of the ITAA 1997 ]

Income year 2012-13 and later income years

Who is entitled to the deduction?

16.44 Taxpayers carrying on a business and who satisfy the conditions outlined in paragraph 8.12 can deduct capital expenditure incurred by them or another establishing entity on the establishment of trees for the purpose of carbon sequestration. [ Schedule 8, item 12, subsection 40-1005(1 )]

16.45 The primary and principal purpose of establishing the trees must be for carbon sequestration and can not include felling the trees or using the trees in commercial horticulture. This deduction will only apply to trees planted as part of a carbon sink forest. [ Schedule 8, item 12, paragraphs 40-1010(1 )( d ) and ( e )]

16.46 The deduction is not available for expenditure incurred on trees in a carbon sink forest by a managed investment scheme or a forestry managed investment scheme. [ Schedule 8, item 12, paragraph 40-1010(1 )( f )]

16.47 A forestry manager entity may operate a separate business of carbon trading by establishing a qualifying carbon sink forest.

16.48 The trees must meet the conditions for deduction as outlined in paragraphs 8.15, 8.16 and 8.18.

How is the deduction calculated?

16.49 The deduction is worked out using the following formula:

[ Schedule 8, item 12, subsection 40-1005(2 )]

16.50 The types of expenditure included in establishment expenditure are as set out in paragraphs 8.33 to 8.41.

16.51 The write-off days in income year is the number of days in the income year starting on the first day of the income year in which the trees are established and ending 14 years and 105 days later. The first day of the income year is 1 July unless the taxpayer has, or is transiting into or out of, a substituted accounting period. [ Schedule 8, item 12, subsection 40-1005(2 )]

16.52 The number of write-off days does not include days in the income year on which the taxpayer did not use the land for the purpose of carbon sequestration by the trees, or did not meet the conditions for the deduction as set out in paragraph 8.12. Therefore, if the taxpayer sells their trees during the income year, the number of write-off days in the income year does not include the days after the sale of the trees. [ Schedule 8, item 12, paragraph 40-1005(2 )( a )]

16.53 The write-off rate is constant at 7 per cent per annum. [ Schedule 8, item 12, subsection 40-1005(2 )]

16.54 This deduction will allow a straight line write-off of 7 per cent per income year over 14 years and 105 days. However, the taxpayer is not able to deduct more than the total amount incurred on establishing the trees. [ Schedule 8, item 12, subsection 40-1005(3 )]

Example 16.10

Matthews Carbon Sinks Services Ltd establishes trees for the purpose of carbon sequestration on 1 September 2012. Matthews Carbon Sinks Services Ltd incurred establishment expenditure of $400,000.

The allowable deduction for these trees is:

2012-13 income year

2013-14 income year

2027-28 income year

As the write-off period is 14 years 105 days after the first day of the income year in which the trees were established, 105 days are remaining in the 2027-28 income year.

That is, $8,000 as subsection 40-1005(3) limits the deduction to the amount of capital expenditure incurred.

Notice of establishment

16.55 At the time the trees are established, the owner of the trees must give a notice to the Commissioner. Further details are provided in paragraphs 8.24 to 8.32.

Non-arm's length transaction

16.56 The amount of capital expenditure on which a deduction is based cannot exceed the market value of what the expenditure was for, if any of the parties to an arrangement under which the expenditure is incurred are not dealing at arm's length. [ Schedule 8, item 6, section 40-1025 ]

Destruction of trees in a carbon sink forest

16.57 A taxpayer cannot claim the deduction for trees in a carbon sink forest if the trees are destroyed. The number of write-off days used in the formula in paragraph 8.51 will not include the days in the income year after which the trees were destroyed.

16.58 However, an extra deduction for any undeducted establishment expenditure will be allowed for an income year if the trees are destroyed in an income year after they are established and the write-off period has not ceased. [ Schedule 8 item 20, section 40-1030 ]

16.59 To work out the deduction, the first step is to calculate the total amounts the taxpayer could have deducted for the trees for the period that starts when the trees were established and ends when they were destroyed. [ Schedule 8 item 20, subsection 40-1030(2 ), paragraphs ( a ) and ( b ) of step 1 ]

16.60 Secondly, subtract from the capital expenditure incurred for establishing the trees, the result from step 1 as well as any amount received for the destruction (such as the proceeds of an insurance policy). The remaining amount is the deduction allowed for the destruction. [ Schedule 8, item 20, subsection 40-1030(2 ), paragraphs ( a ) and ( b ) of step 2 ]

16.61 This deduction for destruction is in addition to any other deduction for the trees for the income year under these provisions. [ Schedule 8, item 20, subsection 40-1030(3 )]

Example 16.11

Matthews Carbon Sinks Services Ltd establishes trees for the purpose of carbon sequestration on 1 September 2012. Matthews Carbon Sinks Services Ltd incurred establishment expenditure of $400,000.

On 8 February 2015, the trees are destroyed due to fire. An insurance payout of $200,000 is received.

The deduction is worked out as follows:

Step 1

2012-13 income year

2013-14 income year

2014-15 income year

The trees are destroyed on 8 February. The number of days in the 2014-15 income year that the expenditure can be written off is 223 days:

Total amount that could have been deducted = $73,107

Step 2

Establishment expenditure: $400,000

Less result from step 1: $73,107

Less any insurance moneys received: $200,000

Total deduction available for destruction of trees: $126,893

This is in addition to the deduction of $17,107 the taxpayer would have claimed for the trees for that income year.

16.62 If trees in a carbon sink forest, which received an immediate deduction, are destroyed, no extra deduction can be obtained. This is because the total amount of the establishment expenditure is deducted in the income year in which it is incurred and there is no undeducted establishment expenditure. Therefore, this extra deduction for destruction is not available for trees established in carbon sink forests that receive an immediate deduction in the 2007-08 to 2011-12 income years (inclusive).

Obtaining information for the acquisition of trees in a carbon sink forest

16.63 When a taxpayer acquires trees in a carbon sink forest from another entity in circumstances that makes the taxpayer eligible to claim the deduction, section 40-1035 will ensure sufficient information is given to a taxpayer who acquired the trees in a carbon sink forest from the last taxpayer who deducted an amount for this capital expenditure. [ Schedule 8, item 20, subsection 40-1035(1 )]

16.64 The inclusion of amounts of establishment expenditure used by the entity in calculating the deduction, as well as the period when the deductions started in the calculations for the trees, must continue to be applied by the taxpayer who acquired the trees.

16.65 The taxpayer who acquired the trees may, within 60 days of satisfying a condition in subsection 40-1005(5), give a written notice to the other entity seeking certain information [ Schedule 8 item 20, subsections 40-1035(2 ) and ( 3 )]. Only one notice can be served on the other entity [ Schedule 8, item 20, subsection 40-1035(8 )]. The written notice must address the following matters:

•

a request that the other entity provide information as to the amount of establishment expenditure for the trees, and the first day of the income year in which the trees were established [ Schedule 8, item 20, subsection 40-1035(2 )];

•

the other entity has at least 60 days in which to reply to the taxpayer who acquired the trees [ Schedule 8, item 20, paragraph 40-1035(3 )( b )]; and

•

the notice must advise the other entity that failure to comply with the request will subject the entity to a penalty of 10 penalty units if the entity does not have a reasonable excuse and fails or intentionally refuses to comply with the notice [ Schedule 8, item 20, subsection 40-1035(4 )].

16.66 Where the other entity is a partnership, the notice is properly served where the taxpayer gives the notice to any one of the partners of the partnership. [ Schedule 8, item 20, paragraph 40-1035(5 )( a )]

16.67 The obligation to provide the information requested by the taxpayer is imposed on each of the partners, not the partnership. In order to discharge the obligation, any one of the partners may respond to the request. [ Schedule 8, item 20, paragraph 40-1035(5 )( b )]

16.68 There is a penalty of 10 penalty units if a partner fails, or intentionally refuses, to comply with the request for information from the taxpayer. [ Schedule 8, item 20, subsection 40-1035(6 )]

Application and transitional provisions

16.69 Amendments provided for the income years 2007-08 to 2011-12 (inclusive) apply to the 2007-08 income year and later income years. [ Schedule 8, item 11 ]

16.70 Amendments provided for the income year 2012-13 and later years apply to the 2012-13 income year and later income years. [ Schedule 8, item 21 ]

Consequential amendments

16.71 An amendment is made to subsection 40-50(1) to ensure that expenditure for the establishment of trees in carbon sink forests cannot be written off under Subdivision 40-B of the uniform capital allowances provisions. [ Schedule 8, item 4, subsection 40-50(1 )]

16.72 An amendment is made to section 40-630 to ensure that trees in carbon sink forests cannot be deducted under Subdivision 40-G of the uniform capital allowances provisions. [ Schedule 8, item 5, subsection 40-630(2B )]

16.73 An amendment is made to section 70-120 to ensure that a taxpayer cannot claim a deduction under the trading stock provisions for felling a carbon sink forest. [ Schedule 8, item 7, subsection 40-120(5 )]

16.74 Consequential amendments are made to paragraphs 40-1010(1)(b) to (f), (h) and (4)(a) for changes to the write-off rate to 7 per cent for the income year 2012-13 and later income years. [ Schedule 8, items 13 to 19 ]

16.75 Consequential amendments are made to the guide material in section 12-5 to reflect the introduction of this measure. [ Schedule 8, items 1 and 2, section 12-5, item in the table headed ' capital allowances' and after the item in the table headed ' travel expenses' ]

16.76 A consequential amendment is made to the simplified outline of Division 40 to reflect the introduction of this measure. [ Schedule 8, item 3, section 40-10, at the end of the table ]