Summary of proposed amendments
Amendments are being made to the Income Tax Act 2007 to align the income tax treatment of transactions in emissions units received under the Permanent Forest Sink Initiative (PFSI) with the income tax treatment of transactions in emissions units received in relation to post-1989 forestry under the Emissions Trading Scheme (ETS). The two schemes are very similar and the nature of emissions units transactions under the two schemes is virtually identical, so it makes sense for the tax treatment to be the same.
Application date
The amendments apply from 1 January 2009.
Key features
The subject of these amendments is the income tax treatment of the receipt of emissions units from government, and the surrender of emissions units to government, by PFSI participants. These amendments make the tax treatment of these transactions the same as the treatment of those transactions for post-1989 foresters under the ETS, which is that the receipt of emissions units gives rise to income and the surrender is deductible, both on a cash basis.
Background
Foresters who choose to participate under the ETS for post-1989 forests receive emissions units from government reflecting the carbon capture in their growing forests. If the forest is harvested or otherwise lost, an equivalent number of emissions units to those received must be repaid to government. The tax treatment of transactions in emissions units for post-1989 foresters was discussed in the issues paper, Emissions Trading Tax Issues, released in September 2007 and enacted as part of the Climate Change Response Act 2002. Those amendments recognise that transactions in emissions units are part of the ordinary business of post-1989 foresters under the ETS, and so are on revenue account. So, the receipt of emissions units gives rise to income, and the surrender of emissions units is deductible. The amendments also recognise that forestry is generally taxable on a cash basis, unlike other businesses which are generally taxable on an accruals basis.
Under PFSI, foresters may choose to enter into covenants with government. Those covenants limit their ability to harvest the forest, but entitle them to receive emissions units for the carbon captured in the growing forest. If the forest is harvested or otherwise lost, an equivalent number of emissions units to those received must be “repaid” to government.
PFSI and post-1989 forestry under ETS have very similar transactions in emissions units, both in frequency and nature. Accordingly, it makes sense for their tax treatment to be the same, which is the effect of the amendments in this bill.