Five accounting and tax considerations when tackling carbon projects

Eric Barker, 08/06/2022

WITH legislation for Australia’s burgeoning carbon industry constantly developing and a flood of information being pitched to producers, doing the sums on starting a new project can be hard to navigate.

The industry has seen some major reforms in recent times, including legislation to include Australian Carbon Credit Units (ACCUs) in Farm Management Deposits (FMDs).

New South Wales-based accountant Scott Christian, from Boyce Accountants, presented some of the basic accounting considerations to the National Carbon Farming Conference in Albury last week. He has been dealing with carbon projects in Western NSW for the past 10 years.

While Beef Central has pulled out five points from his presentation, Mr Christian said the advice should be taken as a guide and long consultation was needed look into the specifics of each project.

Tax changes still not legislated

Last year, outgoing agriculture minister David Littleproud announced the then government’s plan to make revenue generated from Australian Carbon Credit Units (ACCUs) a part of primary production income – meaning it could be put into Farm Management Deposits.

Mr Christian said he believed the legislation had support from the incoming Labor Goverment. But he said it was unlikely to be an option for this financial year.

“It is anybody’s guess as to how quickly they may or may not be able to get to that,” he said.

“I’ve had clients wanting to use FMDs with their carbon income this year, but it’s not legislation yet and to base your tax planning on it become legislation would be quite risky.”

With carbon projects traditionally being run by landholders in conjunction with aggregators, Mr Christian said it was still unclear who was able to claim the ACCUs as primary production income.

“That is mainly because the legislation does not exist yet, but I think this is one of the complexities that would be slowing up the draft,” he said.

While the legislation is still coming through, Mr Christian said there was a specific tax classification to use for carbon income. He said to look for a division 420 and s995.

“If you want to talk to your accountant about carbon sales and they don’t know what division 420 is, they could mis-classify your carbon income quite quickly,” he said.

“I’ve seen it happen before because the rules for accounting for carbon from a tax point of view are quite different from other incomes – like share trading or trading stock. But the rules for division 420 are very specific and there are specific tax implications.”

Capital gains tax susceptibility

Mr Christian said capital gains tax was another major consideration for carbon projects, particularly when it came to changes in land ownership.

“Capital gains tax legislation is quite clear that a carbon project on primary production land can be classified as an active asset and that is really important for tax concessions,” he said.

“But that is one take up on a case-by-case basis.”

He said some of the other tax considerations were the increasing value of ACCUs being a taxable event, the timing of income from carbon and the instant asset write-off.

Banks approach to carbon varies

Mr Christian said banks were divided on their approach to financing carbon projects, with some showing more confidence in the future

“Some banks have done a lot of research, attended forums and are more across the implications of carbon projects than others,” he said.

“But there are some banks who are treating carbon as scary and have not taken the position that is the future of the industry like others have.”

Mr Chistian said some banks were showing more confidence in the income generated from regular farming than carbon farming.

“A couple of weeks ago, I was doing some work for a client and the bank had to exclude carbon revenue from future cash flows because they said they couldn’t be as certain as they could with the livestock enterprise,” he said.

“But given the carbon was a contract with the Federal Government and the product is audited and regulated I find it a bit ridiculous. They’re saying it can rely more heavily on the sheep and cattle enterprise, which is subject to market volatility and subject to more production risk with droughts and other factors.”

Mr Christian said it was important for new project holders to contact banks early for mortgagee consent.

Viability of the project

Like any other primary production enterprise, Mr Christian said it was important to look at the viability of the project – from the details in the contract to potential yield of carbon credits.

“I’ve seen big variations in the viability of projects and in-some-cases I have advised clients not to proceed with a project,” he said.

“The other thing to consider is the commercial agreement with your provider, how much of the revenue they will take and how long your contract is. Interference in the property is also important, looking at whether you want to change the operations of your property.

Mr Christian said scale was still an issue with some projects.

“The smallest properties I have dealt with in the western division of NSW are 8,000 to 10,000 acres. I think there will be an opportunity for smaller holdings to be involved the higher the price goes,” he said.

“But there is a big fixed cost with carbon projects, with regular audits needed and a lot of the project developers are not too keen on small projects at this point.

Impact on property value

While property values have been increasing across the board in recent times, Mr Christian said it was important to consider the impact a carbon project has on values.

“The experience for those early carbon projects in Western NSW was that there was an uplift in property values with carbon projects,” he said.

“Moving forward with soil carbon projects, it’s important to note we do not have an active marketplace. But because of the nature of the project, it may place implications on the new owner and the either need to cash out those credits or continue the project.”


Your email address will not be published. Required fields are marked *

Your comment will not appear until it has been moderated.
Contributions that contravene our Comments Policy will not be published.


Get Beef Central's news headlines emailed to you -