Farm Forestry New ZealandGetting it right with the Inland Revenue Department: Transferring and trading your carbon credits
Hamish Levack, New Zealand Tree Grower August 2016.
Official carbon credits known as New Zealand Units rose 300 per cent in value from around $5 to about $16 during the year ending May 2016. Last May’s Tree Grower forecast that this increase was unlikely to drop down any time soon, and indicated that major future investments in afforestation are likely to follow because of the substantial additional income streams which carbon can generate.
Many who were granted a one-off compensatory government allocation of carbon credits for land established in forest before 1990, have not yet cashed them up. Those who carried out some new planting after 1989 also have reason to suddenly feel like they have won lotto.
However, most of these owners and even their accountants, do not yet understand the taxation implications of trading and transferring New Zealand Units. Happily, details of a forest owner’s tax obligations are available in the Climate Change Response (Emissions Trading) Amendment Act 2008, and in Tax Information Bulletin Vol 20 No 9. But these documents are difficult to read and difficult to untangle from the obligations and responsibilities of non-forest owners.
This article is not particularly easy to read either, but it is an attempt to simplify the tax implications for forest owners. Here goes.
- Transactions relating to New Zealand Units are zero-rated for GST purposes.
- New Zealand Units transactions relating to land established in post-1989 forest follow ordinary principles and are treated as being revenue
- The acquisition of New Zealand Units is deductible, and their disposal is assessable
- On the allocation of New Zealand Units no taxable income arises to the owners of pre-1990 planted forests by the government
- Where additional New Zealand Units are purchased, no income tax deduction will be available if they are still held at the end of the tax year
- No income tax deduction arises when New Zealand Units are surrendered to the government such as for harvest liabilities, or conversion to pasture
- No income tax deduction arises when replacement New Zealand Units are surrendered because the deduction was already given on their purchase
- An income tax deduction is available when additional New Zealand Units purchased are surrendered.
Example for forest planted after 1989
On 1 April 2017 Blogs Forestry Ltd is awarded 100 New Zealand Units for carbon capture in its post-1989 forest. The market value of the units is $30 each.
There are no tax consequences.
On 30 June 2017 Blogs sells 10 units for $35 each.
Blogs is taxable on $350 in the year of sale. No deduction is given against the sale proceeds as there is no cost base.
On 15 August 2017 Blogs buys 20 New Zealand Units for $32 each.
An income tax deduction in the year of purchase is available for 10 of these units which can be treated as ‘replacement ETS units’. No income tax deduction is available for the 10 ‘additional’ units, which sit in Blogs’s books at the year end at their cost of $320. The deduction for the additional units arise when the units are surrendered or disposed of.
On 30 November 2017 Blogs harvests the forest.
There are no tax consequences.
On 30 April 2018 Blogs transfers 100 units to the government to discharge its harvest liability to surrender units.
There are no tax consequences.
On 5 May 2018 Blogs sells the remaining 10 units for $38 each.
Blogs has a net income of $38 less $32 multiplied by 10 which equals $60 in the year of sale. This is taxable.
Transactions relating to pre-1990 forestry
For transactions relating to forestry planted before 1990 the following applies.
- No income tax liabilities arise from, and no income tax deductions are created by ‘free’ New Zealand Units allocated by the government.
- There are no income tax deductions if additional units are bought to satisfy a deforestation liability, or where units are bought in excess of any potential liability and remain held at the end of the year.
- There are no income tax deductions when a deforestation liability arises.
- There are no income tax deductions when units are surrendered to the government to meet a deforestation liability.
Generally, if a business which owns pre-1990 forest land purchases emissions units and later sells them, any gain will be taxable and any loss will be deductible. This is as they would be for a business which did not own pre-1990 forest land.
Example for a pre-1990 forest land
The government has allocated Smith Ltd 100 New Zealand Units in relation to land it owns which was established in trees before 1990. The market value of the units was $30 each.
There are no tax consequences.
On 30 June 2017 Smith Ltd sells 10 units for $35 each.
There are no tax consequences.
On 15 August 2017 Smith Ltd purchases 1,410 units for $32 each.
There are no tax consequences.
On 30 November 2017 Smith Ltd fells the forest and converts the land to dairy farm.
There are no tax consequences.
On 30 April 2018 Smith transfers 1,000 units to the government to discharge deforestation liability.
There are no tax consequences.
On 5 May 2018 Smith Ltd sells the remaining 500 units for $35 each.
Smith Ltd is taxable on $35 minus $32 multiplied by 500 which equals $1,500.
GST treatment of unit transactions
The supply of New Zealand Units is zero rated, which means the GST to be accounted for by both transferor and transferee is nil.
Example for GST
On 1 April 2017 Blogs Forestry Ltd is awarded 100 New Zealand Units for carbon capture in its post-1989 forest. The market value of the units is $30 each.
The government makes a taxable supply of units valued at $3,000 to Blogs. Blogs makes a supply of services to the government valued at $3,000. Both supplies are zero rated so no input GST or output GST arises for either party on either transaction.
On 30 June 2017 Blogs sells 10 units for $35 each.
Blogs makes a taxable supply of $350. The supply is zero rated so no GST is payable by Blogs and the purchaser cannot claim any input GST.
On 15 August 2017 Blogs purchases 20 units for $32 each.
Blogs receives a taxable supply of $640, but the supply is zero rated so no input GST can be claimed.
On 30 April 2018 Blogs transfers 100 units to the government to discharge the liability to surrender units that arose due to harvesting the forest in November 2017.
Blogs makes a taxable supply of NZUs, but it is zero-rated and so no output GST is payable.
Selling your trees
Many people planted their forests in the mid-1990s and will shortly be selling the trees one way or the other. They need to be aware that they are allowed to spread the stumpage they get from selling their trees for income tax purposes. The Income Tax Act says −
- They may allocate the income between the income year in which you derive it and any one or more of the previous three income years.
- To do this they must apply in writing to the Commissioner no later than one year after the end of the income year in which they derive the income.
- Alternatively, they can spread forestry income forward for five years by using the Income Equalisation Deposits Scheme, but you cannot do that for selling a cutting right. In other words you must be harvesting trees.
Other considerations
If you do not want to pay any tax at all, try contacting Mossack Fonseca in Panama. This is a company which specialises in selling methods to avoid taxes. However, recently it appears to be unable to stop confidential information leaking out and this might result in unwelcome publicity for you, or even a period of constrained but free accommodation provided by the Department of Corrections.
NZFFA on facebook