Tax deductible carbon sink forests

Tax deductible carbon sink forests

A tax deduction is currently available to businesses that plant a forest for the purposes of absorbing carbon dioxide from the atmosphere (a carbon sink forest) through section 40-1010 of the Income Tax Assessment Act 1997 (ITAA97).

However, Parliament has recently expressed concerns about the consequences of this tax deduction including the possible conversion of prime agricultural land to forestry, the impact on water resources, the disturbance of rural communities, the length of time that these forests remain in the ground, the possible large corporate involvement in planting such forests and inappropriately claiming the available tax deduction and the further spread of inappropriately sited monoculture forests.

Amendments to the ITAA97 affecting tax deductible carbon sink forests have been referred to the Senate Standing Committee on Rural and Regional Affairs. See the inquiry into the Implementation, operation and administration of the legislation underpinning carbon sink forests.

The returns from planting a carbon sink forest are likely to be very low, especially in the first years of such a forest's life, possibly too low to justify the resumption of prime agricultural land from food production. If this is the case it is unlikely that rural communities will face significant disruption. On the other hand, a number of studies support the conclusion that the planting of carbon sink forests is a cost effective way of offsetting CO2 emissions, including a 2005 paper Land-use change and carbon sinks—econometric estimation of the carbon sequestration supply function; a Pew Center 2005 report The cost of U.S. forest-based carbon sequestration; and a 2007 paper A review of recent studies on cost effectiveness of GHG mitigation measures in the European agro-forestry sector.

Guidelines, enabled by subsection 40-1010(3) of the Income Tax Assessment Act 1997 and announced in July 2008, require the possible diversion of water resources by a carbon sink forest to be taken into account. These guidelines depend on the completeness of various water allocation plans. Unfortunately, these plans, across Australia, may not be complete until 2011 at the earliest.

Further reading:

L Nielson, Tax deductible carbon sink forests?, Research paper, no. 4, 2008–09, Parliamentary Library, Canberra, 22 August 2008.



19 November, 2010

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