Income tax treatment of PFSI forestry
2009 amendments to the income tax treatment of foresters under the Permanent Forest Sink Initiative.
Sections EH 34 and YA 1 of the Income Tax Act 2007 and section OB 1 of the Income Tax Act 2004
Amendments have been made to ensure that foresters under the Permanent Forest Sink Initiative (PFSI) are eligible:
- for the same tax treatment for expenditure as those who carry out conventional forestry; and
- to use income equalisation accounts.
The amendments are intended to achieve consistency in the taxation of different types of forestry activity.
The PFSI is a government climate change initiative. Under the scheme, a person who owns land which has been reforested since 31 December 1989, or who owns land which they intend to reforest, can enter into a binding covenant with the government. This covenant limits the landowner's rights to fell the trees, but in exchange they receive emissions units reflecting carbon capture in the trees.
Specific income tax rules exist for forestry, primarily in subpart DP. These rules apply to people who carry on a "forestry business". Under the previous legislation, there was uncertainty over whether some PFSI foresters were carrying on a "forestry business". If they were not, the deduction rules applicable to them would be different from the rules applying to other foresters.
Income equalisation accounts are addressed in subpart EH. A person is entitled to use an income equalisation account for their "income from forestry". Under the previous legislation, income derived by a PFSI forester from selling the emissions units received did not fall within the definition of "income from forestry", and so PFSI foresters were not eligible to use income equalisation accounts.
Both of these issues conflicted with the policy objective of generally applying the same rules to PFSI foresters and those carrying out conventional forestry involving the harvest of trees.
A new definition of "forestry business" has been inserted in section YA 1 of the Income Tax Act 2007 and section OB 1 of the Income Tax Act 2004. It includes PFSI forestry, so that the provisions in subpart DP apply to PFSI foresters.
The definition of "income from forestry" in section EH 34(1) of the Income Tax Act 2007 has been amended to refer to PFSI forestry income, so that PFSI foresters are entitled to use income equalisation accounts.
The amendments to the Income Tax Act 2007 to extend the application of subpart DP and to extend the availability of income equalisation accounts to PFSI foresters apply from the 2008-09 income year.
The amendment to the Income Tax Act 2004 to extend the application of subpart DP to PFSI foresters apply from 1 April 2005.