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Australia’s forests and woodlands provide us with clean air and water; they are home to more than half of our terrestrial biodiversity and they are a large store of terrestrial carbon. Australian climate policy significantly relies on forests and land use to reach its mitigation target. Across Australia, about 50 per cent of the remaining native forest has been estimated to be severely degraded. The main causes for the decline in biodiversity and forest health are drought, fire, disease, pests and weeds; while stressors such as clearing, fragmentation and climate change are considered to underlie and further exacerbate these problems.

In Australia, as in some other industrialised countries, a significant part of native forest is privately managed, thereby creating an additional layer of complexity in terms of forest management and conservation. Private landholders need to be provided with effective incentives for conservation of native forests. By comparison, the greater  part of the Canadian native forest is managed by provinces rather than privately. Nonetheless, Canada has one of the largest forest areas in the world and considerably advanced forest regulations; therefore, it is compelling to consider Canadian policy as a point of reference.

Australian governments have used a variety of mechanisms to encourage conservation on private land. The scope of this article is limited to fiscal measures, specifically tax incentives, which may provide an opportunity to achieve sustainable forest management and native forest protection goals in Australia. My paper examines the tax incentives for forests and land conservation currently offered in Australia, and compares them with similar mechanisms and regulations in Canada.

Current tax regimes prioritise commercial use

The Australian tax regime is focused on business and other income-connected expenses, meaning land conservation-related expenditure is not tax deductible unless it is directly linked to the commercial use of that land. That provides an incentive for landholders to use the land for production purposes rather than for conservation.

The Canadian tax regime similarly focuses on expenses incurred as a result of business and income-producing activity. Therefore, both regimes do not allow general deductions for expenses related to conservation of land and forests. The Australian and Canadian tax regimes could be improved if the expenditure of landholders involved in conservation could be deducted from their assessable income, irrespective of source of income. Further, the suggested deduction should only be available where there is no payment received in return for entering into the covenant.

Division 31 of the Income Tax Assessment Act 1997

One of the most relevant provisions providing deductions related to conservation covenants or some other permanent protection instruments registered on title is Division 31 of the Australian Income Tax Assessment Act 1997.

A conservation covenant is defined as a voluntary agreement between a landholder and an authorised body (normally a Covenant Scheme Provider)[1] that aims to protect the natural, cultural and/or scientific values of the land. Eligible taxpayers holding a conservation covenant are entitled to a deduction under Division 31. The deductible amount is the difference between the market value of the land before entering into the covenant agreement and the market value of the land directly after that. The deduction is only available where there is a decline in value of the land by more than $5,000 as a result of entering into the covenant agreement.

The Canadian Income Tax Act also provides some specific tax incentives to encourage conservation easements[2] that protect the natural value of land. The tax incentives are delivered via the ecological gifts program (EGP), for gifts of interests in environmentally sensitive land made to qualified conservation charities, federal, provincial, territorial and municipal governments. The aim of the ecological gifts program is to encourage the conservation of land and protect its natural value across Canada. Canadian tax incentive provisions are narrowly focused on conservation and protection of ecologically sensitive lands.

There is an additional incentive for ecological gifts of property under the Canadian tax regime. In particular, split-receipting rules recognise a gift for income tax purposes where a landholder receives a partial consideration for the transfer of property that is environmentally sensitive land. Under the split-receipting approach, a landowner in effect receives two benefits; that is, a payment for permanently protecting environmentally sensitive land and a tax deduction. The tax deduction received by the taxpayer is for any unremunerated value of the environmentally sensitive land gifted in establishing permanent protection over that land. Hence, the split-receipting rules distinguish the private benefit – that is, the consideration received for conservation of the land – and the ‘charitable’ (public) benefit of transferring the land for conservation purposes and reducing its fair market value.

Policy options for Australia

One of the major weaknesses of the Australian tax system is that, in some cases, it fails to recognise the public interest character of private conservation. Where covenanting occurs entirely as a gift, it is accepted as a transaction in the public interest, and thus is covered by the related tax incentives, for example deductions under Division 31 of the Income Tax Assessment Act 1997 discussed above. However, where a landholder receives some consideration in return for entering into a conservation covenant, the Australian tax regime classifies such transactions as private in nature, and the tax benefits do not apply.

The Canadian split-receipting approach is a valuable method of recognising and accommodating both the public and private interest character of environmentally beneficial transactions. In  light of this, a recommendation for Australian tax policy, which would help to recognise public and private interest in conservation transactions, would be the prompt introduction of a split-receipting mechanism, which works well in the Canadian system.

Generally, the Australian tax system facilitates some incentives encouraging private conservation of land, but there are also a number of impediments to optimal conservation. One of the possible lessons from the Canadian experience could be the introduction of more beneficial capital gains tax (CGT) provisions, which would provide a straightforward exemption for  land that is donated for conservation. Specifically, a capital gains tax exemption for land conservation, that is not dependent on income or a deduction obtained as a result of a covenant, would be very helpful for Australian taxpayers involved in conservation activities.

An alternative approach could be similar to the Canadian ecological gifts program that focuses purely on ecological gifts. The Australian tax system has similar standalone provisions addressing specific issues. For example, Pt 3-50 of the Income Tax Assessment Act 1997 institutes the system for treatment of emissions units. Such an approach establishes an essential component of consistency and comparative simplicity to the tax treatment of emissions units.

An analogous standalone provision covering the conservation of land and forest would be beneficial. In particular, it might incorporate treatment of income from environmental offsets and grant programs, the management of conservation lands, participation in conservation tenders, conservation covenants and other relevant matters. This would enable the creation of an integrated tax regime for the conservation of land and related management activities. The Canadian experience indicates that the tax system could provide more effective incentives for private conservation than those existing in Australia.

Conclusion

There are various conservation-related tax regulations in Australia. However, these regulations do not provide a strong incentive to conserve land and forests.

The Australian experience, where the deductions provided under Division 31 have been a key feature of the system for many years, suggests that such an approach is not enough to ensure adequate conservation incentives. It needs to be a tax incentives system that can sufficiently ensure that those willing to participate in land conservation have appropriate incentives and trust in the outcomes of the process. To that end, the system must ensure a certain degree of simplicity and certainty. It must be able to provide consistent support and incentives for biodiversity conservation; it must provide flexibility in its approach and it must be effective in the sense of being beneficial and transparent for taxpayers. The Australian system does not always achieve all of these goals – the Canadian system scores considerably better on them.

Overall, and despite the different approaches adopted by the Australian and Canadian authorities, the tax incentives for conservation systems in both jurisdictions have some similar problems related to the deductibility of conservation expenditure. The Australian Government might wish to consider whether conservation-related expenses could be deductible under the landcare provision, or alternatively the Government could  introduce a separate provision allowing for such deductions. This consideration is equally valid for the Canadian system, which may similarly benefit from introducing a provision allowing deductions of conservation-related expenditure. These measures, for Australia and Canada, may not fix all the problems related to biodiversity conservation that exist in each of the countries. However, at least they may go some way to ensuring that the tax incentives addressing land conservation are improved in both countries.

 

[1] Covenant Scheme Providers could be not-for-profit organisations, government agencies or local councils (listed on the Register of Environment) that can sign conservation covenants with landholders to protect land with conservation values.

[2] A conservation easement is similar to the Australian conservation covenant and can be defined as a voluntary legal agreement between a landowner and a land trust or other qualified entity that permanently limits uses of the land in order to protect its conservation values.

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