SOME ASPECTS OF ENVIRONMENTAL TAXATION IN AUSTRALIA
Submitted by: Hope Ashiabor
Macquarie University



The information on this site provides an overview of the regulatory framework governing the tax treatment of certain expenditures incurred in relation to environmental activities. The areas covered are set out under the following headings:

  1. The regulatory framework: an overview.
  2. General Treatment: Business Expenditure.
  3. Environmental Impact Study Costs
  4. Environment Related capital Expenditure.
  5. Capital Improvements related to Primary Production Activities.
  6. Drought Investment Allowance.
  7. Extractive Industry Concessions related to Environmental Activities.
  1. The Regulatory Framework: an overview
The Income Tax Assessment Acts 1936 and 1997 (Commonwealth), provides the principal framework for regulating the tax treatment of issues related to the environment in Australia. Its provisions prescribe a wide range of devices to enable taxpayers’s to recoup expenses they have incurred on activities related to environmental assessment, protection, and rehabilitation.

Other sources of regulation in this area, consist of decided cases, regulations and administrative rulings issued by the Australian Taxation Office. The general effect of these sources is that they tend to elucidate the intended coverage of the Act to particular transaction.

2. General Treatment: Business Expenditure.

Generally, non-capital expenditures which are sufficiently linked to an income producing activity or a business operation are deductible under section 8-1 of the Act (1977) from the receipts generated by those activities. Section 8-1 however, denies a deduction for expenditures on capital account.

Operating expenses incurred in relation to environmental related activities of an income producing nature are also deductible under the same rules that apply to businesses generally.

The Act (1977) also provides a special regime which governs the tax treatment of environment related expenditure. This regime complements section 8-1 as it provides a wide range of concessional deductions for capital outlays which would otherwise be denied a deduction under section 8-1. The devices used to confer these deductions include:-

  • one-off deductions at a pre-determined rate.
  • immediate deductibility of the expense incurred.
  • amortisation of expenses
  • accelerated depreciation
  • concessional tax rebates.
These devices are designed to accelerate the recoupment of expenditures incurred in relation to certain eligible environmental activities. Most of these measures are available to taxpayers in addition to the ordinary deductions allowable for operating expenses. In some cases however, the availability of the measures are precluded by the general rule against double deductions.

3. Environmental Impact Study Costs

Expenses of carrying out studies for the sole or dominant purpose of evaluation or reporting on actual or likely impact of a proposed income-producing activity on the environment, are deductible in equal installments over either: -

  • the life of the project that is the subject of the study, or
  • 10 years,
whichever is less.

The deduction is not available where; -

  1. the study is primarily one of economic feasibility
  2. objectors to a venture undertake an independent environmental study.
  3. the expenditure is specifically denied a tax deduction under a provision of the Act (e.g.- entertainment, leisure facility such as a boat).
Expenditure on plant and equipment used in an environmental impact study is subject to the normal depreciation rules.

If the project is abandoned, or comes to an end, any expenditure incurred on an environmental impact study will be fully deductible in that year.

The deduction available for expenditure incurred on environmental impact study can also be offset against income from other sources. The deduction allowable should be reduced by the amount of any grant or recoupment the taxpayer received (or is likely to receive) which is not assessable.

4. Environmental Related Capital Expenditure

Capital expenditure incurred for the sole or dominant purpose of cleaning up the environment also qualifies for a full deduction. The eligible activities include: -

  1. preventing, combating or rectifying pollution of the environment by the taxpayers business (or on the site of the business).
  2. treating, cleaning up, removing or storing waste produced by the taxpayer’s business (or on the site of the business).
  3. removing redundant structures to control pollution or manage waste.
The immediate deduction does not apply to expenditure on: -
  1. depreciable plant and equipment, which are subject to the normal depreciation rules.
  2. capital works such as buildings and structural improvements (including earthworks) for environmental protection purposes. These are deductible at a rate of 2.5% (ie – over a 40-year period).
  3. the beautification or enhancement of the appearance of a disused industrial site.
5. Capital Improvements, Related to Primary Production Activities.

The capital improvements which qualify for the tax concessions in this area can be classified under 2 broad headings: -

  1. conservation, and
  2. fostering targeted economic activity.
(a): Conservation

The legislation prescribes a number of tax measures which are intended to provide an incentive for the maintenance of the natural resource base which sustains commercial scale primary production activities in Australia.

The eligible activities are: -

  1. Landcare operations.
Capital expenditure incurred by taxpayers engaged in the business of primary production on land degradation and soil conservation measures in Australia are fully deductible for tax purposes. Claims for a deduction may be reduced if: -
  1. the land has been partly used for primary production in the relevant year (as apportionment may be required).
  2. some or all of the expenditure has been reimbursed or recouped but is not assessable to the taxpayer.
  3. the item is eligible for depreciation.
Activities which come within the definition of "landcare operations" for the purpose of this deduction include: -
  1. eradication or extermination of animal or vegetable pests.
  2. destruction of weed or plant growth detrimental to the land.
  3. preventing or combating land degradation (other than by erecting fences).
  4. erecting fences to exclude livestock or vermin from areas affected by land degradation.
  5. construction of levee banks or of similar improvements.
  6. construction of drainage works; or
  7. fencing to separate different land classes under an approved management plan.
A tax offset (rebate) of 34% is available for eligible expenditure from 1 July 1997 for farmers with taxable income of up to $20,700. Any unused rebate can be carried forward for up to 3 years.
  1. Land Degradation.

    2. A full deduction is available to taxpayers who carry on business from the use of rural land in Australia in respect of expenditure incurred to erect, repair or alter fences designed to prevent land degradation in the year that the expenditure was incurred.

  2. Water Facilities.
Capital expenditure incurred on works designed to conserve or convey water, and the drilling of bores and wells (including unsuccessful drillings). are deductible over a 3-year period if the facilities are used in activities related to primary production. (b): Fostering Targeted Economic Activity.

(i) Expenditure on establishing commercial vineyards. These are deductible on a straight-line basis over 4 years, pro-rated strictly on a time basis. This means that an apportionment will be required in the first and fifth years. If the vineyard is sold before the end of the 4-year period, the balance of the claim transfers to the new owner.

  1. Other primary production activities which are eligible for depreciation are: -
    • connecting telephone lines to primary producing property (sec.387-405)
    • horticultural expenditure incurred for establishing plants and trees to produce assessable income for a business of horticulture. The Australian Taxation Office issues administrative rulings on the effective life of different plants for the purpose of ascertaining their depreciation rate.
6. Drought Investment Allowance

A one-off investment allowance capped at $5,000 (ie 10% of $50,000) is available for Drought Mitigation property. This includes facilities for fodder storage, water storage, water conveyancing and minimum tillage equipment.

Excess claims cannot be carried forward to future income years. To be eligible for this tax concession the relevant property must inter alia satisfy the following requirements:

  1. it must have been acquired (or construction commenced by the primary producer) after 23 March 1995 but before 1 July 2000
  2. it is worth $3,000 or more
  3. it is used to produce assessable primary production income
  4. it must be used or installed ready for use by 1 July 2001.
In spite of the prohibition imposed by section 8-10 on the double deductibility of the same expenditure, taxpayers claiming the 10% investment allowance can also be eligible for depreciation as well as the following deductions (where appropriate): -
  • mining and quarrying (subdiv. 330- A),:ITAA 97;
  • transport of minerals and quarrying materials (Subdiv. 330 – H): ITAA 97
  • petroleum prospecting and mining (Subdiv. 330-A): ITAA 97.
The deduction is not available: -
  • Where plant has an effective life of less that 3 years (as it would be eligible for a full deduction in that event)
  • Where the facilities qualify for the 125% deduction for research and development (section 73B – ITAA 36).
  • Where the expenditure relates to exploration and prospecting as well as quarrying and petroleum mining (section 330 – 15): ITAA 97.
7. Extractive Industry Concessions

Special tax concessions are available to taxpayers engaged in general mining, petroleum mining and quarrying operations in Division 330 (ITAA 97). The operative date for the applicability of Division 330 relates to income tax assessments for 1997/98 and subsequent years.

JURISDICTIONAL ISSUES

The provisions in Division 330 confer a deduction to Australian residents for expenditures relating to the operations of extractive industries regardless of whether they were incurred in Australia or in a foreign country. Environmental expenditure in the extractive industry area which are eligible for the Division 330 concessions include: -

  • exploration and prospecting expenditure, and
  • expenditure incurred in rehabilitating former mine sites, petroleum fields and quarries
Exploration or Prospecting Expenditure.

Activities which fall under this heading, are defined in rather wide terms under the Act. Activities encompassed within the definition range from feasibility studies to evaluate the economic viability of mineral reserves, to environmental impact studies incurred prior to any decision to commence mining or quarrying operations amongst others. This is in stark contrast to the position as outlined in a long line of cases which dealt with the deductibility of expenses incurred in relation to feasibility studies.

A full deduction is available for current and capital expenditure incurred in relation to exploration or prospecting activities where such expenses satisfy the statutory activity test. Under this test, eligible expenses would only be deductible if they were incurred in the course of a continuing or proposed business operation during the year of income: section 330-15. Expenditure which satisfies the deductibility criteria, can be offset against income derived from any source.
 
 
 
 

"Allowable Capital Expenditure" (ACE)

Special deductions are available for ACE incurred in the working of mine sites, petroleum fields and quarries either in Australia or overseas.

Section 330-85 sets out an exhaustive list of activities which constitute ACE. These include inter alia the non-capital costs of getting access to the place where extraction of valuable ore is to commence (eg – roads, railways, pipelines), site preparation, buildings and improvements (eg – workshops and storage facilities, as well as connecting utilities).

ACE’s are subject to special write-off provisions.

Site Rehabilitation Expenditure

The legislation defines "rehabilitation" as the restoration or partial restoration of a site to a reasonable approximation of its pre-mining condition – namely, its condition before the general mining, quarrying or petroleum operation commenced. In the case of the petroleum industry for instance, the removal or collapsing of an offshore oil platform would constitute a rehabilitation activity for the purposes of the Act.

Current and capital expenditure incurred on the rehabilitation of sites connected with general mining, petroleum mining and quarrying operations qualify for an outright deduction which can be offset against income from any source in the year it was incurred.

The rehabilitation expenditure deduction also extends to remediation work on sites on which exploration or prospecting were conducted.

Property used in the rehabilitation process (–eg- plant or buildings) do not qualify for the rehabilitation expenditure deductions, instead, they are eligible for either depreciation and/or the capital write off concessions.
 
 




END NOTES

(1)    Hope Ashiabor, Lecturer in Taxation Law, Macquarie University, Sydney, Australia.
(2)    Hereinafter referred to as ITAA 1936, or ITAA 1997 or the Act.
(3)    Section 8-10 (ITAA 97) provides that where a deduction would otherwise be allowed under more than one provision of the Act in respect of thesame     amount (whether for the same income year on different income years), a deduction is only available under the provision which is most appropriate.
(4)  Section 387-170 defines horticulture to include: plants cultivated for their fruits, flowers, foliage, vegetables, seed, bulbs, spores and fungi for the purposes of producing assessable income.  Plants and trees cultivated for felling however are not eligible for the deduction under this heading.
(5) The relevant provisions governing the general mining, quarrying and petroleum mining activities in relation to earlier years were dealt with in ITAA 1936, Division 10, 10AAA, 10AA and 10AB.
(6)  Items included in the definition of Allowable Capital Expenditure “ACE” are set out in section 330-85 (ITAA 97) and Taxation Ruling TR 95/36; Items excluded from the definition of ACE are covered in section 330-95 (ITAA 1997).
(7)  Softwood Pulp and Paper Ltd v FCT 76 ATC 4439; Case D69 72 ATC 409; Dalton v DFCh of T 98 ATC 2025.
 

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