28 June 2023

Many rural landowners are assessing potential offset arrangements after being approached by developers or seeking out opportunities to be rewarded for their 'natural capital'.

Offsets arrangements can deliver appealing cashflow boosts for primary producers and may attract minimal tax.

A resource company or other developer can be forced to obtain ‘offsets’ as a condition of environmental approvals for a development. For example, if a mining project will disturb an area of protected vegetation or protected animal habitat, the associated federal and state environmental approvals will likely require the resource company to secure offset areas elsewhere that can be managed to improve the abundance of the protected species.

An offset agreement commonly involves the owner of the offset area committing to adopt certain management practices with a view to securing environmental outcomes. The landowner might agree to preserve vegetation, manage fire risks, control weeds and pest animals and potentially exclude livestock (although perhaps only at certain times of the year) in exchange for, usually, an upfront cash payment.

The proceeds will be taxed concessionally as a capital gain if the offset arrangement involves the landowner entering a ‘conservation covenant’ that:

  • restricts or prohibits certain activities on the land that could degrade the environmental value of the land;
  • is permanent and binding on current and future landowners (by way of registration on the title to the land, where possible); and
  • is approved by the Federal Environment Minister.

An example of an offset arrangement in Queensland that meets these criteria is one that:

  • is approved by the Federal Minister as part of an approval under the Environment Protection and Biodiversity Conservation Act (Cth); and
  • involves the making of a voluntary declaration under the Vegetation Management Act (Qld), which changes regulated vegetation mapping of the subject area to ‘Category A’ (red) and is recorded on title as an ‘administrative advice’.

If the above criteria are met, the proceeds the landowner receives for granting an offset will not be taxable in full but instead subject to capital gains tax on the difference between the proceeds and a share of the underlying property’s cost base. The capital gain will be exempt if the underlying property is a pre-CGT asset (acquired before 20 September 1985) and, if not, reduced by the general 12-month 50% CGT discount (for landowners that are individuals or trusts) and, where applicable, reduced even further by the ‘small business’ GST concessions. In some cases, the tax payable could therefore represent a very small percentage of the proceeds.

Of course, the fundamental suitability of an offset arrangement to a particular landowner’s circumstances should be assessed carefully as the proceeds (even if taxed favourably) might not outweigh productivity losses or other opportunity costs. Restrictions contained in other agreements affecting the underlying property should also be considered.

Thynne + Macartney has experience assisting landowners to negotiate offset arrangements that suit their long-term objectives and are structured tax effectively.

This information is intended to provide a general summary only and should not be relied on as a substitute for legal advice.

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