A tax grab-bag from deductions to carbon sink forests

Common errors regarding tax losses

The ATO has warned taxpayers of common errors it has identified when taxpayers seek to utilise their tax losses. It said common mistakes include:

incorrectly classifying the loss on either revenue or capital account;
losses being utilised where the company does not satisfy either the continuity of ownership test or the same business test;
records not being kept to substantiate the loss;
incorrectly claiming tax deductions, particularly on finance-related items; and
incorrect calculation of carried-forward losses from not taking into account amounts previously recouped.

The ATO says it is also concerned about unexplained losses, and claims for losses that do not reflect genuine commercial arrangements.

Tax deductions for carbon sink forests

All things carbon may be on many minds (or not) in the run up to July 1. While the carbon pricing regime starts on that date, it might be easy to forget that the tax law already provides deductions concerning the establishment of carbon sink forests, and that the method of claiming those deductions changes on July 1, 2012. Those provisions, however, require some onerous compliance (to say the least!).

The mechanics of claiming the deductions have taken the tax law to new heights (you know, tall trees and such)! The conditions for the deduction require, among other things, that the taxpayer is carrying on a business, and the taxpayer’s primary and principal purpose for establishing the trees must be carbon sequestration i.e. the process by which trees absorb carbon dioxide from the atmosphere.

In addition, the trees, when established, must satisfy the following conditions:

at the end of the income year, the trees must occupy a continuous land area in Australia of 0.2 hectares or more;
at the time the trees are established, it is more likely than not that they will attain a crown cover of 20% or more and reach a height of at least 2 metres; and
on January 1, 1990, the area occupied by the trees was clear of other trees that attained, or were more likely than not to attain, a crown cover of 20% or more and reached, or were more likely than not to reach, a height of two metres or more.

No wonder more and more Australians need the help of tax agents to prepare their tax returns!

But wait, there’s more.

In order to deduct expenditure for establishing the trees, taxpayers must give the ATO a notice in the approved form. Besides the ABN of their business, taxpayers are required to provide, among other things:

the latitude and longitude of a central point within the area occupied by the trees;
a description of the area occupied by the trees, including the size (in hectares) and the boundary compass points that give a general outline of the perimeter;
the species of trees established;
the estimated number of trees established per hectare of the area occupied by the trees;
the rationale for the probability of meeting the required forest characteristics.

Piece of cake!