A taxing time for biodiversity – ATO rules on CGT for NSW biodiversity stewardship agreements

The Australian Commissioner of Taxation has released two long awaited Class Rulings (CR 2026/15 and CR 2026/16) setting out his views on the capital gains tax (CGT) outcomes for biodiversity stewardship agreements (BSAs). The key result is that CGT liability arises when the biodiversity credits are created under a BSA and not only when they are sold.

While this result may have been anticipated, it has significant implications for stakeholders in the NSW Biodiversity Offsets Scheme (BOS) and for the BOS Itself.

The BOS, BSAs and biodiversity credits

The BOS is established under the Biodiversity Conservation Act 2016 (NSW) (BC Act) as the NSW Government's scheme for ensuring that significant biodiversity impacts from development projects are offset (or compensated). The BOS works primarily through the use of tradeable biodiversity credits as the offsetting mechanism. Essentially:

• a landowner can enter into a BSA with the NSW Environment Minister which requires the landowner to take specified management actions on the landowner's land (which becomes a Biodiversity Stewardship Site) to conserve or enhance the biodiversity values on that land, and provides for the creation of specified types of biodiversity credits to reflect the outcomes of those actions;

• the landowner can trade those credits in a market which the BOS establishes and the NSW Government administers;

• a developer whose project has significant biodiversity impacts will have an obligation, under the project approval, to offset those impacts, and the offset obligation usually is expressed in terms of the number and type of biodiversity credits required to offset those impacts;

• the developer can deliver its offset either by purchasing the relevant credits or by paying into a NSW Government fund an amount which represents the estimated market value of the credits plus a premium (in some very rare situations, other offset options may also be available).

In addition, biodiversity credits offer a means for corporations to voluntarily offset their biodiversity impacts, which is an increasing area of focus as the impetus for nature-based reporting grows and the concept of nature positive takes hold.

The increasing demand for biodiversity credits has presented a supply challenge for some types of credits, leading to developers approaching landowners to encourage them to enter BSAs, or using their own land for BSAs, and the NSW Government devising incentives for landowners to enter into BSAs.

The Commissioner's rulings

A key focus for the Commissioner is the land based obligation which a BSA imposes. The BC Act requires a landowner to register the BSA on the title to its land and effectively creates a perpetual conservation covenant on that land. The covenant is created for consideration that is satisfied wholly by the issue of biodiversity credits.

Income tax laws describe conservation covenants as covenants that:

• restrict or prohibit certain activities on the land that could degrade the environmental value of the land;

• are permanent and registered on the title to the land (if registration is possible); and

• are approved in writing by, or entered into under a program approved in writing by, the Environment Minister

(see section 31-5 of the Income Tax Assessment Act 1997 (ITAA 1997)).

It is reasonably clear that BSAs fall within this description, noting they were most recently approved by the Commonwealth Environment Minister on 15 March 2024 as an Approved Program.

The capital gains tax provisions in Part 3-1 of the ITAA 1997 expressly contemplate the creation of such covenants. Specifically, section 104-47 of the ITAA 1997 provides that CGT event D4 happens if a taxpayer enters into a conservation covenant over land that they own and that the time of that event is when the taxpayer enters into that covenant.

A taxpayer makes a capital gain on the happening of CGT event D4 if the capital proceeds from entering into the covenant are more than that part of the cost base of the land that is apportioned to the covenant (see s104-47(3) of the ITAA 1997). Capital proceeds from a CGT event include the market value of any property the taxpayer receives, or is entitled to receive, in respect of the event happening worked out at the time of the event (see sectiion 116-20(1) of the ITAA 1997).

Given these provisions, it is unsurprising, albeit disappointing, that the Commissioner has reached the conclusions set out in these class rulings. The terms of the rulings are consistent with the Commissioner's views as expressed in Class Ruling CR 2009/77, which related to the BOS's predecessor under the former Threatened Species Conservation Act 1995 (NSW).

The rulings reflect a common approach in CGT provisions in that we frequently see the trigger date being the date of contract rather than the date of settlement. For example, where a house is sold, the relevant CGT event (CGT event A1) arises when the contract for sale is executed rather than when settlement happens notwithstanding that the taxpayer does not have the funds at that date. However, in practice, this rarely produces significant issues because settlement usually occurs prior to the date on which the tax return is lodged and the taxpayer is assessed, such that the taxpayer can expect to have the funds available when the tax liability relating to the event actually needs to be satisfied.

Effects on landowners, developers and the BOS

The real issue for landowners is that the relevant CGT event for their BSAs may fall in a tax year which is potentially years prior to the year in which the credits are sold. This can create a significant tax burden and the taxpayer will need to find other sources of funds from which to service the tax liability.

The concern is that this may discourage landowners from entering into BSAs, which could worsen the supply of credits. This, in turn, could present greater challenges for developers and potentially slow the pace of project delivery, including for housing supply, essential infrastructure and key industries. It could also cause a re-think on the delivery of the NSW Government's recently legislated nature positive policy.

These considerations might warrant a reconsideration by Treasury of the operation of the relevant tax provisions, and possibly a change to those provisions to defer or rollover recognition of a capital gain to a point where the value of the consideration has come home to the taxpayer.

It is important to note that these rulings expressly do not apply to taxpayers who hold their land on revenue account. This exclusion also applies where a BSA is entered into:

• for the purposes of obtaining and selling biodiversity credits in the ordinary course of business and those credits are held as trading stock (ie. business inventory); or

• as part of a singular or one-off profit-making purpose such as arose in FCT v Whitford's Beach Pty Ltd [1982] HCA 8.

Further, given the rulings do not apply to land that is not held on capital account, these rulings similarly would not apply where the land in issue:

• is itself properly part of an enterprise's trading stock (see FCT v St Hubert's Island Pty Ltd (in liq) [1978] HCA 10; and/or

• was acquired for the one-off profit-making purpose described above. This would arise where a business opportunity is identified in respect of certain land and the land is acquired for the purpose of realising that profit-making purpose.

What's next?

There seems to be a reasonable case for change. The challenge is now to determine whether that case will be taken up and, if so, how the Commonwealth Treasury will respond.

In the meantime, taxpayers should review their arrangements in light of these rulings. Although the rulings are expressed to apply to arrangements entered into from 1 July 2025 – 30 June 2030, we expect that these rulings similarly record the Commissioner's views in respect of dealings entered into before this period, in light of the earlier class ruling (CR 2009/77). We can provide assistance in reviewing any such arrangements and their implications for taxpayers.