ATO Class Rulings on NSW Biodiversity Stewardship Agreements confirm upfront capital gains tax treatment

The ATO has published two long-awaited Class Rulings on the taxation treatment of Biodiversity Stewardship Agreements (BSAs) in New South Wales and the biodiversity credits generated.

For many taxpayers, the key takeaway from the Class Rulings is likely to be that the ATO has confirmed its view that, for capital gains tax (CGT) purposes, a taxpayer who enters into a BSA is deemed to receive the market value of the biodiversity credits generated under the BSA at the time the BSA is entered into. This is notwithstanding that often taxpayers who enter BSAs will not realise a benefit from the biodiversity credits generated, such as by selling them or retiring them to satisfy development approval conditions, for some years.

We recommend that taxpayers who have entered into BSAs or are considering doing so review their arrangements and consider seeking advice at the earliest opportunity to understand the tax and financial implications.

Background

A BSA is an agreement that a landowner enters into with the Minister responsible for administering the Biodiversity Conservation Act 2016 (NSW) (Minister). Broadly speaking, a BSA designates land as a biodiversity stewardship site to permanently protect and manage its native habitat. A BSA generates biodiversity credits which can be retired, such as to satisfy development approval conditions, or sold on the market.

The Class Rulings (CR 2026/15 and CR 2026/16) set out the ATO’s views on the various taxation issues that arise, and in particular its views on the CGT consequences both on entry into the BSA and on dealing with the credits generated.

CR 2026/16 deals specifically with situations where a landowner establishes a BSA to satisfy development approval conditions by retiring credits for an impact site held on capital account, whereas CR 2026/15 applies more broadly but explicitly excludes landowners who retire credits to satisfy development approval conditions (who will be covered by CR 2026/16). The Class Rulings are otherwise substantially the same.

Australia’s tax system generally taxes gains either as ordinary income (on “revenue account”) or under the CGT rules (on “capital account”). These Class Rulings apply where the land the subject of the BSA is held on capital account and not where the land is held on revenue account.

Overview of the key points in the Class Rulings

The ATO has confirmed its view that:

• A BSA is a “conservation covenant” and therefore that CGT event D4 happens when a BSA is entered into. The capital proceeds are the market value of the biodiversity credits generated under the BSA, worked out as at the time of the CGT event.
• CGT event A1 happens when a landowner disposes of a biodiversity credit.
• CGT event C2 happens when a landowner retires a biodiversity credit or a biodiversity credit is cancelled. If the landowner receives no capital proceeds, it is deemed to receive the market value of the biodiversity credit.
• The cost base or reduced cost base of a biodiversity credit can include amounts such as the application fee, a portion of the total fund deposit (which must be paid before credits can be transferred), and incidental costs. It also can include the market value of the rights created by the Minister when a Landowner enters into a BSA. 

The Class Rulings also discuss the taxation treatment relating to management actions on the land, including the deductibility of expenses and capital allowances.

Key considerations for taxpayers

As noted above, the main consideration for many taxpayers is likely to be the ATO confirming its view that CGT event D4 happens and a taxpayer is deemed to receive the market value of all of the biodiversity credits generated at the time the BSA is entered into. Taxpayers will therefore need to determine the market value and account for any tax payable, even though they may not sell or retire the credits in that same income year. Taxpayers also need to value the land the subject of the BSA for the purposes of determining the cost base or reduced cost base for the CGT event.

For taxpayers who retire biodiversity credits and therefore do not receive any capital proceeds, further market valuations of the biodiversity credits will need to be obtained at the time of each retirement as they are separate taxing events.

The Class Rulings apply to entities that enter into the scheme from 1 July 2025 to 30 June 2030. In practice, the views expressed are likely to reflect the ATO’s approach to existing arrangements. Accordingly, taxpayers should consider the implications of the positions set out in the Class Rulings on their existing arrangements, and whether they are at risk of the ATO forming a view that there is a historic exposure to additional tax, penalties and interest. This could include considering whether:

• their arrangements are similar or dissimilar to those contemplated by the Class Rulings; and/or
• it is appropriate to make a voluntary disclosure to the ATO, which can lead to a reduction in penalties and potentially interest on any tax shortfall that would otherwise be payable if discovered during an audit by the ATO. 

We can assist taxpayers in evaluating their positions, documenting the basis for positions, and if need be, engaging with the ATO. Contact Annemarie Wilmore from our Tax team if you would like assistance with this.