This article has been written by Amanda Kenafake of Power Tynan, a partner of QFF.

Navigating Compensation Tax Treatment for Renewable Energy Projects

The Australian Taxation Office (ATO) has published key guidance outlining tax obligations for landholders receiving compensation tied to Renewable Energy Zone (REZ) infrastructure projects.

Importantly, this guidance relates to compensation payments made to landholders for impacts associated with renewable energy and transmission projects. It is not intended to cover ordinary commercial arrangements where a landholder receives regular rent, lease payments or other income for the use or occupation of land.

While REZ rollouts are concentrated in states like New South Wales and Victoria, Queensland landholders and rural enterprises may encounter compensation, easement and access arrangements associated with renewable energy and transmission projects.  Understanding the potential income tax, capital gains tax and GST treatment of these payments can help property owners avoid unexpected tax consequences.

Key tax considerations

A key principle in the ATO guidance is that the tax treatment of a compensation payment depends on what the payment is actually for, rather than the label given to it in the agreement or contract.

Compensation packages may cover a range of impact on a farming property.  Each component needs to be considered separately because the tax treatment can differ depending on what the payment is intended to compensate for.

Income Replacement:

• Payments intended to replace lost income are generally treated as assessable ordinary income. However if received by a primary producer, they may qualify for valuable primary production concessions.

Temporary Access & Easement:

• Payments for temporary land access or construction easements are typically assessable.

Sign-on and Disturbance Payments

• Upfront Incentives are generally assessable where the land is used in a business.  Where the land is used by the landholder for private purposes, then Capital Gains Tax will apply. 

Permanent Easements:

• Compensation for creating a permanent infrastructure easement (such as hosting transmission towers) generally triggers Capital Gains Tax 

Goods & Services Tax (GST)

Each type of compensation payment will also have associated GST implications that need to be considered.

Because compensation agreements can include different types of payments with different tax treatments, landholders should keep clear records and ask project developers and operators for an itemised breakdown of the compensation. It is also important to seek professional tax advice before signing any agreement.  QFF’s new toolkit also includes practical checklists to help landholders work through the key legal, tax and financial issues they should consider when considering with these type of transactions.

The ATO announcement is here:  Renewable Energy Zone (REZ) projects – tax treatment of compensation | Australian Taxation Office

The Queensland Renewable Energy Landholder Toolkit is available here.

Energy Information Service for Landholders 

Farmers who are unsure where to start can contact The Energy Information Service for Landholders to discuss bills, tariffs, energy data, load shifting opportunities and questions to ask installers. This is a free phone service for farmers and landholders in Queensland. 

The service is available Monday – Friday from 8:30am – 5pm and can assist by providing information and guidance on a range of energy matters. 

Call 07 3329 7500 to access the service today.