Tax Treatment of Carbon Income
Carbon credits are a valuable asset, and like any income source, they have tax implications. Understanding the tax treatment helps you plan effectively and avoid surprises.
The Basic Rule
For post-1989 forest owners, the tax treatment is relatively straightforward:
- NZUs received — not taxable at time of receipt
- NZUs sold — taxable as income when sold
- NZUs surrendered — generally no tax consequence
- GST — zero-rated (no GST applies)
This means you can defer tax by holding units, but you’ll pay tax when you eventually sell.
Post-1989 Forests
Receiving Units
When you receive NZUs from MPI for carbon sequestered in your post-1989 forest, there’s no immediate tax liability. The units enter your holding account at nil cost for tax purposes.
Key point: Don’t confuse economic value with taxable income. Your units have market value, but until you sell them, no tax is due.
Selling Units
When you sell NZUs, the full sale price is taxable income. Because your cost base is nil (you received them for “free”), the entire proceeds are taxable.
Example:
- Receive 500 NZUs
- Sell at $60/unit = $30,000
- Taxable income = $30,000
Tax is calculated at your marginal rate:
- Individual: 10.5% to 39% depending on total income
- Company: 28%
- Trust: 33% (in most cases)
Trading Stock Treatment
Emissions units are treated as trading stock for tax purposes. This means:
- They’re valued at cost (nil for received units)
- Purchased units are valued at purchase cost
- Different “pools” for different acquisition methods
You must keep track of which units came from where, as purchased units have different cost bases than received units.
Pre-1990 Forests
The rules are different for pre-1990 forests:
- Free allocation units received — not taxable
- Sale of free units — not taxable (capital account)
- Units purchased for deforestation liability — not deductible
- Surrender of units — no deduction
Pre-1990 transactions are generally on capital account, meaning no tax consequences. This reflects that pre-1990 forests were “grandfathered” under the original scheme design.
GST Treatment
Emissions unit transactions are zero-rated for GST purposes. This means:
- No GST charged on sales
- No GST payable on purchases
- No GST output tax
If you’re GST-registered, you may still need to account for the transaction in your GST return (as a zero-rated supply), but no GST is actually payable.
Practical Tax Planning
Timing Your Sales
Because tax is triggered on sale, you have some control over timing:
Spread sales across years: Instead of selling 2,000 units in one year, sell 500 per year to avoid pushing into higher tax brackets.
Match with deductions: If you have significant deductible expenses (establishment costs, pest control, etc.), time sales to offset.
Consider year-end: Sales near balance date affect which tax year income falls into.
Income Equalisation
Forestry income (including carbon credit sales) may qualify for the income equalisation scheme. This allows you to:
- Deposit funds with IRD
- Defer tax on that amount
- Withdraw in future years
This smooths income across years and can reduce total tax paid. Check eligibility with your accountant.
Holding Period Strategy
There’s no benefit to holding for any specific period (unlike some capital gains situations in other countries). The tax treatment is the same whether you sell immediately or hold for years.
However, holding can:
- Defer tax (time value of money benefit)
- Allow you to time sales with other tax planning
- Wait for potentially higher prices
Company vs Personal Ownership
Company ownership:
- 28% flat rate
- Can retain profits in company
- More complex structure
- Possible imputation credit benefits
Personal ownership:
- Marginal rates up to 39%
- Simpler structure
- Income equalisation available
- ACC levies may apply
The right structure depends on your overall situation. Get professional advice.
Record Keeping
IRD requires you to keep records of:
- All NZU transactions
- Purchase and sale dates
- Quantities and prices
- Separate pools by acquisition type
The NZETR provides transaction history, but maintain your own records as well.
Common Tax Questions
”Do I pay tax when I receive units?”
No. Tax is only triggered when you sell.
”What if I gift units to family?”
Generally treated as a sale at market value. Tax applies as if you sold at that value.
”Can I claim deductions for forest establishment?”
Yes, normal forestry deductions apply — planting, maintenance, pest control, etc. These are separate from the carbon transaction treatment.
”What if I surrender units at harvest?”
Surrender is not a sale. No taxable event occurs on surrender.
”I bought some units to cover a liability — can I deduct the cost?”
For post-1989 forests, purchased units are trading stock. When surrendered, the cost is effectively deducted (reduces closing stock value).
”What about losses?”
If you sell units for less than their cost (only possible with purchased units), the loss is deductible.
Getting Tax Advice
Carbon taxation interacts with:
- Forestry tax rules
- GST registration
- Business structure
- Overall income planning
A generic accountant may not be familiar with carbon-specific rules. Seek advice from professionals experienced with ETS transactions.
Key Takeaways
- No tax on receipt — only when you sell
- Full sale proceeds taxable — cost base is nil for received units
- GST zero-rated — no GST on carbon transactions
- Income equalisation available — can smooth income across years
- Record keeping essential — track pools and transactions
- Get specialist advice — carbon tax has nuances