Income Tax Incentives for Environmental Conservation

The new section 37C of the Income Tax Act gives farmers a tax incentive to engage in environmental conservation and maintenance.

The recently introduced Section 37C of the Income Tax Act encourages the conservation and maintenance of land for environmental protection by allowing three different deductions to landowners (e.g. farmers) with land in environmentally important areas. Ordinarily when taxpayers incur expenditure on nature conservation, such expenditure would not meet the requirements for deduction from income as it would not be incurred in the production of income and not be expended for the purposes of trade.

This new tax concession is linked to two environmental management statutes: the National Environmental Management: Biodiversity Management Act., which focuses on the protection of individual ecosystems or species; and the National Environmental Management: Protected Areas Act, which covers the declaration and management of protected areas.

The first of the three S 37C deductions is for expenditure incurred on conservation or maintenance of land under a Biodiversity Management Agreement in terms of section 44 of the Biodiversity Management Act.

The Management Agreement is a private agreement entered into between a landowner (taxpayer) and the Minister of Environmental Affairs and Tourism in terms of which the landowner is responsible or partly responsible for the implementation of a Biodiversity Management Plan. The Management Plan is for the protection of an ecosystem or an indigenous species (plant, animal or organism), which is either listed in the Gazette as threatened or is considered as needing special conservation attention.

Expenditure incurred by a taxpayer to preserve or maintain land will be deemed to be expenditure incurred in the production of income and for the purposes of trade and will therefore qualify as a deduction under sections 11(a) and 23(g) of the Income Tax Act.

The Income Tax Act imposes two requirements for deductibility of the expenditure. Firstly, the management agreement must have a duration of at least five years, and secondly, the land utilised by the taxpayer in the production of income must include the land subject to the Management Agreement, or which is in the immediate proximity of the land under the agreement. SARS's explanatory memorandum to section 37C states that this implies land adjacent or at least across a road from the taxpayer’s income producing land. An example of such a piece of land under a Management Agreement could be for the protection of endangered plant or animal that inhabits a very small area in a mountainous region bordering the farmer’s land, such as the Western Cape leopard.

The second tax deduction is for expenditure on maintaining or conserving land owned by the taxpayer in terms of the Protected Areas Act.

Any expenditure on conservation or maintenance in terms of declarations under sections 20, 23 or 28 of the Protected Areas Act is deemed to be a donation for the purposes of section 18A of the Income Tax Act, and is hence deductible, subject to compliance with the latter provision. The relevant sections of the Protected Areas Act provide for the declaration of national parks, nature reserves and protected areas respectively. There is a requirement that the declaration under the Protected Areas Act is to have a duration of 30 years.

The third incentive under section 37C provides for a deduction of the value of land owned by the taxpayer who has consented to the declaration of a portion of the land as a national park or a nature reserve under sections 20 and 23 of the Protected Areas Act and which is registered under the title deed as such for a period of at least 99 years. The deduction is equal to 10% of the lesser of cost or market value of the land, subject to the declaration which is deemed to be to a donation for the purposes of section 18A and paragraph 62 of the Eighth Schedule (exemption from capital gains tax). A deduction of 10% is allowed each year for 10 successive years. If the taxpayer retains any right of use of the land under the declaration the allowance is reduced to an amount that bears the same ratio of the value of the land without the right as to the value with the right.

Section 37C does have a sting for those taxpayers who renege on their environmental obligations in terms of the Biodiversity and Protected Areas Act. If the taxpayer has previously breached the conditions of a Management Agreement or violates a declaration then the deductions claimed and allowed in the five years preceding the breach or violation will be recouped in the current year of assessment. For example, if land with a value of R10 million has been declared as a nature reserve and a deduction of R1 million was allowed each year for seven years before the taxpayer violated the declaration, an amount of R5 million will be included in his taxable income in the current year of assessment.

Farmers should be aware of these new incentives if they currently incur expenditure on maintaining and conserving land or species without the benefit of tax relief, or wish to engage in environmental activities. The incentives will hopefully encourage those not already doing so to take measures that will aid in the maintaining and conservation of South Africa’s natural environment.