If you hold or trade Australian Carbon Credit Units (ACCUs), Division 420 of the Income Tax Assessment Act 1997 is the single most important piece of tax legislation you need to understand. It doesn’t matter whether you’re a farmer who’s been issued ACCUs from a soil carbon project, a company that’s purchased credits to offset emissions, or a broker trading on the secondary market — Division 420 controls how your carbon credits are taxed.
This guide explains the rules in plain language.
What Division 420 actually does
Division 420 creates a self-contained tax regime for “registered emissions units” (REUs). ACCUs are the most common type of REU in Australia, though the rules also cover Safeguard Mechanism Credits (SMCs) and international units held in the Australian National Registry of Emissions Units.
The key thing to understand is that Division 420 replaces the normal tax rules. Capital gains tax does not apply. The general revenue inclusion rules in Sections 6-5 and 6-10 are overridden. Instead, a purpose-built system called the “rolling balance method” governs everything — acquisition, holding, valuation and disposal.
This means you cannot access the 50% CGT discount on carbon credits. Income from ACCUs is always taxed on revenue account at your full marginal rate (or company rate). There is no concessional pathway through the capital gains provisions.
The rolling balance method explained
The rolling balance method works by comparing the total value of your ACCU holdings at the start and end of each income year. The difference — up or down — flows into your taxable income.
Here’s how it works step by step:
Step 1 — Acquisition. When you first hold an ACCU, you claim an immediate deduction equal to its cost. If the ACCU was issued to you by the Clean Energy Regulator (rather than purchased), the “cost” is deemed to be its market value at the time you first hold it.
Step 2 — Year-end valuation. At 30 June each year, you value all ACCUs still on hand. The total value is included in your assessable income.
Step 3 — Opening balance reversal. At the start of the next income year, the previous year’s closing value becomes a deduction. This is the “rolling” mechanism — last year’s inclusion gets reversed, and replaced by this year’s valuation.
Step 4 — Disposal. When you sell, surrender or otherwise cease to hold an ACCU, the sale proceeds are included in assessable income. The rolling balance mechanism ensures you’re not double-taxed — the opening balance deduction nets off against the proceeds.
The net effect is that you’re taxed on the movement in value during the year, plus any realised gains or losses on disposal. If the market value of your unsold ACCUs goes up, you have assessable income even though you haven’t sold anything. If it goes down, you get a deduction.
This “phantom income” problem — being taxed on unrealised gains — is one of the biggest pain points for farmers holding ACCUs long-term. It’s why the primary producer concessions (covered in our companion article) were introduced from 1 July 2022.
Choosing your valuation method
Division 420 gives you a choice of three valuation methods for the year-end calculation. The method you choose applies to all REUs of the same type — you can’t cherry-pick method by unit.
Four-year lock-in rule
Once you choose a method, you’re locked in for at least four years. You can only change earlier if there’s a significant change in circumstances — and the ATO interprets this narrowly. Choose carefully.
ACCUs issued to you vs ACCUs you purchase
The tax treatment differs depending on how you came to hold ACCUs.
Issued ACCUs — if the Clean Energy Regulator issued ACCUs to you as part of a carbon farming project, your cost base is the market value of those units immediately after you begin to hold them. You get an upfront deduction for this amount. The project costs you incurred to generate those credits (soil sampling, monitoring, registration fees, verification) are separately deductible under Section 8-1 as ordinary business expenses.
Purchased ACCUs — if you bought ACCUs on the secondary market or through a Carbon Abatement Contract, your cost base is what you paid. This is deductible when you first hold the units.
In both cases, the disposal proceeds are assessable income deemed to have an Australian source. This source rule matters for non-residents — foreign holders of ACCUs can still be taxed in Australia on the disposal.
GST treatment of ACCUs
Subdivision 38-S of the GST Act provides that supplies of eligible emissions units are GST-free. This covers ACCUs and SMCs. The practical effect is straightforward: you don’t charge GST when you sell ACCUs, but you can still claim input tax credits on GST paid on related acquisitions — soil testing, aggregator fees, legal costs, monitoring equipment and so on.
However, the GST-free treatment only applies to “eligible emissions units” as defined. International voluntary credits — Verra VCUs, Gold Standard VERs, and similar — are not registered emissions units under Australian law and do not qualify. If you trade in both ACCUs and international credits, you need separate GST treatment for each.
For BAS reporting purposes, ACCU sales appear at G1 (total sales) but not at 1A (GST on sales). Related input tax credits flow through 1B normally. Incorrect GST coding of ACCU sales is one of the most common errors we see in practice — many bookkeepers default to GST-inclusive treatment because the sale looks like ordinary trading income.
What you can deduct
Beyond the Division 420 cost deduction on acquisition, a range of project-related expenses are deductible under ordinary principles:
Project registration and application fees paid to the Clean Energy Regulator are deductible in the year incurred. Soil sampling and baseline measurement costs are deductible as they relate directly to deriving assessable ACCU income. Ongoing monitoring and verification costs, including third-party auditor fees, are deductible annually. Aggregator or Carbon Service Provider fees are deductible as management expenses. Legal and accounting costs for contract review, project structuring and tax compliance are deductible. For carbon sink forests specifically, Subdivision 40-J of the ITAA 1997 provides establishment cost deductions over the life of the project.
One area that catches people out is capital vs revenue characterisation. If you purchase new fencing, water infrastructure or other farm improvements as part of changing practices for a soil carbon project, those costs may need to be depreciated rather than immediately deducted. The purpose test matters — if the primary purpose is carbon sequestration, the nexus to ACCU income supports a revenue deduction. If the improvement has broader farming utility, it may be a depreciating asset under Division 40.
Common mistakes we see
Treating ACCU sales as capital gains. We regularly see tax returns where ACCU proceeds have been reported at the CGT labels with a 50% discount applied. Division 420 overrides CGT entirely. This needs to be corrected — the ATO is increasingly data-matching ACCU transactions through the Registry.
Forgetting the year-end valuation. If you hold ACCUs at 30 June and don’t do the rolling balance calculation, you’re understating your income. For large holdings at current prices (~$36/ACCU), this creates a material understatement that will eventually surface in an ATO review.
Coding ACCU sales as GST-inclusive. ACCUs are GST-free, not GST-inclusive. If your Xero or MYOB coding treats sales as inclusive of GST, you’re overstating your GST liability and understating your income. The BAS won’t reconcile to the tax return.
Missing the cost deduction on issued ACCUs. When ACCUs are issued to you (not purchased), the market value at time of issue is deductible. Many farmers miss this entirely — they pick up the sale proceeds but forget the offsetting deduction, paying tax on gross proceeds instead of the net movement.
Who Division 420 applies to differently
Division 420 applies to all holders of registered emissions units — individuals, companies, trusts, partnerships and superannuation funds. However, from 1 July 2022, eligible individual primary producers can opt into a concessional regime under Subdivision 420-BA that fundamentally changes the timing of taxation. Under the concessions, the rolling balance method is switched off and taxation is deferred entirely to the point of sale.
This creates a two-speed system: entities that qualify for the concessions operate on a simple cash-basis approach (taxed on sale), while everyone else remains on the rolling balance method (taxed on annual value movements). Companies are excluded from the concessions regardless of their farming activities. Trusts can access partial concessions at the beneficiary level, but the trust itself remains on the rolling balance — creating mismatches that require specialist advice.
We cover the primary producer concessions in detail in our companion article: Concessional Tax Treatment for Primary Producers Selling Carbon Credits.
Need help with your ACCU tax position?
Book a free consultation with our carbon credit accounting team. We’ll review your holdings, valuation method and structure.
