Breaking down biodiversity banking: part four - Commodities/Derivatives/Stock Exchanges

In this four-part series, Corrs' Environment and Planning team examines biodiversity banking across Australia, its role in environmental assessment processes at state and federal levels and the different transaction structures for buying and selling biodiversity credits.

In part three of our series on biodiversity banking, we considered possible transaction structures which may be relevant when buying and selling biodiversity credits.

In this, the fourth and final part of the series, we explore the key matters which may be relevant to consider in negotiating the sale or purchase of biodiversity credits and determining the price for each credit.

Biodiversity banking: key transaction terms and some tips and tricks

Considered drafting in any contractual arrangements will be required to address the various risks involved throughout the biodiversity credit transaction process for both the purchaser and the vendor.

Transferring the right credits for the right price

Interestingly, and unlike transfers of land, the paper forms in NSW to be submitted to enable the transfer of credits do not require the purchaser to sign or sight the forms.

Accordingly, ensuring that the vendor has identified the correct number and type of credits are nominated on the transfer form for the correct purchase price is critical. This becomes even more pronounced as we move into electronic transactions and forms can be completed without the purchaser and their solicitors' involvement.

Sunset dates

Biodiversity credits are often purchased to enable a purchaser to satisfy an obligation in a development consent to retire a specific number and type of biodiversity credits to offset the impacts of a proposed development or infrastructure project. The development consent will specify a time for the retirement of the relevant biodiversity credits, often prior to the commencement of the development (although deferrals are possible in some circumstances).

Therefore ensuring that the relevant credits are created and transferred to the purchaser to enable it to retire the credits by the time required in the development consent is critical.

The agreement may need to include a mechanism to allow the adjustment of the purchase price if less credits are created than originally anticipated. Alternatively, if it becomes apparent that the specific credits sought cannot be created and retired (or an insufficient number is created) by the required time, the purchaser may need to be able to terminate the agreement and secure credits from another vendor or make alternative arrangements to satisfy its offset obligations.

Payments of the Total Fund Deposit

In NSW, the vendor is required to make a payment of part of the Total Fund Deposit to the Biodiversity Stewardship Payments Fund on the first transfer of the biodiversity credits created. Depending on the credits, the required payment into the Total Fund Deposit itself can amount to several million dollars.

If a payment into the Biodiversity Stewardship Payments Fund is required, the transfer of credits cannot be processed until that payment is made. Accordingly, for the purchaser, it is important that any agreement consider the vendor's obligation to pay the relevant part of the Total Fund Deposit promptly in order to facilitate the transfer of the credits.

Due diligence

Like any other transaction, purchasers should undertake a thorough due diligence to ensure that the vendor is in a position to create (if the credits are not yet created) and sell the credits. In NSW, the applicants for a proposed biodiversity stewardship agreement (which creates the biodiversity credits) must meet the ‘fit a and proper person' test in the Biodiversity Conservation Regulation.

The title to the proposed biodiversity stewardship site should also be carefully reviewed to determine whether there are any encumbrances on title (such as mortgagees and leases) which could hinder the registration of the biodiversity stewardship agreement on title, a necessary step in the process of entering into a biodiversity stewardship agreement in NSW.

Also, biodiversity credits, like other forms of property, can be encumbered and purchasers will need to ensure that no other persons have any rights to the biodiversity credits the subject of the proposed sale.

Some jurisdictions also maintain biodiversity credit registers, which include a list of available credits and the price at which credits have been previously sold.

Capital gains tax

Vendors should also consider potential capital gains tax (CGT) implications, which can arise when enter into biobanking agreements and selling biodiversity credits. CGT Event D4 occurs when entering into a conservation agreement (called a biodiversity stewardship agreement in NSW) and CGT event A1 occurs when the vendor disposes of biodiversity credits.

When entering into a conservation agreement, a capital gain may arise if the capital proceeds from the conversation agreement are more than that part of the cost base of the land that is apportioned to that agreement.

When selling biodiversity credits, a capital gain can arise if the capital proceeds are more than the cost base of the biodiversity credits. The cost base of biodiversity credits includes the money the vendor paid or is required to pay in respect of acquiring the biodiversity credits (i.e. entering into the conservation agreement), application fees and consultant and legal fees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.