With the implementation of an emissions trading scheme only a few years away, questions are now being asked if a scheme will attract stamp duty or capital gains tax?
The debate between state and federal treasurers is already in full swing, which means that businesses will need to examine how a trading scheme could affect their tax structures.
Stamp duty may apply to an emissions trading scheme (ETS) at more than one level. It may apply to the sale and purchase of credits under the scheme, which could be treated as dutiable property, within the terms of the duty legislation. For example, in Queensland, it could be dealt with as a statutory licence, depending on the structure of the ETS, or under an amendment specific to the purpose.
There may also be duty at a lower level, on transactions which are necessary to create carbon credits, or those which relate to afforestation. The connection of that duty to the ETS is less obvious, as transactions could occur for purposes other than compliance.
At the higher level, if duty were imposed on trading in carbon credits, that would essentially increase the price of those carbon credits by the rate of duty.
How the allocation of duty is divided up between the states, will determine if different rates of duty apply. However, the Commonwealth may be restricted from simply imposing differential carbon prices in each locality due to Constitutional constraints.
If the purpose of the ETS is to achieve a reduction in total carbon production (rather than simply to raise revenue), it would be appropriate for an exemption from duty to apply to trading in the credits themselves.
At the lower level, we may see competition emerge between the states, when they try to attract investment in afforestation and carbon reduction schemes. Specific exemptions, relating to particular activities, could become available once the states recognise the economic value of encouraging investment in low carbon technology and carbon offsets.
By contrast, the states have begun to argue for the exclusion of capital gains tax (CGT) from an ETS. The Commonwealth could elect to place all trading in carbon credits outside the income tax net, which would eliminate the CGT burden from gains made on the disposal of credits.
However, this would also mean the cost of acquiring credits would be non-deductible, and gains made on trading in credits, within the market, would be non-assessable.
The result would be an advantage to the net producers of carbon credits, and a disadvantage to the net acquirers of carbon credits. Such a detriment and benefit could be priced into the cost of the credits themselves to achieve overall neutrality.
It is noteworthy that at present, penalties are specifically non-deductible under the Tax Act, although an exception to that rule could easily be legislated. If penalties remain non-deductible, but the cost of acquiring credits is deductible, that will simply affect the price of a credit, so that the after tax cost of acquiring a credit, equals the after tax cost of paying the penalty.
By way of example, if an energy company spends $1 million acquiring carbon credits, but does not produce any carbon credits, then it would in the ordinary course claim a deduction for the $1 million.
Conversely, if a tree plantation operator 'creates' credits worth $1 million, and sells them to an energy producer, then in the ordinary course it would be subject to income tax on the $1 million.
The net result from the Commonwealth's perspective is neutral, assuming that all the entities, which create and acquire credits are in business, and able to make use of deductions or capital losses, which they incur.
This is subject to one major exception; if the initial allocation of permits is cost free, any proceeds of sale of those permits will represent a gain to the seller, unless the sellers of the permits were treated for tax purposes, having paid a market price for the permits when they were received.
There may also be timing differences, depending on whether the carbon credits are subject to income tax as gains in the course of business, or are treated as affairs of capital. However, while the ETS remains solely an Australian scheme, there should ultimately be no net gain or loss to the income tax revenue, resulting from emissions trading, other than gains on sale of 'free' permits.
There is a middle ground, in which gains from carbon trading can be made tax exempt while losses are deductible, however one suspects that such a middle ground would be prone to avoidance activity, and therefore not considered.
The outcomes under the tax and stamp duty regimes are significantly different. Under the tax regime, the net result to the revenue is fairly neutral, with a benefit to the net acquirers of credits, and a detriment to the net producers of credits.
That 'skewing' of the outcome can be adjusted in the price. Under the stamp duty regime, conversely, there is only a net benefit to the state, with no offsetting advantages to any party. Further, the skewing caused by differential duty rates and outcomes cannot be easily adjusted to produce a neutral result.
Note: The tax consequences of international emissions trading, including linkages between the ETS and other international emissions trading schemes, have not been considered in this article and will be the subject of further comment in later editions.
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.