Australia: Legal Update: Emissions Trading Scheme: Tax Liabilities And New Tax Rules

The Emissions Trading Scheme (ETS) proposed by the Government will have income tax and GST implications which will need to be addressed by those entities that are covered by the scheme. Chapter 11 of the Green Paper on the Carbon Pollution Reduction Scheme released by the Government on 16 July 2008 (Green Paper) is devoted to the tax and accounting issues of the ETS. In summary, the Government's current preferred position is to introduce a specific regime for income tax purposes and to rely on the current rules for GST purposes.

The Green Paper outlines the Government's preferred position on the design of Australia's ETS (refer to Legal Update: Australian Emissions Trading Scheme becomes Carbon Pollution Reduction Scheme 17 July 2008).

Under the ETS, an annual limit is imposed on greenhouse gas emissions. If the annual limit is exceeded by a business which is covered by the scheme, penalties will be imposed. Broadly, businesses can reduce their emissions to avoid penalties by:

  • acquiring and surrendering eligible carbon pollution permits (Permits);
  • emitting less carbon; or
  • sequestering greenhouse gases.

Permits are at the centre of the ETS. Permits can be acquired, surrendered, sold or banked for future use, all of which give rise to potential taxation consequences.

Chapter 11 of the Green Paper outlines the Government's preferred position in relation to the income tax and GST treatment of the Permits. The Government's stated policy is to limit preferential tax treatment of Permits in an attempt to reduce distortion of companies' decisions about the most cost effective method of reducing carbon emissions.

Income tax

New income tax provisions will be introduced to apply to Permits. The effect of the new provisions is to provide the same general outcomes as under existing tax legislation. However, the proposed rules make it clear that trading in or the holding of Permits will be treated on revenue account as opposed to capital account. The capital gains tax provisions should not apply to Permits.

It is proposed that the income tax implications in relation to trading of the Permits will be as follows:

  • A business will include in its assessable income:
    - the market value of a free Permit;
    - a cash grant; or
    - proceeds from sale of a Permit;
    in the income year in which the grant, proceeds or the Permit was received.
  • The cost of acquiring a Permit would be deductible in the income year in which the Permit is acquired, unless the Permit is banked.
  • If the Permit is banked for future use, the deduction for the cost of the Permit will be deferred until the income year in which the Permit is surrendered or sold. The deferring of the deduction could be achieved through a "rolling balance method". Under this method the value of Permits held at the beginning and end of the income year would be taken into account. The Permit could be valued at historical cost or market value, but the Government has no preferred valuation method.
  • A penalty imposed, for example, for failing to surrender sufficient eligible compliance Permits, will not be tax deductible.

Income tax issues that businesses will need to consider include:

  • the time at which a Permit will be "surrendered";
  • valuation of free Permits and Permits under the rolling balance method; and
  • the impact on cashflow and tax losses if there is a timing difference between the income year in which Permits are assessable and tax deductible.


In contrast to the income tax position, the Government's preferred position is to tax the acquisition and sale of the Permits under the existing GST rules. The GST implications would be as follows:

  • the auction and sale of Permits by GST registered businesses would be a taxable supply;
  • no GST would be payable on the supply of free Permits;
  • no GST would apply to cash grants; and
  • GST would not be payable on surrendering of a Permit.

However, it is hoped that the Government will clarify that the Permits are not "derivatives", and therefore not input taxed.

Other tax issues

There are a number of other tax issues that the Government has yet to consider and these include:

  • stamp duty implications on the transfer of Permits; and
  • tax aspects of any international trading in Permits.

What next?

Businesses should consider now the tax impacts of the ETS. Submissions on the Green Paper are due by 10 September 2008. It is expected that the Government will release draft legislation for the ETS, including tax legislation, in December 2008.

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.

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