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
acquiring and surrendering eligible carbon pollution
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.
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
A penalty imposed, for example, for failing to surrender
sufficient eligible compliance Permits, will not be tax
Income tax issues that businesses will need to consider
the time at which a Permit will be
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
no GST would apply to cash grants; and
GST would not be payable on surrendering of a
However, it is hoped that the Government will clarify that
the Permits are not "derivatives", and therefore not
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;
tax aspects of any international trading in Permits.
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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The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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