The start date for the emissions trading scheme has been pushed back 12 months as the politics over the scheme unfold. If the new Carbon Pollution Reduction Scheme Bill (CPRS) is passed and phased in as promised from 1 July 2011, how will Australian emissions units (Units) be treated under Australian taxation laws?
On 4 May 2009 the Government announced that the start date for the CPRS will be pushed back 12 months to "help Australian companies manage the impacts of the global recession". The Government also announced:
- for the first year of the scheme, a fixed price of $10 per tonne will apply to Units. From 1 July 2012, the fixed price will no longer apply, and market forces will prevail; and
- a Global Recession Buffer as part of the assistance package that will be available to emissions-intensive industries.
A package of 6 draft bills to introduce the scheme was put before Parliament on 14 May 2009.
Goals And Coverage Of The Scheme
The CPRS targets emissions that are counted in Australia's Kyoto Protocol emissions account. The Government has unconditionally committed to a 5% reduction in carbon pollution below 2000 levels by 2020, with more ambitious targets dependent on the global response. On a long term basis, the Government has committed to a 60 per cent reduction compared with 2000 levels by 2050.
Agricultural emissions will not be included in the scheme until at least 2015. Emissions from deforestation will also not be included. The forestry industry will have the luxury of opting in to the scheme if desired, due to the fact that forests are likely to store more carbon than they emit.
When Is A Tax Not A Tax?
The Government maintains that the charge for the acquisition of a Unit is not a tax. Under the Australian Constitution, if a new tax is to be imposed, it must always be in a separate Bill dedicated solely to that tax. In order to ward off any potential constitutional law challenges to the scheme, the Government has prepared for the possibility of the charge being construed as a tax by including all clauses dealing with the charge discretely in separate Bills.
Income Tax Treatment
The income tax treatment of Units is set out in Schedule 2 of the Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2009. Units acquired by emitting entities will be taxed under a scheme similar to that which applies to trading stock. The cost of acquiring Units will be deductible, and amounts received for the sale or surrender of Units will be assessable income. The difference in the value of all Units held at the end of an income year and those held at the start of an income year must be brought to account as income (or as a deduction in the event of a decrease). Specific rules will apply to value free Units and Units acquired via non-arms-length dealings. The normal deduction provisions in the income tax law will apply to costs associated with holding Units, and interest payments on borrowings to finance Units.
At the end of the first income year in which a taxpayer holds Units, the taxpayer can elect to value Units held by them using the 'first-in, first-out' (FIFO) cost method, the actual cost method or market value. A change in the choice of valuation method can be made once before the 2016-17 tax year. After this, a change will only be allowed after a method has been used for 4 years.
If an entity surrenders a Unit for a non-business related purpose, any deduction claimed by the entity for the cost of the Unit will be effectively reversed by including in assessable income an amount equal to the amount deducted for its acquisition.
For foreign residents, Units registered on the Australian register will be treated as having an Australian source, subject to the terms of any double tax treaty that may be relevant. Therefore, foreign residents will be subject to the same tax treatment as Australian residents for Units on the Australian register.
Importations of international emissions units into Australia will be taxed differently depending on whether the international emissions unit was held on capital or on revenue account immediately before the importation. It is expected that in most cases, the unit will be held on revenue account. The entity importing the unit will be treated as having sold the unit to someone else for its cost just before the importation and as having immediately bought it back for the same amount. This will establish the cost of the Unit for the purposes of the Australian taxation system. In the more unusual circumstances where the international emissions unit was held on capital account immediately before the importation, the entity will be treated as if it sold the international emissions unit for market value to someone else, and repurchased it for the same amount just before the importation. A new capital gains tax event K1 will capture any resulting capital gain or loss.
GST will apply to the supply of Units in the same way as it applies to any other supply. However, provisions will be inserted in the GST Act to clarify that the supply of a Unit, and the supply of a Kyoto unit, should be treated as a supply of a personal property right for GST purposes and not a supply of real property. In addition, a new provision will be inserted into the GST Act to ensure that the supply of a Unit or a Kyoto unit is not a supply directly connected with real property. This means that the export of units can be GST-free despite any direct connection with real property provided the other requirements for a GST-free supply are met.
How Can Deacons Help?
Further amendments may yet be made to the Bills before they become law. Contact the Deacons tax team should you require advice regarding the introduction of the CPRS and any amendments that are made as the Bills proceed through Parliament.
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.