The Carbon Pollution Reduction Scheme (CPRS) is a hot topic at the moment and is being widely covered in the Australian media. The finalisation of the Scheme is subject to various draft bills and legislation being passed through Parliament.
The basic framework is clear:
- An eligible emissions unit must be surrendered for each tonne of greenhouse gas emissions that an entity is responsible for in a particular year.
- Eligible units include Australian Emissions Units and Eligible International Emissions Units.
- The number of Australian Emissions Units issued in a given year will be capped and will represent Australia's emission target for that particular year.
Lobbying to convince the Government that CPRS transactions should either be GST free, or have special concessions to remove the cash flow effects on businesses and to minimise their compliance costs, has not been successful. The Government's view is that special GST treatment for CPRS activities would "undermine the broad-based nature of the GST, provide different GST treatments for like transactions in the economy (including purchasing more energy efficient assets), and add complexity to the GST law", even though emissions units are GST free in New Zealand.
How will GST affect the CPRS?
In addition to the accounting and income tax treatment of CPRS transactions (and carbon sequestration activities such as reforestation), businesses will need to take the impact of GST into account.
The basic GST rule is that supplies made by a business for money are subject to GST. There are additional tests, such as whether the supply is connected with Australia and if the supply is GST free or input taxed. Input taxed supplies include things like shares and other dealings that are regarded as financial supplies (including some derivatives).
A supply is connected with Australia (and subject to GST) in a number of circumstances, including when it is the supply of real property situated in Australia or directly connected with real property in Australia.
Because the GST law operates differently if a transaction is the supply of an interest in real property (or directly connected with real property) as opposed to, for example, a financial instrument, there has been some debate about where emissions units would fit within the GST framework.
The GST law will be amended to specifically provide that emissions units are not interests in property, but are personal property rights. These changes will mean that, in certain circumstances, the supply of an emissions unit to a non-resident (where permitted) may be GST free, whereas it could otherwise have been subject to GST if the unit were regarded as being directly connected with real property in Australia.
We anticipate that the GST consequences for participants in the CPRS market will generally be straight forward:
- The sale of a unit will be a taxable supply subject to GST and will give rise to input tax credits in most cases.
- The issue of free units would not generally attract GST, as an essential element of a GST taxable supply is that the supply is made for consideration.
- The surrender of units will generally not have GST consequences.
Much more complex GST issues will arise for dealings in emission unit derivatives and for cross border transactions.
Depending on the structure of the transaction, a derivative may be regarded as a financial supply for GST purposes, so that no GST is payable on the supply but no GST input tax credits can be claimed in connection with it.
While the export of Australian emissions units may not be taken into account at the moment, the acquisition of emissions units offshore needs careful GST analysis. Imported goods attract GST in Australia, although "imported" rights generally do not attract GST, with a number of important exceptions, including where the right is connected with real property in Australia.
As noted above, the GST legislation is being amended to ensure that emissions units are not regarded as directly connected with Australian real property. Even with these amendments, there are some situations where acquisitions from offshore could trigger GST costs in Australia.
The GST "reverse charge" rule imposes GST on offshore services or rights where the Australian acquirer does not use whatever has been acquired solely for a "creditable purpose".
An example of the operation of the reverse charge rule may be where an Australian bank acquires rights from an offshore entity which are solely used to make input taxed supplies, such as lending money or perhaps dealing in derivatives. In this scenario the Australian bank may have a GST cost, for which no input tax credits can be claimed.
While GST on CPRS transactions will usually be straight forward, the GST considerations will be far more complex for derivatives and offshore transactions.
Emissions units may be imported and used to discharge domestic emissions obligations, even though the draft legislation currently prohibits the export of Australian emission units. If the Government changes its mind and allows emission units to be exported, it will provide five years' notice of the decision.
The development of secondary markets dealing with emission units will likely involve derivatives that may be treated as financial supplies for GST purposes. The result may be that GST amounts that have been paid out in connection with the supply of CPRS derivatives may not be recoverable as input tax credits.
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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.