Update 15 December 2008 - White Paper released  
 
On 15 December, the White Paper was released by the Government which outlines the final design of the Carbon Pollution Reduction Scheme (CPRS) and the medium-term target range for reducing carbon pollution.  
 
The key tax treatments canvassed in the White Paper include:

• Discrete legislative provisions will be developed for the tax treatment of permits.
 

• The rolling balance method will be used to bring permits to account for income tax purposes.
 

• The cost of acquiring a permit will be deductible when the taxpayer starts to hold the permit
 

• If the permit is banked, the effect of the deduction will be deferred until the time the permit is surrendered or sold.
 

• Taxpayers will be allowed to make an election to use either historical cost or market value to value all permits held at the end of an income year.
 

• Any proceeds received on the sale of a permit will be treated as assessable income.
 

• The value of administratively allocated permits issued to emission-intensive trade-exposed entities will be valued at zero at the end of an income year ending before the last surrender date for the emissions year for which they were issued.
 

• A penalty imposed under the CPRS, including one imposed on a liable party for failing to surrender sufficient eligible compliance permits, will not be deductible.
 

• TOFA provisions and other tax provisions that could otherwise apply to the acquisition, holding and disposal of permits will not apply. Derivatives of permits that are ‘cash settlable’ may be ‘financial arrangements’ under the draft TOFA legislation.
 

• There will not be a discrete set of GST rules for CPRS transactions. The normal GST rules will apply, however, the GST law will be amended to confirm that permits and eligible emission units are personal property rights, not real property for GST purposes.

• The Institute supports the Government’s proposal to develop discrete provisions of the income tax law to govern the tax treatment of permits which should provide increased certainty, reduced complexity and equitable outcomes.
 
 

• We do not agree with the proposition that free permits and cash grants be assessable up front on receipt. The upfront taxation of free permits and cash grants on revenue account would create timing and/or permanent disadvantages. We submit that the simplest mechanism, in relation to free permits and cash grants, is for these to be expressly exempted from taxation.
 
 

• The Institute considers that it is imperative that the tax policy in relation to CPRS should include a tax loss carry-back mechanism which will be applicable to the parties which are affected by the constraints on free permits and thus have an adverse impact on their business values arising from this policy.
 
 

• The rolling balance method as currently proposed does not achieve a matching of revenue and expenditure. If the rolling balance is to be used as the underlying calculation mechanism, it needs to be augmented by an express rule that the permits on hand at the end of the taxpayer’s balance date should be reduced by the permits which will be acquitted after year end in relation to emissions identified as occurring before the taxpayer’s year end and a nil value should be given to free permits.
 
 

• The tax implications under proposed stages 3 and 4 of the Taxation of Financial Arrangements should be considered. In its current form, proposed Division 230, subject to certain exceptions set out in the provisions, should capture gains and losses from the trade of carbon derivative instruments on forward and other derivative markets that are expected to emerge, which we consider is an appropriate outcome. We also recommend that as the default position, direct trading of permits should be excluded from Division 230.
 
 

• The Institute recommends the adoption of a stand-alone GST-free (or non-supply) model for core trades and dealings in permits and similar emissions rights. In particular, a specific provision should be inserted into the GST Act to achieve this.
 
 

• Consideration should be given to appropriate climate change tax incentives as part of the design and implementation of the CPRS.
 
 

• In determining the nature and level of any penalties for non-compliance, care needs to be taken to properly consider the tax implications so that the after-tax position of the relevant party is fully understood and unintended behaviours and consequences do not arise. In particular, the cost of acquiring additional permits in a subsequent period, in accordance with a make good requirement to remedy any short fall of permits at each acquittal date, should not be treated as a non- deductible penalty for tax purposes.

• The cost of acquiring a permit would be deductible at the time the permit is acquired.
 

• If the permit is banked, the effect of the deduction would be deferred until the time the permit is surrendered or sold.
 

• Any proceeds received on the sale of a permit would be treated as assessable income.
 

• The effect of deferring a deduction for the purchase of a permit would be achieved through a rolling balance method, under which the value of permits held at the beginning and end of the income year would be taken into account. The Government does not yet have a preferred approach to valuing permits for this purpose.
 

• The value of free permits would be included in the taxpayer’s assessable income in the year the permits are received.
 

• The value of a cash grant given to a liable entity as assistance under the scheme would be included in their assessable income in the income year it is received.
 

• A penalty imposed under the scheme legislation, including one imposed on a liable party for failing to surrender sufficient eligible compliance permits, will not be deductible.
 

• Scheme transactions would be treated under the normal GST rules.