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Climate change sparks tax debate
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7 April 2008  
 
 
Tax is a key issue in developing policies to combat climate change, says a report jointly produced by the Institute of Chartered Accountants in Australia (the Institute) and Ernst & Young. 
 
The Institute’s Tax Counsel, Ali Noroozi, said the report recommends tax policies which are consistent with reducing global carbon emissions while maintaining and enhancing Australia’s economic attractiveness, and calls on the government to ensure climate change initiatives address the relevant tax issues. 
 
“With Australia moving towards an integrated action to reduce carbon emissions, including developing an Australian Emissions Trading Scheme (AETS), the effects of such a scheme need to be properly addressed by the Australian tax system,” Mr Noroozi said. 
 
“Rather than introducing a new policy, the amendments recommended in the report are needed to provide clarity. They fall within the ‘simplicity’ guideline, recognising that the tax law must deliver certainty and appropriate tax outcomes for business,” he said. 
 
Ernst & Young’s Managing Partner Business Tax Services, Trevor Hughes, said the report sets out the Australian tax issues that will emerge, recognising that the precise tax implications of transactions under AETS will depend on the legal form of the scheme under the AETS legislation when released.  
 
“The tax issues that will arise relate to emissions permits and offset credits, capital expenditures and research and development initiatives,” Mr Hughes said. 
 
The report argues that the existing regime will not properly deal with the AETS in a number of areas and that consideration should be given to amending the tax legislation relating to income tax (including the international tax issues involved with global trading), the Goods and Services Tax (GST), Petroleum Resources Rent Tax (PRRT), state stamp duties and other taxes and charges. In particular, the report makes the following recommendations:

  • An exemption is needed from income tax and capital gains tax in relation to the free allocation of AETS permits to all recipients. The free allocation is intended in part to provide compensation to businesses whose viability and asset values would be otherwise affected.
  • For GST purposes, emission permits be characterised as things other than goods and real property to avoid difficulties that may arise in respect of international trade. Furthermore, any transactions involving AETS permits should have a uniform GST treatment.
  • The imposition of stamp duty on AETS transactions would create an additional cost and complexity to trading and will provide a windfall in revenue for some states. In the event that the AETS is introduced prior to the abolition of stamp duty in some states, those states should be encouraged to exempt the transfer of AETS permits and offset credits from stamp duty until relevant stamp duty is fully eliminated.
  • PRRT is applied before, and in addition to, income tax. The PRRT legislation does not specifically address issues arising from the AETS and expenditure on carbon abatement strategies. Clarity and consistency of treatment of expenditure is needed to ensure that costs incurred in relation to the abatement of greenhouse gases are deductible for PRRT purposes.
The report also identifies some potential tax incentives geared towards reducing the burden on business of the significant capital expenditures and adjustments, which will be required as a consequence of the introduction of mandatory targets and the AETS. 
 
“The current Australian tax treatment of, and incentives for, innovation will need to be enhanced to encourage necessary innovation and investment by Australian businesses in risky technologies to reduce emissions,” Mr Hughes said. 
 
“Clean technologies that were once cost-prohibitive to develop and commercialise, may become more cost-competitive; however, this will demand significant innovation from Australian businesses, with activities in research and development,” Mr Hughes said. 
 
Such opportunities underscore the need for detailed consideration of Australia’s tax and government policies and support for necessary innovation. The following actions are proposed for the Government to consider:
  • Increase the deduction on eligible clean technology R&D expenditure
  • Extend the scope of the Refundable Tax Offset for companies developing clean technology
  • Allow companies using depreciating assets for R&D on clean technology to claim an annual one-third write-off for qualifying plant expenditure at the rate of 125 per cent, to recognise the costs associated with commercialising new clean technology or incorporating clean technology into existing operations
  • Consider improving the expenditure eligible for outright deductibility.
These incentives are in addition to the provision of grants under various schemes, which will be targeted at very early stage high-risk research, for companies developing and/or redesigning high-risk/high-potential clean technology projects. 
 
“The government could consider the recommendations contained in this report concurrently with developing other climate change initiatives. These recommendations could be used to commence a public consultation process”, Mr Ali Noroozi said. 
 
“The AETS gives the federal and state governments the opportunity to demonstrate best practice consultative approaches to the tax policy development. The process should involve the greatest possible transparency in considering policy options. As a starting process, our recommendations could be used to develop a discussion paper on which input could be widely sought,” he said.