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Tax changes required to ensure CPRS works

Publication date: 03 Sep 08 | Source: THE TAX INSTITUTE

Australia’s premier professional tax body, the Taxation Institute of Australia, has called on the Government to make the trading of Carbon Pollution Reduction Scheme (CPRS) permits GST free and to treat penalties for non-compliance of the scheme as tax deductible costs.

The Taxation Institute said some of the current proposals will add considerable imposts on businesses already slugged by the new compliance and administrative costs of the scheme.

Taxation Institute President, Sue Williamson, said while the Green Paper was a critical step forward in setting a model that would reduce the impact of climate change on Australia, there were some concerning issues with the proposed tax model.

“In the broad sense, the Taxation Institute supports the Green Paper’s tax premise of developing discrete provisions of the income tax law to increase certainty and reduce complexity,” Ms Williamson said.

“However, as we advised Treasury in its recent round of consultation, there are a number of tax measures that should be reconsidered or they could add significant impost on businesses already hit by the new compliance and administrative costs of the scheme.

“This is on top of some operational issues of the scheme.  

“For example, firms directly impacted by the scheme will need to meet the costs of permits and alter their business structure to reduce carbon emissions.  Entities dealing with those firms will feel the indirect cost of the scheme if those price increases are passed through to them.  

“Consideration needs to be given to making sure that the direct and indirect CPRS costs can be passed on notwithstanding the existence of long term contracts, similar to the way the issue was dealt with in the context of the introduction of the GST regime.”

In its submission to the Government CPRS Green Paper, the Taxation Institute raised a number of concerns about the proposed tax treatment of the scheme and submitted 11 recommendations. Issues raised include:

  • The timing mismatch between the tax year and acquittal date of permits, which could see businesses wait up to 18 months before it can claim a tax deduction on permits;
  • The significant costs that the GST treatment of CPRS trading could have on businesses, including financing costs and compliance costs;
  • The effectiveness of the proposed fuel offsets, which will not achieve the policy aims of reducing the compliance and implementation costs to offset the real costs;
  • The need for an alternate model for penalties for non-compliance that ensures that the cost of complying with the Scheme is transparent; and
  • The need for the trading of permits to be free of stamp duty.
“The Tax Institute will continue to work with the Government to ensure that there are robust and workable tax laws underpinning the scheme,” Ms Williamson said.

- ends -

Note to the Editor:  A summary of the 11 recommendations made by the Taxation Institute are below. A full copy of the submission can be found here.

Media Contacts:    Sue Williamson, President - Taxation Institute of Australia on 0411 646 783
Peter Laidlaw, Lighthouse Communications Group on 0419 210 306
Taxation Institute of Australia
Summary of Recommendations on the proposed tax laws for the Carbon Pollution Reduction Scheme

Special tax code: The Taxation Institute supports the primary premise of the Green Paper in the taxation context, that discrete provisions of the income tax law should be developed thereby increasing certainty and reducing complexity.

Deductibility on acquisition: The Taxation Institute supports the preferred position that permits are deductible on acquisition and that any proceeds received on the sale of a permit would be treated as assessable income.

Permits held at year-end deemed used at next acquittal date: The Taxation Institute does not support the preferred position that if the permit is on hand at year end, the effect of the deduction would be deferred until the time the permit is surrendered or sold.  It recommends that in order to minimise mismatch, permits held at year end and used to acquit an entity’s liability at the next acquittal date (e.g. 15 December) should be deemed to be surrendered for tax law purposes at year end.

Election of valuation method: The Taxation Institute recommends that taxpayers should be given an opportunity to elect which method they wish to adopt.

GST free: The Taxation Institute does not support the proposed GST treatment of trading under the CPRS as it creates significant GST costs including financing costs and compliance costs.  The Taxation Institute recommends that trading of permits and the associated derivative products should be GST free.

Deductibility of penalties: The Taxation Institute recommends that any penalty for failing to surrender sufficient eligible compliance permits should be deductible, in light of the price cap issue, the consistency in the tax treatment of penalties under the CPRS, and consistency with other similar legislative regimes.

Free permits not subject to tax: The Taxation Institute does not support the proposed tax treatment of free permits and cash payments.  The Taxation Institute recommends that any CPRS permit issued free to enterprises in Emissions Intensive, Trade Exposed (EITE) industries or to enterprises under the Electricity Sector Adjustment Scheme (ESAS) should not be subject to tax.

Taxation of Financial Arrangements (TOFA) interaction: To avoid compliance cost increases, the Taxation Institute recommends that either the TOFA thresholds need to be lifted to account for the increase in TOFA financial instruments held by an entity or that carbon pollution permits and associated financial instruments are excluded from TOFA’s scope.
Stamp duty: Given the significant costs CPRS will entail, the Taxation Institute recommends that stamp duty is not applied to trading in permits or associated derivative products.  This can be achieved by a Commonwealth prohibition on the States taxing dealings in permits or by the Commonwealth and the States reach agreement that no duty should apply to dealings in permits.    

Fuel Offsets: In order to reduce the compliance costs and implementation issues associated with the proposed carbon price offset scheme for fuels, the Taxation Institute recommends that the Government explore alternative solutions, such as the one outlined in the Taxation Institute’s submission, which are consistent with the policy aims.  

Targeted tax incentives: The Taxation Institute recommends that the Government consider the introduction of targeted tax incentives, such as those outlined in the Taxation Institute’s submission, to more quickly and specifically encourage behavioural change in response to the carbon pollution reduction scheme through the enhancement of technical development and carbon sinks.