Bills Digest no. 163 2008–09
Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2009
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Concluding comments
Contact officer & copyright details
Passage history
Date introduced: 14 May 2009
House: House of Representatives
Portfolio: Climate Change and Water
Commencement: Generally, at
the same time as section 3 of the Carbon Pollution Reduction Scheme Act 2009 (CPRS Act). This particular section commences on the 28th day after the CPRS
Act receives Royal Assent. However, the related Acts have not themselves first
received Royal Assent under by the 28 day, if the CPRS Act does not commence at
all. These related Acts are:
- Australian
Climate Change Regulatory Authority Act 2009
- Carbon
Pollution Reduction Scheme (Charges – Customs) Act 2009
- Carbon
Pollution Reduction Scheme (Charges-Excise) Act 2009
- Carbon
Pollution Reduction Scheme (Charges-General) Act 2009, and
- Carbon
Pollution Reduction Scheme (Consequential Amendments) Act 2009 (this Bill ).
Certain
items do not commence at all if Schedule 1 to the National Greenhouse and
Energy Reporting Amendment Act 2009 commences before Schedule 3 to the CPRS
Act. The provisions of the Carbon Pollution Reduction Scheme (Consequential
Amendments) Act 2009 (CPRS Consequentials Act) whose commencement is affected
by this particular condition are:
- Item 64B of Schedule 1, and
- Item 66 of Schedule 1.
Other
commencement conditions for provisions of the CPRS Consequentials Act are:
- Part 2, Schedule 1
– 1 July 2011, and
- Part 3, Schedule 1
– the latter of the commencement of section 3 of the CPRS Act and immediately
after the commencement of Schedule 1 of the National Greenhouse and Energy
Reporting Amendment Act 2009.
Links: The relevant links to the Bill, Explanatory Memorandum
and second reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/. When Bills have been passed they can
be found at ComLaw, which is at http://www.comlaw.gov.au/.
This Act amends various existing
Commonwealth legislation as a consequence of the passing of the main
legislation implementing the Government’s Carbon Pollution Reduction Scheme referred
to above as the CPRS Act. This latter Act is currently before Parliament. The following
legislation is affected by the CPRS Consequential Amendments Bill:
- Anti-Money Laundering and Counter Terrorism Financing Act 2006
- Australian Securities and Investments Commission Act 2001
- Corporations Act 2001
- Financial Management and Accountability Act 2007
- National Greenhouse and Energy Reporting Act 2007
- Ozone Protection and Synthetic Greenhouse Gas Management Act
1989
- Renewable Energy (Electricity) Act 2000
- Trade Practices Act 1974
- A New Tax System (Goods and Services Tax) Act 1999
- Income Tax Assessment Act 1936
- Income Tax Assessment Act 1997, and
- Taxation Administration Act 1953.
The background to this Bill can be found in the Library’s Bills Digest on the CPRS Act.[1]
The proposed measures are based on the above mentioned Government
White Paper entitled ‘Carbon Pollution Reduction Scheme: Australia’s Low
Pollution Future’ released by the Government on 15 December 2008. A link to
that document is here.
The Senate Standing Committee on Economics completed its
inquiry and report on the Exposure Draft of the Carbon Pollution Reduction
Scheme Bill 2009 and related Bills, one of which is the CPRS Consequentials
Amendments Bill on 16 April 2009. Details of the inquiry are at http://www.aph.gov.au/Senate/committee/economics_ctte/cprs_09/info.htm .
The exposure draft legislation for the CPRS, one of which is
the CPRS Consequentials Amendments Bill is also being considered under broader
terms of reference by the Senate Select Committee on Climate Policy, which is
due to report by 15 June 2009. Details of this inquiry are at http://www.aph.gov.au/SENATE/committee/climate_ctte/index.htm .
The Senate Select
Committee on Fuel and Energy’s terms of reference also include inquiry into the
impact of an emissions trading scheme on the fuel and energy industry. The
Committee released an interim report on 7 May, before its final report due by
21 October 2009. Details of the inquiry are at http://www.aph.gov.au/SENATE/committee/fuelenergy_ctte/index.htm .
Please refer to the Library’s Bills Digest on the Carbon
Pollution Reduction Scheme Bill 2009.
The pros and cons of the proposed Carbon Pollution Reduction
Scheme were extensively discussed in the Library’s Bills Digest on the Carbon
Pollution Reduction Scheme Bill 2009.
Likewise, the position of the
various political groups, as of the date of publication, are discussed in the
Library’s Bills Digest on the Carbon Pollution Reduction Scheme Bill 2009.
The financial impact of the proposed Carbon Pollution
Reduction Scheme is outlined in the Library’s Bills Digest on the Carbon
Pollution Reduction Scheme Bill 2009.
Item 1A inserts a new definition of ‘eligible
emissions unit’ into the Anti-Money Laundering and Counter-Terrorism
Financing Act 2006 (AML/CTF Act) An eligible emissions unit is
defined in Clause 5 of the Carbon Pollution Reduction Scheme Bill 2009
(CPRS Bill) as an Australian emissions unit (AEU) or an eligible international
emissions unit. These are emission units that are able to be surrendered by
liable entities under the proposed Carbon Pollution Reduction Scheme (CPRS) to
acquit their responsibilities under that scheme.
Briefly, an AEU is an emission unit issued by the proposed
Australian Climate Change Regulatory Authority (the Authority). Eligible
international emissions unit are certain emissions units arising from the
operation of the ‘flexible mechanisms’ (such as the clean development
mechanism) set up under the Kyoto Protocol to the United Nations Framework
Convention on Climate Change. They may include other non-Australian sourced
emissions units at a later date as the CPRS develops. The Library’s recent
Bills Digest on the Carbon Pollution Reduction Scheme Bill 2009 contains
further details on the Kyoto Protocol, flexible mechanisms and the above-mentioned
Convention.
Item 1C will amend the AML/CTF Act so that an agent
of a person acting as an agent of another person acquiring or disposing of an
eligible emissions unit has to verify the identity of their principal.
Item 1 amends the Australian Securities and
Investment Commission Act 2001 so that both and AEU and an eligible
international emissions unit are financial products for the purposes of this
Act. Amendments in Item 2 mean that providing a service in respect of
these units is not the provision of a financial service for the purposes of
this Act.
Item 6 amends the Corporations Act 2001 so
that both an AEU and an eligible international emissions unit are financial
products for the purposes of this particular Act.
Items 13 to 66 amend the National
Greenhouse and Energy Reporting Act 2007 (NGER Act) so that previous
references to the Greenhouse and Energy Data Officer (Officer) in this Act now
refer to the Australian Climate Change Regulatory Authority. All the functions
exercised by this Officer would now be exercised by the Authority.
Items 68 to 83 amend the Renewable Energy
(Electricity) Act 2000 so that the functions of the Renewable Energy
Regulator under this Act would be exercised by the Authority.
Items 87 to 97 of this Schedule contain
provisions that allow the transition of functions in relation to the CPRS,
reporting of greenhouse gas emissions under the NGER Act and renewable energy
to the Authority. Note in particular that under item 93, definitions of
‘Office of the Renewable Energy Regulator’, ‘protected document’, ‘protected
information’ and ‘Regulator’ will continue to apply despite the repeal of the those
provisions in the Renewable Energy (Electricity) Act 2000. Item 96 also provides that if before the commencement of this item, if the accounts
were described by specific terms and designated by particular authorities, they
will have be considered effective under the new Act.
Items 98 to 194 amend the NGER Act.
Item 101 inserts new subsection 3(2) so that
one of the formal objectives of the NGER Act is to underpin the CPRS Act by
imposing various registration, reporting and record-keeping requirement.
Item 109 repeals existing section 6 of the NGER Act
and inserts new sections 6, 6A, 6B, and 6C into that Act. These provisions define where this Act applies. In addition to
the existing provisions new section 6A ensures that the NGER Act applies
to Australia’s continental shelf. New section 6B ensures that the NGER
Act will also apply to the Joint Petroleum Development Area, between East Timor
and Northern Australia.
Items 111 to 145 amend section 7 NGER Act so
that the various definitions of terms used in the amended Act are updated.
Item 146 inserts new sections 7A, 7B, 7C and 7D into the NGER Act. These amendments are vital for the operation
of the CPRS Act. Briefly, these amendments define the following terms for CPRS
Act purposes:
- new section 7A – definition of a greenhouse gas
- new section 7B – definition of a synthetic greenhouse gas
- new section 7C – definition of potential greenhouse gas
emissions embodied in an amount of eligible upstream fuel,
- the term eligible upstream fuel is defined in Clause 5 of the
CPRS Bill to include a wide range of solid, liquid and gas fuels that may be
supplied from either a producer (such as a coal mine) or importer (such as an
oil company) through to the consumer, and
- new section 7D carbon dioxide equivalence of potential
greenhouse gas emissions embodied in an amount of eligible upstream fuel.
These definitions are vital for the operation of Part 3 and
Part 11 of the CPRS Act.
The CPRS operates on the basis of individual facilities. Item
151 amends existing subsection 9(1) of the NGER Act so that the definition
of a facility contained in this subsection applies to the CPRS Bill.
In the first instance liability under the CPRS rests on the
person or entity that has operational control over a facility (this liability
may pass to other parties under the CPRS – particularly the entity with
financial control over a facility). Item 172 inserts new sections 11A, 11B and 11C into the NGER Act to clarify which entity has
operational control over a facility if two or more parties satisfy the criteria
in existing section 11 of this Act for determining who controls a facility.
Item 173E inserts new sections 15A, 15B and 15C into the NGER Act. These sections require various persons or
entities to register under this Act. These entities or persons are:
- a person or entity who was, or is, liable under the CPRS for the
current eligible financial year, and/or
- a person or entity who, in the current eligible financial year,
supplied an amount of eligible upstream fuel or synthetic greenhouse gas to
another person, and that person quoted an ‘obligation transfer number’ (OTN) to
the supplier.
An ‘eligible financial year’ is defined in Item 5 of
the CPRS Bill as a financial year beginning on 1 July 2011 or later financial
year. It follows that the ‘current eligible financial year’ is simply a current
financial year that starts after this date.
An OTN is defined in Clause 5 of the CPRS Bill as a
number issued under either Clause 44 or 45 of that Bill.
Briefly, these numbers allow a suppliers’ liability for greenhouse gas
emissions embedded in eligible upstream fuels or synthetic greenhouse gases to
be transferred to the recipient of these materials.
Item 181 inserts new sections 22A to 22F in the NGER Act that require liable entities, OTN holders, fuel suppliers and
holders of liability transfer certificates to report to the Authority and to
keep records of such reports. Broadly, these reports are to be provided in the
specified form and contain information that will allow the Authority to
determine the emissions for which the entity or person is responsible under the
CPRS scheme.
Maximum penalties for contravention of these requirements
are 2000 penalty units ($220,000) for individuals and 10 000 penalty units
($1.1 million) for other entities.
Item 184 requires the Authority to publish
information sourced from these reports on its website, especially the
provisional emissions number applying to a particular liable entity.
Clause 5 of the CPRS Bill defines a provisional
emission number as:
- having the meaning given by Part 3 of that Bill, and
- the meaning given by new sections 11B and 11C of
the NGER Act.
Briefly, the provisional emissions number in Part 3 of the CPRS Bill is the amount of greenhouse gases emitted by a liable entity.
New subsections 11B(7) and 11C(7) of the NGER Act define this
number in terms of a formula that expresses this number in terms of emissions
per liable person for those emissions.
This information has to be published by 28 February
following the end of the relevant eligible financial year.
An efficient emissions trading market runs on accurate and
timely information. This particular provision is a significant contribution to
the provision of that information.
Item 194 inserts new section 74B into the NGER
Act. This section enables the Authority to require a non-group entity
(individual) who they suspect of not complying with that Act to appoint a
registered greenhouse and energy auditor. Further, this section gives the
Authority the power to require that an audit of the non-group’s operations be
carried out by that appointed auditor.
New section 74C of the NGER Act allows the Authority
to appoint a greenhouse gas and energy auditor without the need to hold a
suspicion of non-compliance.
The synthetic greenhouse gases are hydrofluorocarbons
(HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6).
These gases have a much greater global warming potential per tonne than carbon
dioxide (CO2) (ranging from 1000 to 23 000 times more potent
over a 100–year timeframe). Emissions of many of these gases have been rapidly
increasing, as they are used as substitutes for ozone–depleting substances
controlled under the Montreal Protocol. They are used or produced in numerous
industrial processes, mainly as:
- refrigerants for refrigeration and air conditioning equipment
- foam–blowing agents for some thermal insulation applications
- propellants in some aerosols
- extinguishing agents in some systems, and
- insulation gas in electrical switchgear.[2]
Item 199 inserts a definition of sulphur hexafluoride
into section 7 of the Ozone Protection and Synthetic Greenhouse Gas
Management Act 1989 (Ozone Act). This gas is one of the six greenhouse
gases controlled by the Kyoto Protocol and is covered by the CPRS scheme.
Effectively this gas is now included in the controls imposed by the Ozone Act.
Item 203 inserts new section 9A into the Ozone
Act which exempts synthetic greenhouse gases that are part of another
manufactured product, from regulation under that Act. Thus where these gases
are part of another manufactured product they are not covered under the CPRS
scheme.
Item 217 inserts new section 46A into the
Ozone Act that requires manufacturers, importers and exporters of synthetic
greenhouse gases to give a report to the relevant Minister within 15 days of
the end of the relevant quarter in which these action took place, if:
- such actions were not in circumstances covered by regulations
made under paragraph 13(1A)(b) of the Ozone Act, and
- in the case of an importer the above criteria did not apply and
the import was not covered by paragraph 68(1)(d) of the Customs Act 1901.
There is no requirement for the Minister to make these
reports available to the Parliament.
Paragraph 13(1A)(b) of the Ozone Act allows the manufacture,
import and/or export of synthetic greenhouse gases, where it takes places in
these circumstances, to be prescribed in regulations.
Paragraph 68(1)(d) covers goods that are accompanied or
unaccompanied personal or household
effects of a passenger, or a member of a crew, of a ship or aircraft.
Thus, amounts of synthetic greenhouse gases covered by the
Ozone Act imported as personal luggage are covered by the provisions of the
Ozone Act. Given the very high unit value of some of these gases it may have
been possible to profitably import an amount of these gases as personal luggage
and not had these imports covered by this Act, or regulated by the CPRS Scheme,
but for this particular provision.
Item 1 of Schedule 2 inserts subsection
9-10(3B) into the A New Tax (Goods and Services Tax) Act 1999 (GST
Act). The effect of this amendment is that the supply of an eligible emissions
unit of a Kyoto Unit is a supply of a personal property right under tax
legislation and therefore subject to the Goods and Services Tax (GST).
Briefly, liability for GST arises where a registered
business supplies goods or services to its customers. The GST is imposed at the
rate of 10 per cent. Typically, it is included in the price paid by the
recipient of the goods and services. The supplier must account for the amount
of GST to the Australian Taxation Office.
If the recipient of goods or services is a registered
business entity, it will normally be able to claim a credit for the amount of
GST it has paid, provided it holds a tax invoice. This credit — called an input
tax credit — is offset against any GST on goods or services that the recipient
supplies to its own customers.[3]
The application of GST to AEUs and Kyoto units is
controversial. The following comment from the Taxation Institute explains some
of the major concerns:
The GST is proposed to be applied to trading in emissions
units. This approach is based upon the mistaken belief that an emissions unit
is akin to any other business input (eg a piece of steel) and that consistency
of treatment with other inputs is more important than any compliance costs
imposed on consumers. The Government also believes that the reduction in
compliance costs to the community in respect of the trading of emission permits
“. . . would undermine the objective of meeting Australia’s emissions
reductions in a cost-effective way by providing a preferential GST treatment
for emissions units relative to pursuing other ways of reducing emissions”.
However, loading the cost of emissions permits with inefficient and
distortionary compliance costs only reduces the efficiency of the Carbon
Pollution Reduction Scheme (CPRS). It should be the market price of the
units that encourages other ways of reducing emissions not compliance costs.
The problem is that an emissions unit will not be traded like
a piece of steel, where an order is sent to a supplier, who some days later,
delivers the steel. Rather, due to the design of the scheme which discourages
holding of emission units, the trades will occur in high volumes (with in
excess of 460 million permits available to be traded), electronically, in split
seconds by traders in a market not dissimilar to the stock exchange or the
futures market. Currently, those finance trading markets do not apply GST to
dealings in marketable securities such as shares and options.[4]
Clause 5 of the CPRS Bill defines a Kyoto unit to
mean:
- an assigned amount unit (AAUs)
- a certified emissions reduction unit (CER)
- and emissions reduction unit (ERU)
- a removal unit (RU), or
- a prescribed unit issued in accordance with the Kyoto rules.
The first four of these
units arise under the current Kyoto Protocol. AAUs will not be accepted for
CPRS purposes. An unlimited number of CERs will be accepted for CPRS purposes.
However, some conditions apply to the acceptance of ERUs and RUs for CPRS purposes.
The last dot point refers to any future type of unit issued under the Kyoto
Protocol, or its successor.
Items 3 and 4 insert a reference to the definition
of an eligible emission unit and a Kyoto Unit in the CPRS Bill, into section
195-1 of the GST Act.
Item 6 ensures that an eligible emission unit and a
Kyoto unit are not ‘real property’ for GST purposes.
Item 10 inserts
new section 70-12 into the Income Tax Assessment Act 1997 (ITAA97). The effect of this new section is that a registered emissions unit is
not trading stock for taxation purposes. This does not mean that these units
cannot be traded.
A registered emissions
unit is defined in new section 420-10 (see Item 19 of Schedule
2) as either an eligible emissions unit or a Kyoto Unit for CPRS purposes
that is entered in the relevant register maintained by the Authority.
Section 70-10, ITAA97 defines trading stock as anything
produced, manufactured or acquired that is held for purposes of manufacture,
sale or exchange in the ordinary course of a business.
As noted above, this category does not include the holding of a registered
emissions unit. The special rules applying to the taxation treatment of trading
stock in the income tax legislation do not apply to these units. The following
noted amendments however do establish a taxation regime applying to registered
emissions units.
Item 15 inserts section
104-205 into the ITAA97. This section defines a new CGT event K1 in
relation to an international emissions unit and defines the amount of capital
gain or loss in relation to that unit.
Item 45 inserts the definition of the term
international emissions unit into sub-section 995(1) ITAA97. Briefly, this term
is defined as:
- (a) a Kyoto unit (see above discussion) or
- (b) a non-Kyoto international emissions unit.
Clause 5 of the
CPRS Bill defines this latter term to be either (a) a prescribed unit issued in
accordance with an international agreement (other than the Kyoto Protocol) or (b)
a prescribed unit issued outside Australia under a law of a foreign country. An
example of the latter units are the emissions permits issued under the European
Union Emissions Trading Scheme. For the moment, these latter units are not
accepted for CPRS purposes.
Item 17 inserts section 118-15 into the
ITAA97. This new section exempts capital gains and capital losses made from a
registered emissions unit from the capital gains tax provisions of this Act.
However, this does not mean that income and losses from this source are not
assessed at all (see Item 19 following).
Item 19 of this
Schedule inserts new Part 3-50 into the ITAA97. Generally, this Part
sets out the taxation arrangements for gains or losses arising from the
acquisition and disposal of registered emissions units.
As noted above new section
420-10 defines what a registered emission unit is for taxation purposes.
New section 420-15 allows the deduction of expenditure incurred in becoming a holder of registered
emissions units, except where:
- they were provided free of charge to the holder under the
Emissions Intensive Trade Exposed assistance program or assistance to the coal
fired power generators (new subsection 420-15(3))
- provided as a result of reforestation activities (new
subsection 420-15(4)
- provided as a result of the destruction of synthetic greenhouse
gases (new subsection 420-15(5)), or
- if the sale proceeds of that unit would not be assessable for
taxation purposes (new subsection 420-15(6)).
The expenses incurred
in ceasing to hold a registered emission unit are also deductible under new section 420-42.
New section 420-25 includes the gross amount
received on the disposal of a registered emission unit in a person’s or
entity’s assessable income. As noted earlier, the expenditure incurred in
becoming the holder of these units, as well as disposing them, is tax
deductible.
The increase and decrease in the value of registered
emissions units held over an income year, is also included in a person’s or
entity’s taxable income under new section 420-45.
This approach is unusual.
Usually, a person or entity would have either the gains or losses arising from
the disposal of an asset assessed only when that asset was sold. The proposed
measure in this section would include the unrealised gains or losses of
registered emissions units held over an income year in the entity’s assessable
income. The unrealised gains would be assessable, but not representative of a
real increase in the entity’s income for that period. This may lead to the
entity paying tax on assessed income they have, in fact, not yet realised.
Concluding
comments
One of the key foundations of any emissions trading scheme
is the accurate collection and dissemination of information on emissions and
liability for those emissions. Without this information liability entities, and
the regulators, cannot accurately administer such schemes. The proposed changes
in the CPRS Consequentials Bill require the collection and dissemination of
this information. If the CPRS scheme is to commence the amendments in this Bill
are essential to its successful operation.
Further, this Bill sets out the taxation treatment of gains
and losses arising from the acquisition, holding and disposal of registered
emissions units. Again, these are vital legislative provisions and must proceed
through Parliament if the main CPRS Bill also passes through Parliament.
Members, Senators and
Parliamentary staff can obtain further information from the Parliamentary
Library on (02) 6277 2495.
Leslie Nielson
16 June 2009
Bills Digest Service
Parliamentary Library
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