The exposure draft legislation has been issued by the Government in relation to the proposed carbon tax. Some of the draft legislation deals with the proposed income tax treatment in relation to the dealing with registered emissions units (which includes carbon units). A new Division 420 will be inserted into the Income Tax Assessment Act, 1997. The new division is given exclusivity in relation to determination of deduction of expenditure and inclusion in assessable income with respect to registered emissions units.
The tax treatment has similarities to the tax treatment of trading stock namely:
- each income year an entity must compare the value of all registered emissions units held by it at the beginning and end of the income year and any increase in value at the end of the year will be included in assessable income and a reduction in value at the end of the year will be an allowable deduction
- deductions for expenditure incurred in acquiring or disposing of registered emissions units and amounts included in assessable income for the sale of registered emissions units, will be brought to account on a gross basis rather than on a net profit basis.
There are three valuation methods that may be used namely the FIFO cost method (first in first out), the actual cost method; or the market value method. The default method is FIFO cost method if a choice is not made as to which method to use. There are deemed market value rules applying to dealings in units that are not on arm’s length terms.
Where carbon units are issued for free:
- the entity that receives the free carbon unit cannot claim any deduction for expenditure incurred in becoming the holder of the unit
- the benefit of having valuable units issued for free will not be assessed for tax to the entity when the free unit is issued but if during the fixedprice phase (1 July 2012 to 30 June 2015), free units are sold back to the Clean Energy Regulator, the price received from the sale will be included in the assessable income of the entity.
- For tax consolidated groups, amendments have been made to the tax cost setting rules to include registered emissions units.
However where tax consolidated groups have tax sharing agreements, a review should be undertaken to ensure that those agreements deal with the new provisions to ensure that the provisions of the agreement are sufficiently wide to ensure that the appropriate tax and accounting outcomes are achieved in relation to the taxation treatment of the registered emission units.