Guideposts through the “green” maze and the new carbon tax
On 8 November 2011, the Clean Energy Act 2011 was passed by the Senate. It introduces a carbon price in Australia (frequently referred to in the media as a carbon tax) and is the Government’s response to the risks of global climate change. The key aspects of the new scheme are:
• Certain “large” emitters of carbon dioxide must purchase a permit for each tonne of carbon dioxide they emit each year;
• This will come into effect from 1 July 2012;
• The price of a permit is fixed until 1 July 2015. For the first year it will be $23 per tonne;
• From 1 July 2015 the fixed price permits will be replaced by a “cap and trade” emissions market.
• It is intended that the top 500 carbon emitters in Australia will be subject to the new scheme;
• There is some assistance for industry and households to minimise the impact of the new scheme.
What does this mean for your business?
All businesses in Australia should consider the following issues:
Are you subject to the carbon tax?
In general, permits to emit carbon will need to be acquired by businesses that operate a facility that emits 25,000 tonnes of carbon dioxide per year. Some facilities are subject to different tests (such as some natural gas suppliers and landfill operations). Transport fuels will not be directly subject to the scheme, although changes in fuel excise will impose a defacto carbon tax for certain industry sectors. The carbon tax does not apply to the primary production sector.
Can you reduce your exposure to the carbon tax?
It may be possible to fall below the threshold at which carbon tax is payable, for example, by implementing emission savings, or selling an emitting facility. Please note that there are anti-avoidance rules, similar to the tax anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936, to prevent artificially avoiding the carbon tax by “emissions splitting” through different entities.
Could you become subject to the carbon tax in the future?
If your carbon emitting activities are increased or you acquire or begin to control a carbon emitting facility, it is possible your business might become subject to the carbon tax in the future. This should become a due diligence matter when making an acquisition to ensure it won’t inadvertently subject the purchaser to the new scheme.
Are you eligible for assistance?
There are a number of industry assistance arrangements that have been implemented as part of the new carbon scheme, including the coal industry, emissions intensive trade exposed industries and manufacturing. If you believe you might qualify, you should seek further advice.
M&A Due Diligence
As obtaining permits for carbon emissions will now become a legal obligation after 1 July 2012, ensuring compliance with the new scheme should become part of standard due diligence practices when acquiring corporate entities (such as companies and unit trusts). Some transactions in the pipeline now may not come into fruition until after the new scheme is in effect, so carbon tax compliance needs to be addressed now. In this regard, a full suite of warranties ensuring that the target entity is compliant with its carbon tax obligations, similar to tax warranties, should now be contemplated.
Even if your business is not directly subject to the new carbon tax, it may have an impact on your costs e.g. if electricity prices or other inputs increase in price due to a supplier being subject to the new scheme. Businesses that attempt to improperly adjust their prices to deal with this should be aware of the powers of the ACCC to police such changes. When the GST was first introduced in 2000, special price exploitation rules applied to prevent excessive increases in price on account of the GST. No such special regime will apply to the carbon tax, but the ACCC has the power to take action to enforce any contraventions of existing laws. This could include the making of false or misleading claims in respect to price changes. The ACCC will be given additional funding to pursue such actions. If you are contemplating adjusting your prices, consider seeking advice on this matter.
Long Term Agreements
For some long term agreements (such as supply and distribution agreements or leases), prices may be locked in and will continue to apply well after the introduction of the new scheme. When the GST was introduced there were special compulsory mediation processes to re-negotiate long term contracts. However, there are no similar arrangements with the new carbon scheme. Those who are adversely impacted may wish to seek legal advice as to whether their current long term contracts do or do not provide for variation to prices on account of the carbon tax. Future long term contracts should have clauses that properly deal with adjustments to price on account of the carbon tax.
Administration and Enforcement
As part of the new scheme there will now be a new government agency, the Clean Energy Regulator (Regulator). Those subject to the scheme will need to report their carbon emissions for a financial year to the Regulator. The business concerned will need to buy permits or “units” equal to the amount of carbon emissions it reports to the Regulator, by the relevant due dates. The Regulator can make assessments of a business’s emissions if it believes emissions have been under reported. A shortfall charge can be imposed if insufficient units are obtained. Those who are dissatisfied with a decision of the Regulator, there is a review and appeal process. Penalties can be imposed for non-compliance including civil and criminal penalties and directors’ liability in some circumstances.
A new tax regime will apply to profits and losses made on the purchase, use and sale of units. In brief, the new rules will operate similar to the current trading stock rules. Importantly, most gains and losses will be on revenue account. The new units will not be subject to GST.
Contact Mills Oakley for further advice
The time until the new scheme comes into effect is short. If any aspect of the new carbon scheme affects your business please seek advice as a matter of urgency. To discuss any aspect of the carbon scheme please contact: