Emissions Trading Scheme for non-forestry industries

By Annamaria Maclean and Andrea Scatchard

Inland Revenue has released its final interpretation statement 'Income tax and GST – industries other than forestry registered in Emissions Trading Scheme' (IS 25/24). This statement applies to industries participating in the Emissions Trading Scheme (ETS) (excluding forestry, which is subject to separate tax treatment) and encompasses emissions-intensive and trade-exposed sectors, as well as those engaged in removal activities and certain horticultural operations.

The interpretation statement addresses the intricacies of ETS-related rules for non-forestry industries and should be carefully reviewed by affected parties.

In summary, the interpretation statement outlines that businesses may claim deductions for emissions liabilities incurred, calculated according to the number of New Zealand emission units (NZUs) required to be surrendered based on production levels and on an accrual accounting basis.

NZUs can be obtained through purchase in the open market or, in some cases, received as “free NZUs” as an annual government subsidy. The statement clarifies that NZUs are considered revenue account property, with specific valuation requirements upon acquisition and at balance date. Additional complexity arises when businesses are allocated free NZUs; rather than reducing the emissions liability deduction due to receipt of free NZUs, the market value of these units at balance date generates income that offsets the emissions liability deduction.

Challenges may also occur if there is a shortfall or excess in the number of free NZUs provided or when a business's balance date does not correspond with the emissions year's calendar period.

The statement highlights the complexity in accurately monitoring and documenting all purchased and free NZUs held, including their valuation and method of disposal (whether sold or surrendered) from a tax perspective, noting this may differ from NZU register records. As part of robust tax governance, it is essential for impacted taxpayers to monitor compliance and assess their tax positions annually to ensure that they are following the guidance outlined in the interpretation statement.

Many submitters on the exposure draft of the interpretation statement highlighted the significant complexity inherent in the current ETS regime for non-forestry industries. Submitters have advocated for legislative reforms aimed at simplifying the regime’s application and reducing administrative burdens for affected taxpayers.

Among the changes proposed by submitters are measures to remove the taxation of stockpiled free NZUs that have not been surrendered (or sold) to offset an emissions liability in an income year. Additionally, there are calls to allow taxpayers to calculate emissions liabilities and allocation of NZUs based on the emissions year that ends within their income year (much like inclusion of income from limited partnerships and CFCs), which would facilitate easier tracking and reconciliation of NZUs and associated tax obligations.

It is understood that these submissions have been forwarded to the Inland Revenue Tax Policy team for consideration. We will continue to monitor developments and keep readers informed regarding any future changes that may arise from this ongoing review process.

Please reach out to your usual Deloitte advisor if you have any queries on the ETS regime.