Emissions Trading Scheme for non-forestry industries
By Annamaria Maclean and Andrea Scatchard
Inland Revenue has published its final interpretation statement, “Income tax and GST – industries other than forestry registered in Emissions Trading Scheme” (IS 25/24). The document applies to non-forestry sectors participating in the Emissions Trading Scheme (ETS) and covers emissions-intensive and trade-exposed industries, as well as entities involved in removal activities and certain horticultural operations. Forestry remains subject to separate tax treatment.
This interpretation statement delves into the nuanced tax rules that govern ETS activities for non-forestry industries and is essential reading for affected parties.
Key takeaways include that eligible businesses may deduct emissions liabilities as they accrue, with deductions based on the NZUs (New Zealand Emission Units) required to be surrendered relative to production levels, using accrual accounting principles. NZUs can be obtained either by purchasing on the open market or, in some cases, as free NZUs provided as an annual government subsidy. The statement clarifies that NZUs are revenue-account property, with specific valuation rules both at acquisition and at balance date. Notably, when free NZUs are allocated, their market value at balance date generates income that offsets the corresponding emissions liability deduction, rather than simply reducing the deduction.
Practical challenges arise if there is a shortfall or surplus of free NZUs, or if a business’s balance date does not align with the emissions year’s calendar period. The interpretation statement underscores the difficulty of tracking and documenting all purchased and free NZUs, including how they are valued and disposed of (sold or surrendered) from a tax perspective. This may diverge from records in the NZU registry. Robust tax governance is therefore crucial: impacted taxpayers should monitor compliance and reassess their tax positions annually to ensure alignment with the guidance in the interpretation statement.
Stakeholders who submitted comments on the exposure draft highlighted the current regime’s considerable complexity for non-forestry industries. Many urged legislative changes to simplify the regime and reduce administrative burdens for taxpayers. Proposed reforms include:
- Removing tax treatment of stockpiled free NZUs that remain unsurrendered (or unsold) to offset an emissions liability in any given income year.
- Allowing emissions liabilities and NZU allocations to be calculated based on the emissions year that ends within the taxpayer’s income year, similar to the treatment of income from limited partnerships and foreign-controlled companies, to ease tracking and reconciliation.
These submissions have been forwarded to Inland Revenue’s Tax Policy team for consideration. We will continue to monitor developments and keep readers updated on any future changes that emerge from this review process.
If you have questions about the ETS regime, please contact your Deloitte advisor.
