House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, Minister for Housing and Minister for Homelessness, Social and Community Housing, the Hon Michael Sukkar MP)

Chapter 1 - Refund of large-scale generation shortfall charge

Outline of chapter

1.1 Schedule 1 to the Bill amends the ITAA 1997 to make refunds of large-scale generation shortfall charges NANE income for income tax purposes.

1.2 All legislative references in this chapter are to the ITAA 1997, unless otherwise stated.

Context of amendments

1.3 The REE Act operates to:

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encourage the additional generation of electricity from renewable sources;

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reduce emissions of greenhouse gases in the electricity sector; and

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ensure that renewable energy sources are ecologically sustainable.

1.4 This is done through the issuing of large-scale generation certificates for the generation of electricity using eligible renewable energy sources and requiring certain electricity purchasers (called liable entities) to surrender a specified number of certificates for the electricity that they acquire during a year (section 3 of the REE Act).

1.5 Liable entities are generally electricity retailers and large industrial users of electricity.

1.6 Where a liable entity does not surrender sufficient certificates, the liable entity must pay a renewable energy shortfall charge.

1.7 A charge that is payable under the REE Act is not deductible for income tax purposes (section 7A of the REE Act). Liable entities which pay the large-scale generation shortfall charge can apply to have the shortfall charge refunded if they surrender outstanding large-scale generation certificates within, broadly, three years of paying the charge (section 95 of the REE Act). Currently, there is some uncertainty as to whether a refund of shortfall charges is assessable income for income tax purposes.

1.8 As part of the 2019-20 Mid-Year Economic and Fiscal Outlook, the Government announced that it will amend the income tax law to ensure that no tax is payable on refunds of large-scale generation shortfall charges. This will enable the market for renewable energy certificates to work as intended, meeting targets for clean energy while ensuring affordable electricity for consumers.

Summary of new law

1.9 Schedule 1 to the Bill makes refunds of large-scale generation shortfall charges NANE income for income tax purposes.

1.10 As a result, no income tax is payable on refunds of large-scale generation shortfall charges. However, deductions for expenses incurred in relation to large-scale generation certificates are not affected by making refunds of shortfall charges NANE income.

Comparison of key features of new law and current law

Detailed explanation of new law

1.11 Schedule 1 to the Bill amends the ITAA 1997 to make refunds of large-scale generation shortfall charges NANE income for income tax purposes. [Schedule 1, item 2, subsection 59-100(1)]

1.12 As a result, no income tax will be payable on refunds of large-scale generation shortfall charges made to electricity retailers and large industrial users of electricity.

1.13 Under the general deduction provision in the income tax law (section 8-1), a taxpayer cannot deduct a loss or an outgoing incurred in relation to gaining NANE income. However, the fact that refunds of large-scale generation shortfall charges are NANE income is disregarded for the purposes of determining whether an entity can deduct expenditure incurred in relation to large-scale generation certificates. [Schedule 1, item 2, subsection 59-100(2)]

1.14 Therefore, deductions for expenses incurred in relation to large-scale generation certificates are not affected by making refunds of large-scale generation shortfall charges NANE income. This will ensure that taxpayers are not inadvertently disadvantaged by the amendment to make refunds of shortfall charges NANE income.

Consequential amendments

1.15 A consequential amendment is made to the list of NANE income provisions to add a reference to refunds of large-scale generation shortfall charges. [Schedule 1, item 1, section 11-55]

Application and transitional provisions

1.16 Schedule 1 to the Bill commences on the first day of the first quarterly period following the day the Bill receives Royal Assent.

1.17 The amendments apply to refunds of large-scale generation shortfall charges made on or after 1 January 2019. [Schedule 1, item 3]

1.18 In this regard, the amendments are beneficial to taxpayers and were sought by affected stakeholders to clarify the operation of the law. No taxpayers receiving a shortfall charge refund will be disadvantaged by the amendments.