Edited version of private ruling

Authorisation Number: 1011410278124

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Ruling

Subject: GST and Renewable Energy Certificates

Questions

Is entity A (you) entitled to claim an input tax credit in connection with the acquisition of renewable energy certificates (RECs)?

Are you remitting the correct amount of GST on the supply of a renewable energy system (RES) to your customer?

Is your sale/transfer of RECs to an energy retailer a taxable supply?

Answers

Yes, you are entitled to claim the input tax credit for the acquisition of RECs provided you make a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and hold a valid tax invoice.

Yes, you are remitting the correct amount of GST on the supply of a RES to your customer.

Yes, your sale of RECs to an energy retailer is a taxable supply.

Relevant facts

Entity A (you) supply and install renewable energy systems (RES) to customers who then become entitled to renewable energy certificates (RECs).

You are also registered with the Office of Renewable Energy Regulator (ORER) as an "Agent", which allows you to create RECs, purchase others' REC rights and sell RECs.

Your customers or customers of another installer of a RES, who may or may not be registered for GST, assign their rights to create RECs to you. You then sell the RECs on the market to energy retailers which require these RECs to offset their liability under current legislation.

Where your customer assigns their REC rights to you on a sale you make of a RES, you have been treating the REC in the sale transaction as follows:

· by the customer assigning the RECs directly to you using the 'assignment form', the customer will offset the value of the RECs against the price of the RES.

· you determine the value of the RECs based on the current market value.

· the following scenarios are illustrative of the method you use to calculate the final price of the RES for a customer:

Scenario 1:

Unit price $2,000 GST inclusive

Less RECs value $ (500) No GST for unregistered customer

$1,500 Amount payable by customer

Scenario 2:

Unit price $2,000 GST inclusive

Less RECs value $ (550) GST for registered customer

$1,450 Amount payable by customer

You remit GST for the supply of the RES by calculating the GST on the unit price (i.e.: the $2,000).

In addition to being assigned RECs directly from customers, you also purchase RECs from other installers who have been assigned the rights to create RECs from their customers.

You keep the assignment forms and upload the RECs into the ORER website to be validated and ready for trade.

You enter into a written contract with energy retailers to sell them RECs and invoice the energy retailer for the amount in the following manner:

To energy retailer

RECs $500

$ 50 GST

$550 Amount payable

You have only sold one batch of RECs to an energy retailer and the contract has been submitted with this ruling request.

You are registered for GST.

Reasons for the Decision

1. Are you entitled to claim an input tax credit in connection with the acquisition of RECs?

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

· you acquire anything solely or partly for a *creditable purpose; and

· the supply of the thing to you is a *taxable supply; and

· you provide, or are liable to provide, *consideration for the supply; and

· you are *registered, or *required to be registered.

(* Denotes a defined term in the GST Act)

The first requirement for a creditable acquisition is that it is made solely or partly for a creditable purpose. 

The term 'creditable purpose' is defined in section 11-15 of the GST Act.  Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that it is acquired in carrying on your enterprise.  Subsection 11-15(2) of the GST Act states that you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed or the acquisition is of a private or domestic nature.

In this case, you acquire the right to create RECs from your customer. By signing the assignment form, the customer assigns to you the right to create RECs. Therefore, the supply of the assignment of the right is acquired for a creditable purpose as you acquire it in carrying on your enterprise. You provide the customer with consideration for the supply and you are registered for GST. Therefore paragraphs 11-5(a), 11-5(c) and 11-5(d) of the GST Act are satisfied. We now have to determine whether the supply of the right to you is a taxable supply.

The supply of the REC to you will be a taxable supply where the entity making the supply to you (i.e.: the customer) satisfies the requirements of section 9-5 of the GST Act.

Section 9-5 of the GST Act states:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that you *carry on; and

· the supply is *connected with Australia; and

· you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

In this case, where a customer makes a supply of a REC and is not registered for GST they will not satisfy the requirements of making a taxable supply under section 9-5 of the GST Act.

As the supply of the REC to you by the customer is not a taxable supply you will not satisfy the requirement given by paragraph 11-5(b) of the GST Act and will not be making a creditable acquisition for the purposes of section 11-5 of the GST Act. Consequently you will not be entitled to any input tax credit on a REC from an unregistered entity.

Where a customer makes a supply of a REC and is registered for GST the supply will be a taxable supply where they have satisfied the remaining requirements of section 9-5 of the GST Act. On this basis that customer's supply of the REC to you will be a taxable supply.

In the situation where the supply to you of the REC is a taxable supply you will satisfy the requirement given by paragraph 11-5(b) of the GST Act. As the remaining requirements of section 11-5 of the GST Act have been met you will be entitled to an input tax credit on the acquisition of the REC where you hold the relevant tax invoice.

2. Are you remitting the correct amount of GST on the supply of a renewable energy system (RES) to your customer?

Section 9-40 of the GST Act provides that you must pay GST on any taxable supply that you make.

Section 9-70 of the GST Act explains that the amount of GST on a taxable supply is 10% of the value of the taxable supply. The value of a taxable supply is given by the meaning in section 9-75 of the GST Act which states:

(1) The value of a *taxable supply is as follows:

Price x 10/11

Where:

Price is the sum of:

(a) as far as the *consideration for the supply is consideration expressed as an amount of money the amount (without any discount for the amount of GST (if any) payable on the supply); and

(b) so far as the *consideration is not consideration expressed as an amount of money the *GST inclusive market value of that consideration.

In this case, you make taxable supplies by way of selling RESs to customers. As such you will incur a GST liability equal to 1/11th of the price of the RES. In scenarios 1 and 2, you have advised the price of the RES will be $X. You receive consideration of this amount .Therefore your GST liability for making this taxable supply will be 1/11 of $X.

3. Is your sale/transfer of RECs to an energy retailer a taxable supply?

As stated in question 1, you make a taxable supply where the requirements of section 9-5 of the GST Act are satisfied.

In this case you will make a supply of the RECs to energy retailers for consideration. The supply is connected with Australia and you are registered for GST. However a supply is not a taxable supply to the extent that it is GST-free or input taxed.

There is no GST-free provision in the GST Act which applies to your supply of the REC; therefore what remains to be determined is if your sale of RECs to an energy retailer is an input taxed financial supply under the GST Act.

Input taxed financial supplies

A financial supply is input taxed by virtue of subsection 40-5(1) of the GST Act and is defined in regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Regulation 40-5.09 of the GST Regulations states that:

The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if:

· the provision, acquisition or disposal is:

· for consideration; and

· in the course or furtherance of an enterprise; and

· connected with Australia; and

· the supplier is:

· registered or required to be registered; and

· a financial supply provider in relation to supply of the interest.

Paragraph 22 of Goods and Services Tax Ruling GSTR 2002/2: Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) states that:

For the purposes of the GST Regulations and the GST Act, a supply includes a financial supply and a financial supply includes the acquisition of a financial interest.

Furthermore, the operation of regulation 40-5.06 of the GST Regulations results in the acquirer of a financial interest being regarded as a financial supply provider.

As such, an acquisition of a financial interest mentioned in, relevantly for this case, subregulation 40-5.09(3) of the GST Regulations may be a financial supply provided all the other relevant requirements of regulation 40-5.09 of the GST Regulations are satisfied.

In this case, the fundamental issue is whether the RECs fall within a financial interest mentioned in subregulation 40-5.09(3) of the GST Regulations.

Item 11 in the table in subregulation 40-5.09(3) of the GST Regulations (item 11) is relevant in this case. It lists an interest in or under a derivative.

A derivative is defined in the Dictionary of the GST Regulations to mean an agreement or instrument the value of which depends on, or is derived from, the value of assets or liabilities, an index or a rate.

The Commissioner's understanding of the term 'derivatives' for GST purposes is set out in Schedule 1 of GSTR 2002/2 as:

Financial instruments such as options, forwards, futures, swaps, etc. whose value is tied to or derived from an underlying security, commodity, currency, liability or index. Entities usually use derivatives to hedge against changes in interest rates and foreign exchange risks or to minimise business risks. Some derivatives are also called synthetics or exotics.

Part 9 of Schedule 7 of the GST Regulations provides examples of items which come under item 11. The examples include forms of derivatives such as forward contracts, futures contracts, swap contracts, options contracts and also commodity derivatives that involve no option, right or obligation to delivery of the commodity.

A clear distinction is thus made in the GST Regulations between the underlying commodity and the commodity derivative itself which is a financial instrument that derives its value from that underlying commodity.

In our view, the purchase/sale of RECs as provided in the Contract for sale of environmental products between you and the energy retailer is the outright purchase of commodities that are capable of being used to offset greenhouse gas emissions.

This view is supported by the Contract which does not provide for cash settlement. Instead, the contract is physically settled by the actual transfer of the RECs.

Thus the REC is distinct from a commodity derivative which derives its value from that of the underlying commodity.

As such, we consider the RECs acquired/sold by you are not derivatives for GST purposes but rather, are commodities that are capable of being used or transferred.

Accordingly, the acquisition/transfer of RECs does not constitute an acquisition of an interest mentioned in subregulation 40-5.09(3) of the GST Regulations and therefore, failing to satisfy this requirement, your acquisition or sale of RECs is not a financial supply for the purposes of the GST Act.

Consequently, your sale of the RECs is a taxable supply as all the requirements of section 9-5 of the GST Act are met.

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