Senate

Revised Explanatory Memorandum

(Circulated by the authority of the Minister for the Environment, the Hon Greg Hunt MP and the Treasurer, the Hon J.B. Hockey MP)

Chapter 1 - Repeal of the carbon tax

Outline of chapter

1.1 Chapter 1 describes how the carbon tax will be repealed. It also describes the associated transitional arrangements for the winding-up of carbon tax liabilities for 2012-13 and 2013-14. The removal of the equivalent carbon prices applied through the fuel tax credits system, through excise and excise equivalent customs duties, and through SGG levies is dealt with in Chapters 5 and 6.

1.2 The Main Repeal Bill includes provisions to:

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repeal the CE Act and the five CE Charges Acts;

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provide continuing powers and transitional provisions so that liabilities incurred in relation to 2012-13 and 2013-14 may be collected and obligations enforced by the Regulator;

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ensure that no carbon tax liabilities will be incurred from 1 July 2014; and

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require the Regulator to cancel any remaining carbon units after the final surrender deadline for 2013-14.

1.3 Chapter 1 also describes the process for ending carbon tax-related industry assistance:

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The Main Repeal Bill maintains the assistance to eligible electricity generators under the Energy Security Fund and to emissions-intensive trade-exposed entities under the JCP for 2013-14 but terminates assistance from the 2014-15 year.

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The Main Repeal Bill makes provisions which, with the True-up Shortfall Levy (Carbon Tax Repeal) (General) Bill 2014 and the True-up Shortfall Levy (Carbon Tax Repeal) (Excise) Bill 2014, corrects under- and over-allocations of 2013-14 free carbon units issued under the JCP. It does this by allowing for issue of extra free carbon units to make up for under-allocations, and relinquishment of units or payment of a levy to redress over-allocations.

Context of amendments

Repeal of the carbon tax

1.4 The Main Repeal Bill repeals the carbon tax by repealing the CE Act and the CE Charges Acts from 1 July 2014. The carbon tax is created by the CE Act, which establishes which entities are directly liable to pay the carbon tax or pay a carbon tax on the natural gas and gaseous fuels that they supply (these entities are known as 'liable entities'). In addition the CE Act:

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establishes the fixed and flexible price periods of the carbon tax, including setting out how an entity may acquire and surrender carbon units in each period;

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creates carbon units, which may be used by liable entities to meet their carbon tax liability;

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provides for the allocation of free carbon units as assistance to certain affected industries; and

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establishes monitoring, investigation, enforcement and penalty provisions, and sets out which decisions are reviewable.

1.5 The Main Repeal Bill makes it clear that the Minister is not required to make regulations that relate to financial years after 2013-14.

1.6 The Main Repeal Bill also establishes arrangements for:

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managing the over-surrender of ACCUs in 2013-14;

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the cessation of carbon units, providing certainty that carbon units do not exist after the final surrender deadline for 2013-14; and

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the Regulator to cancel any carbon units sold at an auction and refund the purchase price to the holder of each unit, in the event that auctions are held before the Main Repeal Bill receives the Royal Assent.

Providing a framework for 2012-13 and 2013-14 carbon tax liabilities

1.7 Liable entities must meet all 2012-13 and 2013-14 carbon tax liabilities. To facilitate this, the Main Repeal Bill includes specific provisions to preserve elements of the CE Act with some modifications.

1.8 The modifications of the CE Act provisions ensure that no carbon tax liabilities will be incurred from 1 July 2014, that all arrangements relating to the flexible price period are removed, and that reporting and other obligations that do not relate to 2013-14 or 2013-14 liabilities are ceased.

Finalising industry assistance arrangements

1.9 The Main Repeal Bill provides that carbon tax liabilities stop accruing at the end of 2013-14. Consequently, the Main Repeal Bill also provides that industry assistance, which compensates for the impact of the carbon tax, is terminated for 2014-15 and beyond.

1.10 There is one transitional matter relating to industry assistance that needs to be dealt with by the Carbon Tax Repeal Bills. The JCP is designed on the basis that there are annual releases of free carbon units. Recipients of assistance receive free carbon units based on the previous financial year's production and are required to submit verified production data in the subsequent year. The Regulator compares reported production data and actual production data for a 'true-up' process and determines whether it is necessary to correct an allocation of free units. Each year's true-up units are taken into account in determining the subsequent year's allocation of free units.

1.11 With the JCP to be discontinued after 2013-14, a process must be established to ensure the Regulator receives 2013-14 production data to do a 'true-up' of the final JCP allocation of free carbon units and that under- and over-allocations of free carbon units are corrected.

1.12 The Main Repeal Bill, together with the True-up Shortfall Levy (General) (Carbon Tax Repeal) Bill 2014 and the True-up Shortfall Levy (Excise) (Carbon Tax Repeal) Bill 2014, establish a broad framework for a true-up reporting process and for correcting under- and over- allocation of 2013-14 free carbon units. The details of this process are to be set out in rules made by the Minister. The rules would be in place by 1 July 2014.

Comparison of key features of new law and current law

Detailed explanation of new law

General provisions

1.13 When enacted, the name of the Act will be the Clean Energy (Carbon Tax Repeal) Act 2014. [clause 1]

1.14 All amendments made by the Main Repeal Bill, whether to primary or subordinate legislation, have effect according to the terms set out in the Bill. Any amendments made to regulations made by the Bill, may be further amended or repealed by the Governor-General in Council. [clause 3]

1.15 Sections 1, 2 and 3 of the Main Repeal Bill commence on the day that the Governor-General gives the Royal Assent. [clause 2, table item 1]

Status of legislative instruments

1.16 Any legislative instrument (including regulations, ministerial determinations, rules or other instruments) made under the CE Act cease to have effect on the same date on which the provisions conferring the power on the Minister or the Regulator to make that instrument are repealed. The Clean Energy Regulations 2011 (CE Regulations), and the Clean Energy (Reference Price Method) Determination 2013 all cease to have effect when the provisions of the CE Act under which they are made are repealed. To the extent that these instruments are made under provisions of the CE Act preserved for the purpose of managing compliance with 2012-13 and 2013-14 obligations, then they continue to operate for that purpose for as long as those provisions are operative. The Clean Energy (Auctions of Carbon Units) Determination 2013 was revoked on 26 February 2014.

Repeal of the carbon tax

1.17 The Main Repeal Bill repeals the CE Act and the five CE Charges Acts, effective from 1 July 2014. The repeal of the CE Act and the CE Charges Acts means that no new carbon tax liabilities will arise for 2014-15 or subsequent years. [Schedule 1, items 1 to 6]

Arrangements to manage 2012-13 and 2013-14 carbon tax liabilities and end carbon tax-related obligations

1.18 To ensure that liabilities incurred in 2012-13 and 2013-14 are met and can, if necessary, be enforced, the Main Repeal Bill preserves the provisions of the CE Act concerning the management of carbon tax liabilities for 2012-13 and 2013-14.

1.19 To do this, the Main Repeal Bill preserves all of the provisions of the CE Act with certain deletions and modifications. These changes limit the preserved provisions of the CE Act to apply only to 2012-13 and 2013-14 and remove provisions that are not required for managing 2012-13 and 2013-14 carbon tax liabilities. [Schedule 1, item 323]

1.20 These transitional provisions ensure that any actions undertaken by the Regulator before the CE Act is repealed remain valid. [Schedule 1, item 320]

Recovery of 2012-13 and 2013-14 liabilities

1.21 The purpose of recovering 2012-13 and 2013-14 liabilities is largely achieved by limiting the meaning of 'eligible financial year' and 'fixed charge year' in the CE Act to the 2012-13 and 2013-14 years. Together with other minor modifications, this has the effect that the provisions imposing carbon tax liability do not apply to other years but continue to apply to those years. [Schedule 1, item 323, table items 3 and 4] [Schedule 1, item 323, table items 7, 28, 29 and 41]

1.22 In addition, to allow for compliance with 2012-13 and 2013-14 liabilities, the repeal of the CE Charges Acts does not apply to the issue of carbon units with a vintage year of 2012-13 or 2013-14, or to unit shortfall charges incurred for those years. [Schedule 1, item 324(1) and (3)]

1.23 The transitional provisions mean that, for 2013-14, a liable entity will incur a liability, acquire and surrender units and, if it does not surrender units, incur a unit shortfall charge in the same way as it would have done for 2012-13. They also preserve the Regulator's powers to recover unit shortfall charges and any associated late payment penalties that arise in relation to 2012-13 and 2013-14 for as long as these powers are necessary. [Schedule 1, item 323]

Managing the over-surrender of ACCUs in 2013-14

1.24 The Main Repeal Bill makes one significant adjustment to the way that the surrender of 2013-14 units will operate. Section 128(7) of the CE Act currently provides that Australian carbon credit units (ACCUs) that are surrendered in excess of a liable entity's limit (that is, 5 per cent of total liability for most liable entities) are carried forward and deemed to be surrendered in the next financial year. As the carbon tax will be repealed, the Main Repeal Bill includes provisions that make alternative arrangements for these units in 2013-14.

1.25 Rather than being carried forward, ACCUs that are over-surrendered in relation to an entity's 2013-14 liability will be deemed not to have been surrendered and the Regulator will restore the ACCUs to the entity's Registry account. [Schedule 1, item 323, table item 44] [Schedule 1, item 328]

1.26 To enable this restoration of ACCUs by the Regulator, the Main Repeal Bill provides that the Regulator may determine which of the ACCUs surrendered by the entity were over-surrendered and will be restored. For the avoidance of doubt, the Main Repeal Bill confirms that a written notice issued by the Regulator specifying which ACCUs are restored units is not a legislative instrument. This is because the notice is administrative in nature, and does not fall within the meaning of section 5 of the Legislative Instruments Act 2003. [Schedule 1, item 328(4)]

Immediate cessation of auctions of carbon units

1.27 The Regulator is prohibited from holding auctions of carbon units after 30 June 2014 or from the day that the Main Repeal Bill receives the Royal Assent, if it is on or before 30 June 2014. In addition, any determination made by the Minister under section 113(1) of the CE Act (for these purposes the Clean Energy (Auction of Carbon Units) Determination 2013), which sets out the rules and procedures for auctions of carbon units, ceases to have effect from the relevant date. [Schedule 1, item 343] That determination was revoked on 26 February 2014 by the Clean Energy Auction Revocation Determination 2014.

1.28 There is no need for auctions of carbon units to be held after the Main Repeal Bill receives the Royal Assent as, under section 122 of the CE Act, carbon units issued at auction may only be surrendered from 2015-16.

1.29 The repeal of the CE Charges Acts does not apply to units issued as a result of an auction that was conducted before 1 July 2014 so that the auction charges are validly paid. [Schedule 1, item 324(2)]

1.30 If auctions are held before the Main Repeal Bill receives the Royal Assent, the Main Repeal Bill includes the requirement that the Regulator cancel any units that were issued at the auctions. Where there was an entry in the Registry for a carbon unit issued at auction at 3:00 pm on the fifth business day after the day that the Main Repeal Bill receives the Royal Assent, the Regulator must cancel the unit and pay the holder of the unit the amount that was paid for the unit at the auction. Note that the refund will be issued to the holder of the unit, who may not necessarily be the person that purchased the unit at auction. [Schedule 1, item 343A]

1.31 Under Division 420 of the Income Tax Assessment Act 1997 (ITAA 1997), an income tax deduction is provided when an entity becomes the holder of a registered emissions unit. Therefore, to ensure these entities do not benefit from both the refund of the auction unit and an income tax deduction, the amount of the refund is included in the entity's assessable income under the general income tax recoupment rules to offset the deduction (see table item 1.27A of section 20-30(1) of the ITAA 1997).

Final cancellation of carbon units

1.32 Once the final surrender for 2013-14 has taken place (which is to occur on Monday, 2 February 2015), there will be no further need for a person to hold carbon units. If there is an entry for a carbon unit in an entity's Registry account at the start of the 'designated carbon unit day', the Regulator is required to cancel the unit and remove the entry from the Registry account. The Regulator is prohibited from issuing carbon units after the designated carbon unit day. [Schedule 1, item 325] [Schedule 1, item 327]

1.33 The Main Repeal Bill specifies that the 'designated carbon unit day' is either:

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Monday, 9 February 2015 (being 5 working days after Monday, 2 February 2015); or

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a later day specified in a legislative instrument made by the Regulator. [Schedule 1, item 321] [Schedule 1, item 322]

1.34 A later day may be specified as the designated carbon unit day in a legislative instrument by the Regulator, where the Regulator has also made a legislative instrument under section 142 of the CE Act specifying that the final surrender date for 2013-14 is a day later than 2 February 2015. Both of these legislative instruments are disallowable under section 42 of the Legislative Instruments Act 2003. Section 142 of the CE Act allows the Regulator to extend a surrender deadline where technical problems mean that two or more entities are prevented from surrendering units. The Regulator's power to specify a later designated carbon unit day is necessary to reflect any delay in the final surrender date for 2013-14. [Schedule 1, item 322]

1.35 It may be that the Regulator does not need to cancel any carbon units on the designated carbon unit day because of the operation of sections 100(7) and 115 of the CE Act (concerning the cancellation of fixed charge and free carbon units respectively) and item 343A to the Main Repeal Bill (concerning the cancellation of auctioned units).

Ending ongoing obligations under the preserved CE Act provisions

1.36 To provide clarity and remove redundant requirements, the Main Repeal Bill removes the following reporting, notification or administrative obligations unrelated to 2012-13 or 2013-14:

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reporting and notification requirements under the Opt-in scheme, which are set out in the CE Regulations; [Schedule 1, item 329]

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the ability for entities to accept, quote or surrender obligation transfer numbers; [Schedule 1, item 323, table item 11]

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the requirement that holders of an obligation transfer number or gaseous fuel suppliers notify the Regulator of changes to their name or address; [Schedule 1, item 323, table item 16]

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the requirement that joint ventures notify the Regulator if they cease to be a mandatory designated joint venture or cease to pass the joint venture declaration test; and [Schedule 1, item 323, table items 19 and 21]

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the ability for entities to surrender a liability transfer certificate. [Schedule 1, item 323, table item 26]

The Regulator's powers and obligations

1.37 The Main Repeal Bill ends the Regulator's following powers and obligations from 1 July 2014:

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the issue and cancellation of obligation transfer numbers; [Schedule 1, item 323, table items 10 to 11]

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making a declaration that a joint venture passes the joint venture declaration test or revoking such a declaration; and [Schedule 1, item 323, table items 20 and 22]

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issuing or cancelling liability transfer certificates. [Schedule 1, item 323, table items 24 to 26]

1.38 To maintain relevant public information for the 2013-14 compliance process, the Main Repeal Bill retains the Regulator's following information publication obligations until 30 June 2015:

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the publication requirements in Part 9 of the CE Act, concerning the publication of information about the carbon pricing mechanism, particularly the Liable Entities Public Information Database; and [Schedule 1, item 323, table item 58]

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the requirement that the Regulator publish and update information on obligation transfer numbers, including the OTN Register and a list of obligation transfer numbers cancelled or surrendered. [Schedule 1, item 323, table items 12 to15]

Removing references to the flexible price period

1.39 The Main Repeal Bill will remove the following provisions concerning the flexible price period in the preserved provisions of the CE Act:

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definitions relating to concepts relevant only in the flexible price period; [Schedule 1, item 323, table items 2, 5 to 6]

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Part 2, which provides for the making of regulations setting a carbon pollution cap for compliance years from 2015-16; [Schedule 1, item 323, table item 8]

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provisions that set out compliance and relinquishment arrangements and how eligible emissions units are surrendered in the flexible price period; [Schedule 1, item 323, table items 42 to 43, 45 to 47, 64 to 65]

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provisions relating to the publication of information in or about the flexible price period; [Schedule 1, item 323, table items 59, 61 to 63]

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provisions relating to the purchase of carbon units at a fixed price in the flexible price period; [Schedule 1, item 323, table items 30 to 37]

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provisions relating to auctions or issuance of carbon units in the flexible price period; and [Schedule 1, item 323, table items 37 and 39]

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the provision that calculates the 'per-tonne carbon price equivalent', which sets the equivalent carbon price applied to certain uses of liquid and gaseous fuels in the flexible price period. [Schedule 1, item 323, table item 60]

Transitional and other arrangements

Specific transitional provisions

1.40 The Main Repeal Bill includes the following specific transitional provisions to provide clarity, as a consequence of modifications to the CE Act or for the avoidance of doubt:

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confirming that no liabilities arise from facilities in the Joint Petroleum Development Area and Greater Sunrise unit area (which continues the effect of regulation 3.3 of the CE Regulations); [Schedule 1, item 323, table item 9]

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removing provisions that include simplified outlines that are no longer relevant; [Schedule 1, item 323, table items 1, 27, 40 and 48A]

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ensuring that any definitions that are relevant to the repeal transition are in place from the date of the Royal Assent, rather than from 1 July 2014; [Schedule 1, item 345C]

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removing now-redundant provisions from the list of reviewable decisions and civil penalty provisions (noting that the amendments do not apply to decisions or breaches before 1 July 2014); and [Schedule 1, item 323, table items 67 to 68] [Schedule 1, item 323(3) and (4)]

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removing references to emissions trading schemes from the role of the Regulator. [Schedule 1, item 323, table items 70 to 72]

1.41 The Main Repeal Bill also includes two provisions to clarify the operation of preserved provisions of the CE Act:

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for the avoidance of doubt, the final surrender deadline of 15 June or 1 February will always be a business day, even when that date falls on a non-business day (in which case the deadline is taken to be the next business day); and [Schedule 1, item 345A]

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a minor adjustment to an equation in section 131(3) of the CE Act addresses an unintended consequence of the original wording that could be argued to have resulted in an entity having an excessive surrender obligation. [Schedule 1, item 345B]

1.42 If the Main Repeal Bill receives the Royal Assent before 31 May 2014, then it provides that the requirements for the Minister to take all reasonable steps to table regulations setting the carbon pollution cap (section 15(1) of the CE Act) and the price ceiling (section 100(14) of the CE Act) are explicitly removed. These regulations would relate to the flexible price period, which commences from 2015-16 and are not required. [Schedule 1, items 344 and 345]

1.43 There is no continuing need for reviews to be undertaken by the Climate Change Authority (CCA) under the CE Act. Accordingly, provisions relating to these reviews are removed from the preserved provisions of the CE Act. [Schedule 1, item 323, table item 69]For further information about the abolition of the CCA, please refer to the Explanatory Memorandum for the Climate Change Authority (Abolition) Bill 2013 [No. 2].

Transitional rule-making power

1.44 The Minister may, by legislative instrument, make rules in relation to transitional matters arising out of the amendments and repeals made by Schedule 1 to the Main Repeal Bill. This standard rule-making power is included to ensure that the Minister may address any unanticipated transitional matters through rules with legislative force, thereby ensuring that the specific transitional arrangements are clear to all relevant parties. These rules would be disallowable by either House of the Parliament under section 42 of the Legislative Instruments Act 2003. [Schedule 1, item 342]

Acquisition of property

1.45 To the extent that the operation of Schedule 1 to the Main Repeal Bill would result in an acquisition of property from a person within the meaning of section 51(xxxi) of the Constitution, the Commonwealth is liable to pay a reasonable amount of compensation to the person. The person may institute proceedings against the Commonwealth if the person and the Commonwealth are unable to agree on the sum that should be paid. The Commonwealth does not anticipate that the operation of Schedule 1 will result in payment of compensation. [Schedule 1, item 345D]

Finalising industry assistance arrangements

Termination of industry assistance - Energy Security Fund

1.46 The Energy Security Fund is established by Part 8 of the CE Act. Under section 161 of the CE Act free carbon units are issued in, and in relation to, particular eligible financial years.

1.47 From 1 July 2014, the meaning of 'eligible financial year' in section 161 of the CE Act will be limited to the 2012-13 and 2013-14 years. For this reason, from 1 July 2014, the Regulator will not be able to issue free carbon units under Part 8 of the CE Act. [Schedule 1, item 323, table item 3]

Termination of industry assistance - Jobs & Competitiveness Program

1.48 The JCP is established by regulations made under Part 7 of the CE Act. Under clause 103 of Schedule 1 to the CE Regulations, the Regulator issues free carbon units for specified activities which must be carried on during an eligible financial year.

1.49 'Eligible financial year' in clause 103 has the same meaning as in the CE Act, in accordance with section 13 of the Legislative Instruments Act 2003. From 1 July 2014, the meaning of 'eligible financial year' in clause 103 will be limited to the 2012-13 and 2013-14 years. [Schedule 1, item 323, table item 3] For this reason, from 1 July 2014, JCP activities cannot give rise to an entitlement to free carbon units.

True-up arrangements for the final allocation of free carbon units under the Jobs & Competitiveness Program

1.50 The Main Repeal Bill provides for a process by which allocations of free 2013-14 carbon units are subject to a final 'true-up'. This is designed to correct under- and over-allocations of 2013-14 free carbon units, by allowing for issue of extra free carbon units or imposition of a levy if carbon units are not relinquished.

1.51 For the purposes of the true-up process, the Main Repeal Bill creates a reporting requirement for persons (known as 'designated persons') who received 2013-14 free carbon units. A designated person must comply with this reporting requirement just as they are required to comply with a reporting requirement under the JCP. The specific details of the reporting requirement, including what must be reported and when, will be set out in Ministerial rules. By providing that the reporting requirement is set out in rules, the Minister may more readily account for the specific requirements of the affected persons and take account of matters raised in consultation with them. [Schedule 1, item 351]

Under-allocation of units

1.52 A person will have an under-allocation of free 2013-14 carbon units if the conditions set out in the Ministerial rules are met. The rules will also specify the method by which the under-allocation is calculated. The Regulator will rectify an under-allocation of free 2013-14 carbon units by issuing a number of additional 2013-14 free carbon units to a person. This can occur after 1 July 2014 for this purpose. [Schedule 1, item 352 and 353]

Over-allocation of units

1.53 A person will have an over-allocation of free 2013-14 carbon units if the conditions set out in the Ministerial rules are met. The rules will also specify the method by which the over-allocation is calculated. A person who has received an over-allocation of free carbon units under the JCP could relinquish the over-allocated units under section 212 of the CE Act. If the person does not relinquish at least the number of over-allocated units, then the person will have a true-up shortfall equal to the number of units not relinquished. [Schedule 1, items 354 and 355]

1.54 A person who has a true-up shortfall must pay a levy. The amount of the levy will be worked out using the formula: number of units in the true-up shortfall x $24.15

1.55 The true-up levy is imposed in two separate Bills to put beyond doubt that the imposition of the levy complies with section 55 of the Constitution. [True-up Shortfall Levy (General) (Carbon Tax Repeal) Bill 2014, clause 8] [True-up Shortfall Levy (Excise) (Carbon Tax Repeal) Bill 2014, clause 8] When enacted, the names of the Acts will be the True-up Shortfall Levy (General)(Carbon Tax Repeal) Act 2014 and the True-up Shortfall Levy (Excise)(Carbon Tax Repeal) Act 2014. [True-up Shortfall Levy (General) (Carbon Tax Repeal) Bill 2014, clause 1] [True-up Shortfall Levy (Excise) (Carbon Tax Repeal) Bill 2014, clause 1]

1.56 The true-up shortfall levy must be paid by the date set out in the Ministerial rules. A late payment penalty will apply if the true-up shortfall levy is not paid in full by the date prescribed in the rules. The rate of the late payment penalty is 20 per cent per year, unless a lower percentage is prescribed in the rules. The Regulator may recover the levy and late payment penalty on behalf of the Commonwealth. [Schedule 1, items 356 to 358]

1.57 To ensure that the Regulator has the appropriate powers and authority to ensure compliance with the true-up shortfall levy, Schedule 1, Part 4 to the Main Repeal Bill and the True-up Shortfall Levy Bills are included in the definition of 'associated provisions' under section 5 of the CE Act. This brings the arrangements for the true-up shortfall levy in line with the Regulator's powers to ensure compliance with the JCP. [Schedule 1, item 358A]

Ministerial Rules

1.58 The true-up provisions contain a standard provision authorising the Minister to make the rules referred to in the rest of Schedule 1, Part 4 of the Main Repeal Bill (such as the under- and over-allocation rules) and other rules necessary or convenient for giving effect to the Part by way of a legislative instrument. The rules will involve complex, technical drafting which will need to be the subject of consultation with affected persons and which is therefore suitable for inclusion in subordinate legislation. The rules would be disallowable by either House of the Parliament under section 42 of the Legislative Instruments Act 2003. [Schedule 1, item 359]

General provisions

1.59 The formal provisions in sections 1 and 2 of the True-up Shortfall Levy Bills commence on the day that the Governor-General gives the Royal Assent. The operative provisions commence on 1 July 2014 or Royal Assent if earlier. [True-up Shortfall Levy (General) (Carbon Tax Repeal) Bill 2014, clause 2] [True-up Shortfall Levy (Excise) (Carbon Tax Repeal) Bill 2014, clause 2]

1.60 Definitions of expressions relating to the true-up process, which refer to concepts that are expressly defined in the subsequent provisions in Schedule 1, Part 4 (such as 'over-allocation of free carbon units') and the CE Act. The 'levy' is defined by reference to the True-up Shortfall Levy Bills. [Schedule 1, item 346]

1.61 The True-up Shortfall Levy Bills include definitions of expressions used in the Bills, namely 'Joint Petroleum Development Area', 'person' and 'true-up shortfall'. [True-up Shortfall Levy (General) (Carbon Tax Repeal) Bill 2014, clause 3] [True-up Shortfall Levy (Excise) (Carbon Tax Repeal) Bill 2014, clause 3]

1.62 The true-up provisions apply to:

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the Australian States and Territories and Norfolk Island, but the true-up levy does not apply to the extent (if any) that it would involve taxing the property of a State; and [Schedule 1, item 347] [True-up Shortfall Levy (General) (Carbon Tax Repeal) Bill 2014, clauses 4 and 9] [True-up Shortfall Levy (Excise) (Carbon Tax Repeal) Bill 2014, clauses 4 and 9]

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Australia's external territories, exclusive economic zone and continental shelf and in the Joint Petroleum Development Area, consistent with the application of the CE Act. [Schedule 1, items 348 to 350] [True-up Shortfall Levy (General) (Carbon Tax Repeal) Bill 2014, clauses 5 to 7] [True-up Shortfall Levy (Excise) (Carbon Tax Repeal) Bill 2014, clauses 5 to 7]

1.63 The Commonwealth cannot tax itself and the true-up provisions do not apply to the Commonwealth. [Schedule 1, item 347] [True-up Shortfall Levy (General) (Carbon Tax Repeal) Bill 2013, clause 4] [True-up Shortfall Levy (Excise) (Carbon Tax Repeal) Bill 2013, clause 4]

Income tax deduction of true-up shortfall levy

1.64 There is no separate provision for the income tax treatment of a payment of a true-up shortfall levy, as the ordinary income tax deduction provisions apply to this levy (see section 8-1 of the ITAA 1997). This results in taxpayers who dispose of their over-allocated units to a third party being treated broadly in the same way as if they had voluntarily relinquished their excess units to the Regulator.

1.65 For example, if taxpayers were to relinquish their free units to the Regulator for no consideration, financially they would be in a neutral position, having neither received consideration for the relinquishment nor paid for the units. Furthermore, they would not have received a deduction for the market value of the free units received or have been assessed on any amount upon relinquishing the units to the Regulator.

1.66 However, if taxpayers were to sell their free units, they would be liable for a true-up levy. Where the price received for the units is similar to the true-up levy imposed, taxpayers would be in a similar position had they relinquished the units to the Regulator for no consideration. This reflects that any amounts received for the sale of the units would broadly equate to the levy paid. Furthermore, the amount included in assessable income would broadly be offset by a deduction for the levy.

1.67 If the levy remains unpaid after the time when it becomes due for payment, the entity is liable to pay a penalty of 20 per cent per annum or a lower percentage specified in the rules. Section 26-5 of the ITAA 1997 ensures the entity bears the full cost of this penalty and that the entity cannot claim an income tax deduction in respect of this penalty. This outcome is consistent with the income tax treatment that applies where an entity incurs a late payment penalty where they have not paid their unit shortfall charge by the required time.