Emissions Trading Scheme amendments - GST

Sections 11(1)(o) and 11A(1)(u) of the Goods and Services Tax Act 1985

Amendments have been made to the rules under which certain transactions which include a supply of emissions units are zero-rated for GST purposes. These amendments correct an earlier error which inadvertently zero-rated transactions which were intended to be standard-rated.

Background

A general background to the emissions trading scheme is set out under the heading "Emissions Trading Scheme Amendments - Income Tax".

Almost all transactions in emissions units are zero-rated for GST purposes (see Tax Information Bulletin Vol 21, No 8). The policy intention is for a limited number of supplies made in exchange for a supply of emissions units also to be zero-rated. This is intended to be limited to circumstances when the transaction is between the Crown and a private party.

Key features

An error made in the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver and Remedial Matters) Act 2010, which inadvertently zero-rated all supplies made in exchange for the supply of emissions units, has been corrected. The amended legislation makes it clear that only certain supplies made in exchange for a supply of emissions units, when one of the parties is the Crown, are to be zero-rated.

Application date

The amendments apply from 1 July 2010.

Detailed analysis

A detailed explanation of the issue is set out on the Policy Advice Division website at http://taxpolicy.ird.govt.nz/news/2010-10-01-gst-zero-rating-emissions-units-transactions.

Section 11A(1)(s) and (t) of the GST Act zero-rates almost all supplies of emissions units.

Some of those supplies of emissions units will be made by the Crown to businesses under the Climate Change Response Act 2002 either as compensation to those businesses for the impact of the emissions trading scheme on their competitiveness, or in recognition of the capture of carbon by their business operation (mostly foresters). Businesses that receive emissions units in this way are likely to have made either an actual supply to the Crown, or a deemed supply in accordance with section 5(6D).

If a business has an obligation for emissions under the Climate Change Response Act 2002, it may meet that obligation by transferring emissions units to the Crown (known as surrendering). In this instance, the Crown may make a supply back to the business.

When these contra supplies are in the form of services, they are zero-rated by new section 11A(1)(u). When the contra supplies are in the form of goods, they are zero-rated by new section 11(1)(o).

Zero-rating of contra supplies does not extend to a supply made by one business to another in exchange for a supply of emissions units.