Registered emissions units

What are registered emissions units

A registered emissions unit (REU) is a unit for which there is an entry in a Registry account in the Australian National Registry of Emissions UnitsExternal Link, within the meaning of the Australian National Registry of Emissions Units Act 2011.

There are 3 types of REUs:

• a Kyoto unit
• an Australian carbon credit unit (ACCU)
• a safeguard mechanism credit unit.

Basic tax treatment of REUs

Holders of REUs are taxed on their REUs exclusively under Division 420 of the Income Tax Assessment Act 1997 and the normal rules, such as CGT, don't apply to them. Other carbon credits and emissions units, however, are taxed under the general rules about income and deductions, including CGT.

1. You can deduct certain costs related to becoming the holder of an REU in the year you start to hold it.
2. You must account for changes in the value of REUs you hold over the course of the year if you hold any at either the beginning or end of an income year. This may require you to include an amount in your assessable income or may entitle you to claim a deduction.
3. Any proceeds you receive from the disposal of REUs are assessable income. You can deduct costs you incur for ceasing to hold REUs in the year of disposal.

Special rules

The basic tax treatment for REU's is varied in the following circumstances:

• You acquire or dispose of REUs in a non-arm's length transaction, or in a transaction with an associate, for an amount other than their market value:
  • where the disposal of an REU occurs for a purpose other than for gaining assessable income (for example, offsetting your personal carbon footprint)
  • upon the death of the holder of the REU
  • where you are an eligible individual primary producer and the REU is an eligible ACCU
  • where the REU becomes or ceases to be taxable in Australia.

Who is the holder of an REU?

You are the holder of an REU if you are the entity in whose registry account there is an entry for that unit.

If an entity holds an REU on behalf of another entity (as their nominee), the entity on whose behalf the unit is held, is taken to hold the unit, not the nominee.

You hold the unit from the date it is registered in your name.

Basic treatment – claiming deductions for the cost of acquiring REUs

The holder of an REU, other than an ACCU issued to you by the clean energy regulator, can claim a deduction for the costs of acquiring the REU.

If you become the holder of an REU because you are issued an ACCU by the Clean Energy Regulator, you

• can deduct expenses associated with preparing or lodging an application for a certificate of entitlement or offsets report with the clean energy regulator.
• may be able to deduct other expenses in relation to the eligible offset project that gave rise to the credits under general deduction provisions if you meet the criteria for claiming deductions for the project under the general taxation rules.

Accounting for the change in the value of REUs you hold over the income year

You must include in your tax return the change in value of REUs you hold over the income year. If the value of the REUs you hold at the end of the year is:

• more than the value of the REUs you held at the beginning of that year, you must include the difference as part of your assessable income.
• less than the value of the REUs you held at the beginning of that year, you may claim a deduction equal to that difference.

There are also special rules for working out the value of REUs you hold at the beginning and end of an income year.

How to work out the value of REUs you held at the start of an income year

The value of the REUs you hold at the start of an income year is the same as the value of the REUs you held at the end of the previous income year.

If you held no REUs at the end of the prior income year, the value of REUs you hold at the beginning of the year is nil.

How to work out the value of REUs you held at the end of an income year

The value of an REU you hold at the end of an income year is worked out using one of three methods:

• FIFO (first-in first-out) cost method
• Actual cost method
• Market value method.

In the first income year that you hold REUs you must choose one of these methods before you lodge your income tax return. If you do not choose the actual cost or market value method, the FIFO cost method will apply.

Once a choice is made it can't be revoked and you must continue to use this method for at least the 3 income years following the first income year in which you made the choice.

To work out if you are eligible to change your choice of method see Changing your method for valuing registered emissions units.

Cost of an REU

The cost of an REU, depends on whether it is an ACCU issued to you by the clean energy regulator or you purchased an existing REU from its holder.

The cost of an ACCU issued to you by the Clean Energy Regulator is its market value immediately after you begin to hold the unit.

• The cost of other REUs you acquire, is the total of the expenditure that you incurred in becoming the holder of the unit that you can claim a deduction for.

FIFO cost method

The FIFO cost method requires you to work out the value of the REUs you hold by summing up the cost of the REUs you hold at the end of the income year, assuming that you disposed of any REUs in the same order in which you acquired them.

Actual cost method

The actual cost method for working out the value of the REUs you held at the end of the income year requires you to identify and add up the cost of all the units you actually hold at the end of the income year.

Market value method

The market value method for working out the value of the REUs you held at the end of the income year requires you to work out the market value of all the REUs you held at the end of the income year.

Changing your method for valuing REUs

You can only change your choice of valuation method for an income year if you have used the same method for at least the 4 most recent income years and subject to the following limitations:

• You can't choose to use the actual cost method for the current income year if you used the FIFO cost method for the most recent income year in which you held REUs at the end of the income year.
• The choice must be made before you lodge your income tax return for the income year for which you are changing your choice.

Disposing of REUs

The amount you are entitled to receive because you ceased to hold an REU is included in your assessable income in the income year in which you ceased to hold the unit.

Modified tax treatment of REUs

The basic tax treatment of REUs is modified in 5 circumstances:

• non arm's length transactions, or transactions between associates, not at market value
• disposal of REUs for a purpose other than gaining assessable income
• death of the holder
• eligible ACCUs held by eligible individual primary producers
• REUs become or cease to be taxable in Australia.

Non arm's length transactions or transactions between associates not at market value

If the transfer of an REU was not for market value consideration, the transaction is treated for tax purposes as if the REU was sold for market value if the transferor and the transferee either:

• didn't deal with each other at arm's length, or
• are associates.

This means for the purpose of working out the amount they are entitled to deduct or to be included in the assessable income of the buyer and seller respectively:

• the buyer is treated as having paid the seller the market value of the REUs to acquire them and
• the seller is treated as having received their market value from the buyer to acquire them.

Disposal of REUs for a purpose other than for gaining assessable income

If you cease to hold a REU and you disposed of it for a purpose other than gaining assessable income, you are required to include in your assessable income for that year an amount equal to any deductions claimed for:

• the cost incurred in becoming the holder of the REU
• the cost incurred in ceasing to hold the REU.

This doesn't apply in cases where you ceased to hold the units where the non-arm's length rule applies.

If the disposal is a result of a transfer, the entity who acquired the unit is treated as if they had acquired it for the disposer's cost to acquire it. That is the amount the disposer needs to include in their assessable income. If you are the disposer, you must inform the acquirer of this amount.

This rule will not apply where the disposal occurs because the registered emissions unit holder has died.

Death of the holder

A disposal of an REU may occur due to the death of the holder. On the death of the holder an amount is included in their assessable income equal to the deductions claimed by the holder for:

• the costs they incurred in becoming the holder of the REU (other than the costs of eligible offsets projects that are deductible under general deduction provisions)
• the costs they are entitled to deduct in ceasing to be the holder the REU.

There are also specific rules for the person who acquires the unit from the deceased. If the unit passes to:

• the deceased's legal personal representative (LPR)
  • the LPR is treated as having acquired the REU for the amount included in the deceased's assessable income on their death. When the deceased's LPR then passes the unit to a beneficiary, the LPR is treated as disposing of the unit for this amount.
• the deceased's beneficiary, whether directly or indirectly (for example, through the deceased's LPR) the beneficiary is treated as acquiring the unit for the amount included in the deceased's assessable income on their death.

Eligible ACCUs held by eligible individual primary producers

If you are an eligible individual primary producer, you will receive concessional tax treatment for any:

• eligible ACCUs you start to hold on or after 1 July 2022 because of an eligible offsets project associated with your primary production business
• income attributable to eligible ACCUs you receive from a partnership or trust that carries on a primary production business
• eligible ACCUs or eligible income you received from a qualifying arrangement with a carbon service provider.

For more information visit Taxation of Australian carbon credit units for primary producers.

REUs become or cease to be taxable in Australia

Changes to an entity’s tax residency status means there will be tax consequences for their registered emissions units. Whether becoming or ceasing to be an Australian resident for tax purposes, registered emissions units will need to be accounted for in the entity’s tax return for the year that the change occurs. Entity’s that are Australian residents for tax purposes will pay income tax on their registered emissions.

Transferring REUs to your Australian Registry account

If you have Kyoto or Australian carbon credit units that you transfer from your foreign account to your Australian Registry account (or a nominee's Registry account) how you account for them will be different depending on whether the units were held as either trading stock or a revenue asset or held otherwise (such as on capital account).

Where the units were trading stock or a revenue asset, you will be treated as if just before the transfer, you had sold the units to someone else for their cost and you had immediately bought the REUs back for the same amount. As a result:

• their cost will be included in your assessable income and
• a corresponding deduction is allowable for the deemed cost of acquiring the units.

Where the units were not trading stock or a revenue asset, you will be treated as if just before the transfer, you had sold the unit to someone else for its market value just before the transfer, and you had immediately bought the REUs back for the same amount. This means at this time:

• you will have a CGT event and need to calculate whether you have made a capital gain or loss for which you are taken to have received their market value, and
• are entitled to deduction for their market value.

REUs becoming taxable in Australia

In some cases, an entity may acquire registered emissions units while they are a foreign resident for tax purposes and not subject to income tax in Australia. When the entity becomes an Australian resident for tax purposes, the units are treated as if they had been acquired for market value and the entity starts holding the REUs at the time immediately after the entity became an Australian resident for tax purposes.

The cost of the REU is its market value at the date the entity became an Australian resident for tax purposes.

REUs ceasing to be taxable in Australia

An entity may be an Australian resident for tax purposes when it acquires an REU but later becomes a foreign resident for income tax purposes and is no longer subject to Australian income tax on their REUs.

In these circumstances the entity is treated as having sold its REUs for their market value just before they cease to be a resident in Australia and no longer subject to Australian income tax. The market value of the REU is assessable income for the entity in this year. As the entity is no longer an Australian resident for tax purposes, any future changes in the value of their REUs at the start and end of the subsequent income years is ignored, unless the entity becomes an Australian resident for tax purposes again.