House of Representative

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

Glossary

This Explanatory Memorandum uses the following abbreviations and acronyms.

General outline and financial impact

Schedule 1 - Hydrogen production tax incentive

This schedule was prepared by the Department of the Treasury.

Outline

Schedule 1 to the Bill establishes the HPTI, in the form of a new tax offset called the hydrogen production tax offset. The hydrogen production tax offset is a refundable tax offset that is available at a rate of $2 for a kilogram of eligible hydrogen for companies that satisfy the eligibility requirements.

Date of effect

Schedule 1 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives Royal Assent.

The HPTI applies to hydrogen produced in income years starting on or after 1 July 2027 and before 1 July 2040.

Proposal announced

Schedule 1 to the Bill partially implements the 'Future Made in Australia - Making Australia a Renewable Energy Superpower' measure in the 2024-2025 Budget.

Financial impact

Schedule 1 to the Bill is estimated to have a cost to the budget of $6.7 billion over the ten years from 2024-25.

All figures in this table represent amounts in $m.

Impact Analysis

The Impact Analysis relating to Schedule 1 to the Bill has been included in Attachment 1.

Human rights implications

Schedule 1 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 4.

Compliance cost impact

The amendments in Schedule 1 to the Bill are expected to result in a medium overall compliance cost impact.

Schedule 2 - Critical Minerals Production Tax Incentive

This schedule was prepared by the Department of the Treasury.

Outline

Schedule 2 to the Bill establishes the CMPTI, in the form of a new refundable tax offset, the CMPTI tax offset, to support the processing of critical minerals in Australia.

Date of effect

Schedule 2 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives Royal Assent.

The CMPTI applies to expenditure incurred in income years starting on or after 1 July 2027 and before 1 July 2040.

Proposal announced

Schedule 2 to the Bill partially implements the 'Future Made in Australia - Making Australia a Renewable Energy Superpower' measure in the 2024-2025 Budget.

Financial impact

Schedule 2 to the Bill is estimated to have a cost to the budget of $7.0 billion over the eleven years from 2023-24.

All figures in this table represent amounts in $m.

Impact Analysis

The Impact Analysis relating to Schedule 2 of this Bill has been included in Attachment 2.

Human rights implications

Schedule 2 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 4.

Compliance cost impact

This proposal is expected to result in a medium overall compliance cost impact, comprising a medium implementation impact and a low increase in ongoing compliance costs.

Schedule 3 - Amendments relating to Indigenous Business Australia

Outline

This schedule was prepared by the National Indigenous Australians Agency.

Schedule 3 to the Bill supports the Government's Future Made in Australia agenda by amending the ATSI Act to enable IBA to leverage their capital to invest in First Nations communities and businesses.

This reflects the government's intention, as stated in the 2024-25 Budget Papers, to enhance IBA's ability to leverage their capital to invest in First Nations communities and businesses. The amendments reform IBA's borrowing powers to enable greater investment in First Nations individuals, communities and businesses, driving First Nations economic self-determination.

Schedule 3 of the Bill gives IBA the power to borrow for a purpose in connection with their functions if the borrowing is authorised under the PGPA Act or under rules agreed to by the Minister for Finance.

Date of Effect

Schedule 3 to the Bill commences the day after Royal Assent.

Proposal announced

Schedule 3 to the Bill implements, in part, the 'Future Made in Australia - Attracting Investment in Key Industries' measure in the 2024-25 Budget.

Financial impact

Schedule 3 to the Bill has been assessed to have no financial impact.

Human rights implications

Schedule 3 to the Bill is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 4.

Compliance cost impact

Schedule 3 to the Bill does not have any impact on compliance costs.

Chapter 1: Hydrogen Production Tax Incentive

Outline of chapter

1.1 Schedule 1 to the Bill establishes the HPTI, in the form of a new tax offset called the hydrogen production tax offset. The offset is a refundable tax offset that is available at a rate of $2 for a kilogram of eligible hydrogen for companies satisfy the eligibility requirements.^[1] It is available for income years commencing on or after 1 July 2027 and ending before 1 July 2040.

1.2 The HPTI will provide an incentive for companies to commence medium to large scale production of renewable hydrogen in Australia at a time when the renewable hydrogen market is still developing.

1.3 All legislative references in these explanatory materials are to the ITAA 1997 unless otherwise specified.

Context of amendments

Renewable hydrogen production in Australia

1.4 Renewable hydrogen refers to hydrogen produced using renewable technologies and processes, with the most common commercial renewable hydrogen production pathway being electrolysis of water.

1.5 Other production methods that can produce renewable hydrogen include biomass conversion (which converts organic material into hydrogen) and photocatalytic hydrogen production (which uses sunlight to directly split water into hydrogen and oxygen without requiring electrical energy).

1.6 Renewable hydrogen can be used for high-temperature industrial processes and is a key feedstock for producing chemicals such as ammonia and methanol. It can be used as a clean fuel and as an effective means of storing renewable energy. When combusted, the only by-product is water and there are no carbon emissions at that point. It is expected to be an important part of meeting the future energy needs of Australia and the global economy.

1.7 Renewable hydrogen opens the door to green metals, such as iron, steel, alumina and aluminium, and other applications critical to industrial decarbonisation. Australia's world class renewable energy resources mean that we are well placed over the longer term to produce renewable hydrogen at internationally competitive prices. Additionally, Australia is close to key markets, and our major trading partners have expressed a significant appetite for importing renewable hydrogen or its derivatives.

1.8 However, the technology allowing for the production of renewable hydrogen at scale is evolving and the market for renewable hydrogen and its derivatives in particular is limited by the current cost of production. While demand is expected to grow and improvements in technology are expected to drive down production costs over the next decade, there are a number of challenges faced by first movers in this sector.

Future Made in Australia agenda

1.9 In the 2024-25 Budget, the Government announced its $22.7 billion Future Made in Australia agenda. The initiatives that form part of this package are intended to create new jobs and opportunities for every part of our country by maximising the economic and industrial benefits of the move to net zero and securing Australia's place in a changing global economic and strategic landscape.

1.10 This package included a National Interest Framework to guide targeted public investment into priority industries and sectors. Renewable hydrogen was identified as being aligned with the Net Zero Transformation Stream of the National Interest Framework as it was assessed that public investment, such as a production tax incentive, could play an important role in unlocking private investment at scale and driving the development of a renewable hydrogen industry. Australia is committed to reaching net zero greenhouse gas emissions by 2050, and the development of the renewable hydrogen industry will play a key role in facilitating Australia's net zero transition and meeting Australia's international commitments.

Guarantee of Origin Scheme

1.11 Another measure which supports the Future Made in Australia agenda is the GO Scheme.

1.12 The Government, through the Department of Climate Change, Energy, the Environment and Water, and the CER, has worked closely with industry to design the GO Scheme as a voluntary framework to track and verify emissions associated with renewable electricity and clean products - starting with hydrogen.

1.13 The Future Made in Australia (Guarantee of Origin) Bill 2024 was introduced to Parliament on 12 September 2024 to enact the GO Scheme.

1.14 Participants in the scheme will be able to use emissions accounting methodologies, underpinned by international best practice, to create certificates for each kilogram of hydrogen produced. Participants will be able to use these certificates to evidence that emissions and other characteristics associated with their product. These certificates will be housed on a public register.

1.15 The GO Scheme will be administered by the CER.

1.16 The GO Scheme utilises 'profiles' to capture upfront information about registered persons in the scheme. Three types of profiles can be registered:

•

A production profile - which captures information about the production facility, including the owners and operators, the location and details about the facility such as capacity or electrolyser size. Amendments to the production profile, for example the addition of a new electrolyser, will require application for a new profile.

•

A delivery profile - which captures information about entities transporting or storing the product between the point of production and point of use.

•

A consumption profile - which captures details about the end consumption of the product.

1.17 Holders of a production profile can create certificates for each functional unit of product (which will be defined as kilograms in the case of hydrogen). This will contain details including the production pathway for the product and the emissions-intensity of the product to the "production gate".

1.18 Once a delivery profile holder has added post-production information to the certificate, the holder of the production profile can apply to the Regulator to register the certificate. If the Regulator approves, the certificate will be published on the register. To register the certificate, the Regulator must be satisfied that the product could have reasonably passed from the production gate to the delivery gate.

1.19 Certificate information may be updated to correct for errors. This may be initiated by registered persons or the Regulator. Certificate information can generally only be corrected until that information has been confirmed through an Annual Reconciliation Check.

Summary of new law

1.20 Schedule 1 to the Bill amends the tax law to establish the HPTI, in the form of the hydrogen production tax offset, a refundable tax offset of $2 for each kilogram of eligible hydrogen.

1.21 To be eligible for the hydrogen production tax offset for hydrogen in an income year, a company must, broadly:

•

be a constitutional corporation that is subject to tax in Australia;

•

hold the production profile (within the meaning of the Future Made in Australia (Guarantee of Origin) Act 2024) under which the hydrogen was produced, allowing it to issue the PGO certificate for the hydrogen; and

•

have complied with the rules implementing the community benefit principles for the HPTI made by the Treasurer.

1.22 Further, to be eligible for the hydrogen production tax offset for an income year, a kilogram of hydrogen must:

•

have been produced in Australia in the income year, which must have commenced on or after 1 July 2027 and ended before 1 July 2040;

•

have been produced during the offset period (the period in which the hydrogen production tax offset can be claimed) for the production profile under which it was produced and at a time when that production profile was certified by the CER for the purposes of the tax offset;

-

for the profile to be eligible to be certified, the facility set out in the profile must be a single site located in Australia with a production capacity at least equivalent to an electrolyser with 10 MW and a final investment decision must have been made in relation to the facility before 1 July 2030;

•

be the subject of a registered PGO certificate (within the meaning of the Future Made in Australia (Guarantee of Origin) Act 2024) for which the initial reconciliation period has expired and for which no correction notice is in force, that indicates:

-

the hydrogen has been produced with an emissions intensity of not exceeding 0.6kg of carbon dioxide for each kilogram of hydrogen; and

-

if produced using electricity from a grid, the electricity meets the grid matching requirements; and

•

be the subject of a correction notice for the PGO certificate for the hydrogen is in force.

Detailed explanation of new law

1.23 The hydrogen production tax offset is a refundable tax offset of an amount equal to $2 for each kilogram of eligible hydrogen, subject to any reduction that may occur if an entity does not comply with the rules implementing the community benefit principles for the HPTI.

1.24 It is available to companies that satisfy the eligibility requirements, including issuing the PGO certificate for the hydrogen as the holder of the production profile under which the hydrogen was produced.

1.25 There is no cap on the amount a company can receive under the offset, but it is only available for a specified period, reflecting the Government's intention to support early investment.

1.26 The HPTI can only be claimed for hydrogen produced in income years commencing on or after 1 July 2027 and ending before 1 July 2040. This ensures it will provide targeted support to the sector in its early development.

1.27 The eligibility requirements for the HPTI can be divided into requirements that apply to the company claiming the hydrogen production tax offset, and requirements that apply to the hydrogen for which hydrogen production tax offset is being claimed.

Eligible Companies

1.28 To be eligible for the hydrogen production tax offset for hydrogen for an income year, a company must:

•

be a constitutional corporation;

•

hold the production profile under the Future Made in Australia (Guarantee of Origin) Act 2024 under which the hydrogen was produced;

•

be subject to Australian tax in relation to any income from its activities relating to the production of the hydrogen; and

•

comply with the rules implementing the community benefit principles for the HPTI.

Constitutional Corporation

1.29 The first requirement for a company to be entitled to the hydrogen production tax offset is that it is a constitutional corporation. 'Constitutional corporation' is defined in subsection 995-1(1) of the ITAA 1997. An entity will be a constitutional corporation if it is either:

•

a trading, financial or foreign corporation to which paragraph 51(xx) of the Constitution applies; or

•

a body corporate that is incorporated in a Territory.

[Schedule 1, item 3, paragraphs 421-5(1)(g) and 421-5(2)(a) of the ITAA 1997]

1.30 Entities that are not corporations, such as trusts or partnerships, cannot be constitutional corporations and will never be entitled to the hydrogen production tax offset (even if some or all of the trustees of the trust or the partners in the partnership are constitutional corporations).

1.31 If a company that is a member of a consolidated group is a constitutional corporation and satisfies all of the other requirements to be eligible for the hydrogen production tax offset, the head entity for the group will be able to claim the hydrogen production tax offset in respect of the member's entitlement.

Holder of a Production Profile allowing the creation of PGO certificates

1.32 The second requirement for a company to be entitled to the hydrogen production tax offset for an income year is that the company must have created the PGO certificate for hydrogen under the GO Scheme. To be able to create a PGO certificate, the company must be the holder of the production profile that relates to the hydrogen.

[Schedule 1, item 3, paragraphs 421-5(1)(g) and 421-5(2)(b) of the ITAA 1997]

1.33 'Production profile' is defined in the Future Made in Australia (Guarantee of Origin) Act 2024.

1.34 It consists of the information about a product that is being produced, including details of the facility at which it is produced and the manner in which it is produced (the production pathway and production modules). It also includes details of all of the entities that own and operate the production facility.

1.35 The initial holder of a production profile is the person that applied to CER to register the profile. If this person is not the sole owner and operator of the facility, there must be written agreements between the entity and any other owner or operator allowing the person to register the profile and issue PGO Certificates for the hydrogen produced from the facility.

1.36 Under the GO Scheme, production profiles can be suspended, cancelled, surrendered and transferred. If an entity ceases to be the holder of a production profile, they cease to be able to issue PGO certificates and will not be eligible for the hydrogen production tax offset for any subsequent production.

1.37 For further details on the operation of the GO Scheme, please see the Explanatory Memorandum to the Future Made in Australia (Guarantee of Origin) Bill 2024.

1.38 This requirement ensures that there is a clear rule about which company will be entitled to the hydrogen production tax offset for a quantity of hydrogen. Rather than create a new concept or rules, it links entitlement to issuing PGO certificates and holding the relevant production profile under the GO Scheme. Having a production profile is a necessary prerequisite to the production of verifiably renewable hydrogen in Australia. As the process for becoming the holder of a production profile requires the agreement of any other owners or operators, this provides a simple and fair basis to determine entitlement to the hydrogen production tax offset.

Subject to Australian tax

1.39 The third requirement for a company to be eligible for the hydrogen production tax offset for an income year is that it must be subject to Australian tax on income from the activities in the course of which it created the PGO certificate.

1.40 The first element of the requirement is that the company must have created the PGO certificate in the course of an enterprise it is carrying on in the indirect tax zone, and, at all times when that enterprise was being carried on, the company must either be:

•

an Australian resident that has an ABN; or

•

a foreign resident that has both a permanent establishment in Australia and an ABN.

[Schedule 1, item 3, paragraphs 421-5(1)(g) and 421-5(2)(c) to (d) and subsection 421-5(3) of the ITAA 1997]

1.41 'Indirect tax zone' and 'carried on in an indirect tax zone' are defined in sections 195-1 and 9-27 of the GST Act, respectively.

1.42 Enterprise, is defined in section 9-20 of the GST Act. It includes, but is not limited to an activity or series of activities done in the form of a business, on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property or by a charity or trustee of a complying superannuation fund.

1.43 The 'indirect tax zone' means Australia but does not include external territories and certain offshore areas. An enterprise will be carried on in an indirect tax zone if the enterprise is carried on by one or more specified individuals that are in Australia, and:

•

the enterprise is carried on through a fixed place in Australia; or

•

the enterprise has been carried on through one or more places in Australia for more than 183 days in a 12-month period; or

•

the company intends to carry on the enterprise through one or more places in Australia for more than 183 days in a 12-month period.

1.44 In effect this element of the requirement ensures that the company must be linked to Australia in a way that makes its activities subject to Australian tax.

1.45 The second element of the requirement that the company be subject to Australian tax is that the company must not be an exempt entity. An exempt entity is defined in subsection 995-1(1) of the ITAA 1997 as, broadly, an entity all of the income of which is exempt from income tax. An indicative list of exempt entities is set out in section 11-5 of the ITAA 1997.

[Schedule 1, item 3, paragraphs 421-5(1)(g) and 421-5(2)(e) of the ITAA 1997]

1.46 The combined effect of these requirements is that the company must be in a position where any income derived their activities relating to the production of hydrogen must be taxable in Australia. This does not mean that the company must derive taxable income in a particular income year, just that it must be subject to tax on its income it might derive for carrying on its related activities.

Community benefit principles

1.47 The final requirement for a company to be eligible for the hydrogen production tax offset for an income year is that the company must comply with the rules implementing the community benefit principles for the HPTI that apply to the company during that income year.

[Schedule 1, item 3, paragraphs 421-5(1)(g) and 421-5(2)(f) of the ITAA 1997]

1.48 The community benefit principles are the principles set out in the Future Made in Australia Bill 2024. For grants programs and other spending initiatives that are designated Future Made in Australia supports, the Future Made in Australia Bill requires decision makers to have regard to these principles in deciding whether to provide these supports, allowing appropriate enforcement of community benefits.

1.49 While the hydrogen production tax offset is provided through the tax system rather than being a spending initiative, it has been designed with regard to the community benefit principles. This includes providing for the making of rules implementing the community benefit principles in the context of the hydrogen production tax offset.

1.50 The rules implementing the community benefit principles for the HPTI (referred to as the HPTO community benefit rules) are made by the Treasurer (or another Treasury Minister) by legislative instrument and specify conditions that must be met for a company to be eligible for the hydrogen production tax offset for an income year.

[Schedule 1, item 3, paragraph 421-45(1)(a) of the ITAA 1997]

1.51 The rules may also specify that the amount of the hydrogen production tax offset that a company is entitled to for an income year is reduced by a specified amount or proportion if the company does not comply with specified requirements in the rules.

[Schedule 1, item 3, subsection 421-10(2) and paragraph 421-45(1)(b) of the ITAA 1997]

1.52 As the rules will need to be strict requirements, they may require regular updating to address current and emerging circumstances. Given this, it is not considered feasible to include the requirements in primary law. However, the rules will be subject to disallowance and sunsetting after 10 years and will therefore be subject to appropriate parliamentary scrutiny.

1.53 It is anticipated the rules implementing the community benefit principles for the HPTI may involve requiring that entities arrange for the certification of their activities by expert bodies that their activities meet certain requirements, with the ATO needing to confirm the fact of that certification.

1.54 In making the rules, the Treasurer must have regard to the community benefit principles set out in subsection 10(3) of the Future Made in Australia Act 2024. Further, when having regard to those principles, the Treasurer is required to treat the hydrogen production tax offset as if it were Future Made in Australia support within the meaning of the Future Made in Australia Act 2024. Given this, the Treasurer may only make the rules implementing the community benefit principles for the HPTI after the Future Made in Australia Bill 2024 has received royal assent and commenced.

[Schedule 1, item 3, subsections 421-45(2) to (4) of the ITAA 1997]

1.55 This ensures that the requirements under these rules are aligned with the requirement relating to community benefits for other support under the Future Made in Australia agenda despite the differing legislative context.

1.56 For further details on the community benefit principles, please see the Explanatory Memorandum to the Future Made in Australia Bill 2024.

Eligible Hydrogen

1.57 Even if a company is eligible to claim the hydrogen production tax offset for an income year, it may only do so for a kilogram of hydrogen produced in Australia during the income year if:

•

the income year started on or after 1 July 2027 and ended before 1 July 2040;

•

there was a registered PGO certificate for the kilogram of hydrogen for which the initial reconciliation period has ended that indicates:

-

the hydrogen was produced at the facility specified in the production profile, in accordance with the production pathway specified in the profile

-

the production emissions intensity of the hydrogen did not exceed 0.6 kg of carbon dioxide per kilogram of hydrogen; and

-

if electricity used to produce the hydrogen was sourced from a grid, it meets the grid matching requirements,

•

the nominated production profile was certified at the time of production in relation to the facility and production pathway;

•

the kilogram of hydrogen was produced during the offset period for the facility and the production pathway;

•

no correction notice for the PGO certificate is in force.

[Schedule 1, item 3, subsection 421-5(1) of the ITAA 1997]

Where Eligible Hydrogen is Produced

1.58 The first requirement for the hydrogen is that it must have been produced in Australia. This reflects the Government's intention to support the production of renewable hydrogen in Australia.

[Schedule 1, item 3, subsection 421-5(1) of the ITAA 1997]

1.59 In this context, "Australia" includes Norfolk Island, the Coral Seas Islands, Ashmore and Cartier Islands, Christmas Island, Cocos (Keeling) Islands, Heard and McDonald Islands and the coastal seas of Australia, but does not include any other external Territory - see section 960-505 of the ITAA 1997 and sections 2B and 15B of the Acts Interpretation Act 1901.

When Eligible Hydrogen is Produced

1.60 The second requirement for the hydrogen is it must have been produced in an income year starting on or after 1 July 2027 and ending before 1 July 2040. This ensures that the HPTI serves as an incentive for early investment.

[Schedule 1, item 3, paragraph 421-5(1)(a) of the ITAA 1997]

1.61 For the purposes of the measurement of emissions under the GO scheme, units of products, including kilograms of hydrogen, are grouped into batches, representing production for a facility over a set period of time, which can range from an hour to a year. The registered PGO certificate for a kilogram of hydrogen must set out the time and date when the batch was produced. Under paragraph 50(1)(i) of the Future Made in Australia (Guarantee of Origin) Act 2024 this is 'the time and day the last part of the batch left the production gate'.

1.62 To align with these arrangements, the time of production for hydrogen is taken to be the time when the last part of the batch hydrogen that contains the kilogram leaves the production gate within the meaning of the Future Made in Australia (Guarantee of Origin) Act 2024.

[Schedule 1, item 3, subsection 421-15(1) of the ITAA 1997]

1.63 However, the time of production is taken to be prior to 1 July 2027 and the hydrogen will not be eligible for the hydrogen production tax offset if production of the batch of hydrogen commenced before 1 July 2027.

[Schedule 1, item 3, subsection 421-15(2) of the ITAA 1997]

1.64 Together, these rules ensure there is no ambiguity about the time of production in a situation where the production of a kilogram of hydrogen commences in one income year and concludes in another.

Registered PGO certificate

1.65 The third requirement for hydrogen to be eligible for the hydrogen production tax offset is that each kilogram of hydrogen for which the hydrogen production tax offset is being claimed must be the subject of a registered PGO certificate created by the company claiming the offset under the GO Scheme. The certificate must identify the facility at which the hydrogen was produced and the related production pathway and production profile. This information is a standard feature of PGO certificates.

[Schedule 1, item 3, subparagraph 421-5(1)(b)(i) of the ITAA 1997]

1.66 The certificate must also indicate both that:

•

the production emissions intensity of the hydrogen did not exceed 0.6 kg of carbon dioxide per kilogram of hydrogen; and

•

if electricity used to produce the hydrogen was sourced from a grid, it satisfied the grid matching requirements.

[Schedule 1, item 3, subparagraphs 421-5(1)(b)(ii) and (iii) and sections 421-20 and 421-25 of the ITAA 1997]

1.67 In relation to the emissions intensity, the production emissions intensity is the measure of the carbon dioxide emitted when producing the hydrogen, being effectively the emissions from well to production gate. It is defined using the concept of 'production emissions sources' within the meaning of the Future Made in Australia (Guarantee of Origin) Act 2024, which are those sources specified by the Minister administering that legislation in relation to a production profile. It does not include emissions that may occur during delivery or consumption of the hydrogen.

[Schedule 1, item 3, section 421-20 of the ITAA 1997]

1.68 The identification of the level of emissions from well to production gate is a core function of the GO Scheme. This information will need to be included on all PGO certificates for hydrogen.

1.69 The grid matching requirements are intended to ensure grid-matching has occurred if electricity from a grid was used in the production of the hydrogen.

1.70 Grid-matching, the requirement that the electricity sourced by the hydrogen producer in producing the hydrogen through a grid-connected electrolyser project, must have been sourced from the same grid to which the electrolyser is connected, is not directly addressed in the provisions of the Future Made in Australia (Guarantee of Origin) Act 2024. However, it is intended that the rules made under that Bill once it has become law will provide for PGO certificates to indicate if grid-matching has occurred. The grid matching requirements for the hydrogen production tax offset will be aligned with those rules and the related information that will be included on the PGO certificates for hydrogen.

1.71 As the treatment of grid-matching under the GO Scheme will be set out in subordinate legislation, this instrument-making power is necessary to allow the appropriate link to be made.

[Schedule 1, item 3, section 421-25 of the ITAA 1997]

1.72 The grid-matching requirement does not extend to requiring that the time at which the electricity is generated must be matched to the time of production. Time-matching is complex, costly and imposes very substantial compliance costs. It is not appropriate for an incentive targeted towards first movers in the context of the emerging nature of hydrogen production in Australia.

1.73 The overall effect of requiring the certificate to indicate that the emissions intensity is below the required threshold and, if relevant, grid-matching has occurred, is to ensure that the hydrogen must not lead to significant emissions if benefitting from the HPTI.

1.74 Both of the matters that the certificate must address lie within the expertise of the CER rather than the ATO. Given this, the requirement will be satisfied by the existence of a registered certificate rather than by reference to the underlying facts. Any company that wishes to dispute whether hydrogen satisfies the emissions intensity threshold or the grid matching requirements must contest the decision of the CER under the GO Scheme and obtain a registered certificate that satisfies these requirements.

1.75 Further details on the operation of the GO Scheme are set out in the Explanatory Memorandum to the Future Made in Australia (Guarantee of Origin) Bill 2024.

1.76 In addition to containing this information, the relevant certificate must be registered. Under the GO Scheme, PGO certificates are created by the holder of a production profile rather than the CER. Requiring certificates to be registered with the CER before being used to claim the hydrogen production tax offset ensures that the offset is only available if the certificate has been subject to appropriate scrutiny.

1.77 In addition, even if a PGO certificate satisfying all of the other elements exists for a kilogram of hydrogen, this requirement will not be satisfied until the initial reconciliation period for the certificate has passed.

[Schedule 1, item 3, paragraph 421-5(1)(e) of the ITAA 1997]

1.78 Broadly, under the GO Scheme certificates registered during a financial year are subject to checks after the end of the financial year. This checking process concludes either:

•

when the production profile holder confirms the information they have provided to CER in relation to the activities undertaken during the year is true and correct; or,

•

if an error has been identified, after the CER makes a decision about the appropriate response.

1.79 The initial reconciliation period for a PGO certificate registered in an financial year concludes when the checking process relating to PGO certificates for that financial year concludes.

[Schedule 1, item 3, section 421-35 of the ITAA 1997]

1.80 This element of the requirement ensures that the hydrogen production tax offset cannot be claimed while key matters relating to the eligibility for the hydrogen are being reviewed. This reduces the risk that the hydrogen production tax offset may be overpaid and that both taxpayers and the ATO will need to go through the recovery process.

Certified production profile

1.81 The fourth requirements for hydrogen to be eligible for the hydrogen production tax offset, is that the production profile under which the hydrogen is produced must be certified by the CER.

[Schedule 1 , item 3, paragraph 421-5(1)(c) of the ITAA 1997]

1.82 For a production profile to be certified by the CER, a holder of a registered production profile must validly apply for that profile to be certified from a specified time in relation to the facility and the production pathway specified in the profile. The time specified in the application must not be later than the start of the day when the application is made. This is because it would not be possible for the CER to be satisfied of the matters that must be in place to certify an application for a future time.

[Schedule 1, item 3, subsections 421-50(1) and (2) of the ITAA 1997]

1.83 To be valid, that application must be:

•

in the form approved by the CER by notifiable instrument;

•

accompanied by any required information, documents or other materials specified by the CER by notifiable instrument; and

•

accompanied by an 'eligibility statement' for the production profile, being a statement that there are reasonable grounds to believe that the company would be entitled to the hydrogen production tax offset for an income year if the profile is certified.

1.84 CER cannot certify a profile as a result of an application that does not satisfy one or more of these requirements, even if the profile satisfies the conditions for certification. Such an application is taken to not have been made.

[Schedule 1, item 3, subsections 421-50(3) and (4) of the ITAA 1997]

1.85 The CER must certify a production profile in relation to a facility and production pathway for which a valid application has been made if the following requirements were met at the specified time and have continued to be met:

•

the facility covered in the profile is located on a single site in Australia (the location requirement);

•

the facility has a production capacity using the method specified in the profile (the production pathway under the GO Scheme) equivalent to the capacity of an electrolyser with a 10MW nameplate capacity (the capacity requirement);

•

the production of hydrogen under the profile does not involve any excluded processes (the excluded processes requirement);

•

if the start time for certification is on or after 1 July 2030, a final investment decision was made on the production of hydrogen at the required scale under the profile on or before 30 June 2030 (the final investment decision requirement); and

•

based on the information in the possession of CER, it would not be reasonable to believe that the eligibility statement is incorrect (the eligibility statement requirement).

[Schedule 1, item 3, subsections 421-55(1), (3) to (7) of the ITAA 1997]

1.86 However, the CER may, by written notice, request further information or documents that are relevant to certification by a specified time. The CER need not certify a profile if this request is not complied with.

[Schedule 1, item 3, subsection 421-55(2) and subsection 421-70(1) of the ITAA 1997]

1.87 The location requirement ensures that a production profile cannot be certified if the facility specified in the profile is not located in Australia. It also, by requiring that the facility must be a single site, ensures that the capacity requirement cannot be avoided by adding together multiple smaller production sites that fall below the scale the HPTI is intended to support.

[Schedule 1, item 3, paragraph 421-55(3)(a) of the ITAA 1997]

1.88 The capacity requirement specifies that, for a production profile to be certified, the facility specified in the profile must have a production capacity equivalent to the capacity of an electrolyser with a 10MW nameplate capacity either since the time from which certification is sought or over the period for which certification is sought. This ensures that the offset is only available for the production of renewable hydrogen at scale, consistent with the Government's policy intention.

[Schedule 1, item 3, paragraph 421-55(3)(b) of the ITAA 1997]

1.89 This requirement means that that facility specified in this profile must have this production capacity at the time of certification.

1.90 The CER may, by legislative instrument, specify how the production capacity of a facility is to be expressed and determined, including circumstances in which a facility will have production capacity equivalent to that of an electrolyser with a 10 MW nameplate capacity.

[Schedule 1, item 3, section 421-60 of the ITAA 1997]

1.91 This power is necessary to provide clarity and certainty for differing means of producing hydrogen. While the specified threshold provides clarity for the principal existing method for producing renewable hydrogen, other emerging methods do not have the same certainty. It would not be feasible to address all production methods in the primary law, especially given both the substantial ongoing change in this area and the fact that the ways of measuring capacity can differ between methods. The legislative instrument would be subject to appropriate parliamentary scrutiny, including being subject to disallowance and sunsetting after no more than 10 years. The legislative instrument would also be subject to the requirement for appropriate consultation under section 17 of the Legislation Act.

1.92 The excluded processes requirement ensures that the offset is not available to activities involving the production of hydrogen from fossil fuels, even where emissions may be captured using carbon capture and storage technologies.

1.93 The current excluded processes are steam reformation of natural gas and coal gasification, both of which involve the production of hydrogen from fossil fuels. Additional processes may be prescribed by the regulations as excluded processes. Prescribing additional excluded processes by regulation will allow the Government the ability to ensure the requirements are kept up to date and reflect different processes that may be developed in the future. The legislative instrument would be subject to appropriate parliamentary scrutiny, including being subject to disallowance and sunsetting after no more than 10 years. The legislative instrument would also be subject to the requirement for appropriate consultation under section 17 of the Legislation Act.

1.94 The requirement to have a final investment decision before 1 July 2030 ensures that the hydrogen production tax offset is only available to companies that make a definite commitment to the production of hydrogen during the early development of the industry in Australia at a sufficient scale.

[Schedule 1, item 3, subsections 421-55(4) to (6) of the ITAA 1997]

1.95 In this context, a final investment decision is an unqualified decision of the company, made by its directors, to proceed with the project for the production of hydrogen. The decision cannot be vague or tentative. It must be clear about the nature, scope and details of the activities to which it commits the company, including the production capacity that is to be constructed.

1.96 Given this, a decision that is not accompanied by subsequent tangible action would not usually constitute a final investment decision in this context. However, a decision does not need to be wholly unconditional to be a final investment decision. An otherwise unqualified decision to proceed with a project that is subject to external factors, such as receiving environmental approvals or successfully obtaining finance, can be a final investment decision.

1.97 Equally, a decision that is not clearly evidenced in contemporaneous documentation will be unlikely to constitute a final investment decision. A lack of documentation is strong evidence that the decision was not sufficiently final or clear at the relevant time.

1.98 The CER may seek documentary evidence about the nature and timing of a final investment as part of the certification process.

1.99 To satisfy the final decision requirement for a particular production profile the specified production capacity in the decision must be at least equal to the actual production capacity of the facility specified in the production profile -the nominal capacity - at and after the time for which certification is sought. The power of the CER to specify circumstances when a facility is taken to have a particular production capacity that is discussed in paragraph 1.90 above can apply in this context.

[Schedule 1, item 3, subsection 421-55(6) of the ITAA 1997]

1.100 In some cases, final investment decisions may be cumulative - there will have been one decision to construct and operate a 5 MW electrolyser and a subsequent decision to expand the capacity at the facility to 15 MW. If certification is sought for a production profile covering the expanded facility, the second decision would result in the cumulative final investment decisions for the facility in the profile satisfying the requirement that all of the capacity in the profile must have been the subject of a final investment decision.

1.101 Finally, the eligibility statement requirement means that the CER can only certify the profile if, on the basis of the information it possesses at the time, it could not reasonably believe the eligibility statement to be incorrect.

[Schedule 1, item 3, subsection 421-55(7) of the ITAA 1997]

1.102 While it is not feasible for the CER to ascertain the eligibility of a company for the hydrogen production tax offset in advance, this requirement ensures that production profiles held by entities that will never be eligible for the hydrogen production tax offset (such as an entity that is not a company) will not be certified.

1.103 The CER does not have a positive duty to seek information in its assessment of the eligibility statement beyond whatever information it possessed when it receives the certification application, including information that was contained in, or accompanied, that application.

[Schedule 1, item 3, subsection 421-55(9) of the ITAA 1997]

1.104 A decision by the CER to certify or not to certify a registered production profile in response to a valid application is subject to review by the Administrative Review Tribunal, as well as judicial review.

[Schedule 1, item 3, paragraph 421-75(d) and (e) of the ITAA 1997]

1.105 Once a production profile is certified, it remains certified even if the holder of the production profile changes.

1.106 The CER may revoke the certification of a production profile. For the CER to do so, at least one of the following conditions must be satisfied:

•

the registration of the production profile is suspended, cancelled or surrendered under the Future Made in Australia (Guarantee of Origin) Act 2024;

•

at a time after the time the certification of the production profile started, the CER is no longer satisfied that:

-

the facility specified in the profile is located on a single site in Australia;

-

the facility has a nameplate capacity of at least 10 megawatts; or

-

a final investment decision covering the facility and its production capacity was taken before 1 July 2030; or

•

the CER reasonably believes, based on the information in its possession, that the eligibility statement for the production profile is incorrect.

•

the production profile holder has failed to provide specified documents in the specified time in response to a request of the CER made in relation to the certified profile.

[Schedule 1, item 3, subsections 421-65(1), (2) and (4) and 621-70(2) of the ITAA 1997]

1.107 The effect of revocation is that the production profile ceases to be certified from the date the revocation has effect. This does not prevent a subsequent application for the certification of the profile.

[Schedule 1, item 3, subsections 421-65(6) to (8) of the ITAA 1997]

1.108 A decision to revoke the certification of a production profile has effect from the time specified in the instrument of revocation. For decisions relating to the suspension, cancelation or surrender of a production profile or the requirements for certification relating to location, capacity or the final investment decision, this time must be the earliest time at which the CER is satisfied that the relevant condition for revocation was satisfied. For decisions to revoke registration for a failure to comply with a request for information, the specified time must not be before the time at which the information was required to be given. For decisions relating to the eligibility statement being incorrect, the specified time must not be before the time when the instrument of revocation is made.

[Schedule 1, item 3, subsections 421-65(3) and (5) of the ITAA 1997]

1.109 In some cases, the specified time may be before the instrument of revocation is made. If the date specified for revocation is the same as the date the offset period started, the certification is taken to have never been in effect.

[Schedule 1, item 3, subsections 421-65(5), (6) and (7) of the ITAA 1997]

1.110 The CER must notify the production profile holder and the Commissioner if it certifies a production profile. Likewise, the CER must notify the production profile holder (or, if the certification is being revoked as the production profile no longer exists, the entity that held the production profile immediately before it ceased to exist) and the Commissioner if it revokes a production profile.

[Schedule 1, item 3, subsections 421-55(8) and 421-65(9) of the ITAA 1997]

1.111 A decision by the CER to revoke a production profile is subject to review by the Administrative Review Tribunal, as well as judicial review.

[Schedule 1, item 3, paragraph 421-75(f) of the ITAA 1997]

Offset period

1.112 The fifth requirement for hydrogen to be eligible for the hydrogen production tax offset is that the hydrogen must have been produced within an income year falling within the offset period for the facility and production pathway specified in the production profile.

[Schedule 1, item 3, paragraph 421-5(1)(d) of the ITAA 1997]

1.113 The offset period commences from the date chosen by the holder of the production profile. This choice must be done by providing notice to the Commissioner in the approved form. The date chosen must be during the period in which the hydrogen production tax offset is available (on or after 1 July 2027 and before 1 July 2040). Further, the date must be the first day of an income year for the holder of the production profile.

[Schedule 1, item 3, subsections 421-30(1) and (2) of the ITAA 1997]

1.114 An offset period notice cannot be revoked or replaced. Once an offset period notice has been given, the offset period for the specified facility and production pathway is fixed and cannot be varied. Even if the production profile is deregistered and a new production profile is registered and certified, if the same facility and production pathway are specified then the offset period will be the same.

[Schedule 1, item 3, subsection 421-30(3) and (4) of the ITAA 1997]

1.115 The offset period for a facility and production pathway ends at the earlier of the end of the period of 10 years starting from the offset start date or 30 June 2040.

[Schedule 1, item 3, subsections 421-30(5) of the ITAA 1997]

1.116 In some circumstances, hydrogen may be produced under different production profiles at the same facility. This production may occur at the same time, or at different points in time.

1.117 If multiple notices are given under different production profiles, in relation to the same facility, specifying their respective offset start dates, and the CER may be able to determine that a group consisting of two or more notices should be treated together for the purpose of setting the offset period for all of the notices. It does not matter whether the notices arrive at different times. It also does not matter if the production profiles concerned remaining certified or registered.

1.118 To do this be able to make such a determination, the CER must be satisfied that the production at the facility, in accordance with the production pathway specified in any one of the notices is not substantially different from the production at the facility in accordance with a production pathway specified in any other notice in the group.

1.119 In making this determination, the CER may have regard to:

•

the nature of the facility;

•

the nature of the production pathways specified in the notices; and

•

if some of the notices are given at different times - the nature of any changes to the facility between those times.

[Schedule 1, item 3, subsection 421-30(6) to (9) of the ITAA 1997]

1.120 These criteria highlight the key areas in which production processes may differ such as to demonstrate that one process is not the other process rebadged, in whole or part, but is instead a meaningfully distinct process.

1.121 Substantial difference is considered at a high level of detail. Production under different profiles at the same facility will not fail to be substantially different merely because both involve electrolysis, or because many of the production modules are the same. Instead, failing to be substantially different requires that the CER consider that the processes are, in whole or part, in substance the same process carried on at the same facility.

1.122 If the CER makes such a written determination, then the offset period for both production pathways in respect of the facility is the same - starting from whenever the earliest offset period for either pathway would have started. The decision of the CER to make or vary a written determination is subject to review by the Administrative Review Tribunal, as well as judicial review.

[Schedule 1, item 3, subsection 421-30(6) and paragraph 421-75(a)]

1.123 This rule ensures that the effect of the offset period cannot be avoided by the re-registration of what is in substance the same production process for a facility.

1.124 Limiting the period of support for any facility to 10 years means that the support provided under the HPTI is directed toward assisting the establishment of new production and the expansion of the market.

1.125 The start of eligibility is linked to a choice rather than the commencement of production. This allows companies that expect that the production of hydrogen may be limited in the first year in which the project is in operation to defer beginning to claim the offset until later years to maximise the benefit they receive over the 10-year period for which they are eligible for the hydrogen production tax offset. However, even if a company chooses to defer claiming the hydrogen production tax offset, they will not be eligible to claim the tax offset for hydrogen produced in income years commencing on or after 1 July 2040.

1.126 As the offset period must start from the beginning of a company's income year, usually it will be aligned with the income years of the holder of the production profile. However, this will not always be the case - for example, if the production profile holder changes to an entity with a substituted accounting period.

1.127 The making of the approved form for choosing the start date for claiming the hydrogen production tax offset is a matter for the Commissioner. However, it is anticipated that one of the options the Commissioner may consider is including the income tax return as an approved form for this purpose, so that companies can make an election simply by including or excluding the hydrogen production tax offset in their income tax return.

Correction notices

1.128 For hydrogen to be eligible, there must be no correction notice for the PGO certificate for the hydrogen in force.

[Schedule 1, item 3, paragraph 421-5(1)(f) of the ITAA 1997]

1.129 The CER must issue a correction notice if:

•

the initial reconciliation period for the PGO certificate has ended;

•

the registered PGO certificate states that the emissions intensity requirements and the grid-matching requirements (if any) are met; and

•

the CER is satisfied that one or both of the relevant emissions intensity and grid-matching requirements are not met.

1.130 The correction notice must state the CER's satisfaction that the emissions intensity or grid-matching requirements, or both, are not met. The correction notice is in force until revoked.

[Schedule 1, item 3, subsections 421-40(1) to (3) of the ITAA 1997]

1.131 This is likely to arise if material errors around the calculation of emissions or grid-matching are identified after the verification period is over. One common instance where this may occur is if the holder of the production profile or the CER identifies an issue with subsequent production from the facility which is then found to have also occurred for prior production.

1.132 In effect, this requirement is needed due to the otherwise conclusive nature of the GO certificate in relation to emissions intensity and grid-matching. The legislation empowers the CER to prevent companies from accessing the hydrogen production tax offset on the basis of PGO certificates containing materially incorrect information.

1.133 The CER may revoke a correction notice. The CER must be satisfied that one of the following is true:

•

the initial reconciliation period for the certificate is still ongoing;

•

the PGO certificate does not state that the hydrogen meets the emissions intensity requirements and grid-matching requirements (if any) - that is the certificate was never materially in error because it never indicated the relevant requirement was satisfied; or

•

the hydrogen actually does meet the emissions intensity requirements and the facility meets the grid-matching requirements (if any) - that is, the certificate was never materially in error because the hydrogen satisfied both of the relevant requirements.

[Schedule 1, item 3, subsection 421-40(4) of the ITAA 1997]

1.134 The CER must give copies of any correction notice for a registered PGO certificate, as well as any revocation, to the Commissioner and each entity that is a holder of a registered production profile specified in the PGO certificate.

[Schedule 1, item 3, subsection 421-40(5) of the ITAA 1997]

1.135 The correction notices rules are intended to create a mechanism for the CER to correct errors in certificates that it may become aware of in the course of its administration of the GO scheme and the HPTI. They are not intended to place extra burden on the CER or production profile holders. To make this clear, the amendments include express statements that no duty is imposed on the CER to seek or consider information, and do not have any effect on the content or status of the PGO certificate for the purposes of the Future Made in Australia (Guarantee of Origin) Act 2024.

[Schedule 1, item 3, subsections 421-40(6) and (7) of the ITAA 1997]

1.136 The decision of the CER to issue or revoke a correction notice is subject to review by the Administrative Review Tribunal, as well as judicial review.

[Schedule 1, item 3, paragraph 421-75(b) and (c)]

Administration

Joint administration

1.137 The HPTI is jointly administered by the ATO and the CER. The CER responsibilities under these amendments relate primarily to the certification of production profiles, which complement its responsibilities under the Future Made in Australia (Guarantee of Origin) Act 2024.

1.138 All significant decisions of the CER under the amendments are subject to administrative review by the Administrative Review Tribunal (in addition to judicial review).

[Schedule 1, item 3, section 421-75 of the ITAA 1997]

1.139 Because of the significant links between the hydrogen production tax offset and the GO Scheme, the CER's ongoing activity under the GO Scheme will have important consequences for the operation of the hydrogen production tax offset. In particular, CER's role in registering and verifying PGO certificates for hydrogen will be critical to the operation of the HPTI.

1.140 Once the CER has certified the production profile of a company, the hydrogen production tax offset is principally administered by the ATO. The hydrogen production tax offset will usually be self-assessed by the company with an amount included in the company's income tax return in relation to an income year. The ATO's general administration, dispute and compliance powers and functions will apply.

1.141 The decision of the ATO in relation to assessments are subject to the standard processes of objection and review that apply for the tax law.

1.142 To facilitate joint administration, the two regulators may each request the other to provide information that the other regulator may hold, where this information is reasonably necessary or convenient for the requesting regulator's administration of the hydrogen production tax offset. The other regulator must comply with such a request.

1.143 A tax officer complying with a request made for this purpose is acting in the course of their duties for the purposes of the exception to the tax secrecy provisions in section 355-50.

1.144 This amendment ensures that the two regulators can effectively co-operate and share information to efficiently administer the hydrogen production tax offset. It will minimise the need for duplicate reporting. It does not extend to the sharing of information beyond what is necessary or convenient for the administration of the hydrogen production tax offset.

[Schedule 1, item 3, section 421-80 of the ITAA 1997]

Period of review

1.145 In some circumstances issues may be identified with the certification of a production profile many years after certification. Similarly, a correction notice may be issued long after the relevant PGO certificate was registered. As the CER, not the ATO, is responsible for certification and correction notices the existing mechanisms that ensure that the period of review does not bar the ATO from making consequential changes to assessments would not apply.

To address this, the amendments provide that if the certification of a production profile has been revoked, or if a correction notice is issued or revoked, section 170 of the ITAA 1936 does not prevent the Commissioner from amending the assessment of a company to give effect to any consequences of a revocation of certification or the issue or revocation of a correction notice for the period of 4 years after the issue or revocation.

[Schedule 1, item 3, section 421-85 of the ITAA 1997]

Application of the general anti-avoidance rule

1.146 The general anti-avoidance rule in Part IVA of the ITAA 1936 does not apply to tax offsets by default.

1.147 Given the importance and expected financial impacts of the HPTI, the Schedule 1 to the Bill includes amendments to Part IVA of the ITAA 1936 so the hydrogen production tax offset will be a tax benefit to which Part IVA can apply.

[Schedule 1, items 22 to 31, subsection 177A(1), paragraphs 177C(1)(bf) and (j) and 177C(2)(h), subsection 177C(3), paragraphs 177C(3)(ce) and (k), 177CB(1)(h), 177F(1)(h) and 177F(3)(i) of the ITAA 1936]

Public reporting about the HPTI

1.148 The Commissioner must publicly report specified information about the HPTI as soon as practicable after the second 30 June after the financial year that corresponds to the income year for which the company indicated it was entitled to claim the hydrogen production tax offset.

1.149 The information that must be reported in relation to a company that has claimed the hydrogen production tax offset for an income year is:

•

the company's name,

•

the company's ABN (or if the relevant income tax return does not include its ABN but includes its ACN, its ACN); and

•

the amount of hydrogen production tax offset the entity was determined to be entitled to for that income year.

1.150 The company may notify the Commissioner in the approved form if there is an error in the information, including an appropriate correction. The Commissioner may make the correction publicly available at any time. Further, if the Commissioner is satisfied that the reporting of the required information is incomplete, the Commissioner may make publicly available other information to correct this failure at any time.

[Schedule 1, item 5, section 3L of the TAA 1953]

1.151 This reporting serves as a transparency mechanism to maintain the integrity of the HPTI by identifying what support has been provided to which entities as a result of the hydrogen production tax offset. It is based on the equivalent regime in section 3H of the TAA 1953 for the research and development tax incentive. Consistent with the arrangements for the research and development tax incentive, the Commissioner may publish information on an entity for an income year for which the entity claims the hydrogen production tax offset even if the entity is later found not be entitled to the hydrogen production tax offset for the income year.

Interaction with Hydrogen Headstart

1.152 The Government's Hydrogen Headstart grant program, administered by ARENA, provides revenue support for large-scale renewable hydrogen projects through competitive hydrogen production contracts. Companies may be eligible for both the HPTI and funding under the Hydrogen Headstart program. It is the Government's intention that a company should not benefit from funding under the Hydrogen Headstart program in addition to the HPTI. Therefore, to manage the interaction between the two incentives, payments made to companies under the Hydrogen Headstart program will be proportionally reduced by ARENA to reflect any amount of the hydrogen production tax offset that a company has received.

1.153 To assist ARENA administering the Hydrogen Headstart program on this basis, a new exception is made to the prohibition in section 355-25 in Schedule 1 to the TAA 1953 to tax officers disclosing or recording information that is protected information acquired as a taxation officer. Specifically, a new exception is made in respect of protected information where the record is made for or the disclosure is to ARENA and the record or disclosure is of information relating to the entitlement of a company to the hydrogen production tax offset and it is for the purpose of ARENA administering the Hydrogen Headstart program.

[Schedule 1, item 6, subsection 355-65(7) of Schedule 1 to the TAA 1953]

1.154 The new exception is appropriate to ensure that ARENA has the necessary information to inform whether payments to a company need to be reduced under the Headstart Hydrogen program because of a company already receiving amounts under the hydrogen production tax offset.

1.155 The amendments inserting the new exception apply in relation to records and disclosure of information made on or after the commencement of these amendments, regardless of whether the information was acquired before, on or after that commencement.

[Schedule 1, item 7]

Consequential amendments

1.156 Schedule 1 to the Bill also makes a range of consequential amendments to the ITAA 1936 and the ITAA 1997 required by the primary amendments, including adding definitions to the Dictionary and incorporating and updating guide material.

[Schedule 1, items 1 to 5, 22 and 26, section 13-1, table item 29 in section 67-23, section 421-1 and subsection 995-1(1) of the ITAA 1997 and subsections 177A(1) and 177C(3) of the ITAA 1936]

Minor and technical amendment relating to shortfall interest charge

1.157 Schedule 1 to the Bill also makes amendments to Schedule 1 to the TAA 1953 and the ITAA 1936 to address a minor and technical issue with shortfall interest charge.

1.158 This amendment provides that if the assessment of an entity's tax liabilities is amended, and as a result, the amount of the tax offset for which the entity is eligible is reduced, the entity is liable to pay shortfall interest charge on the excessive amount of tax offset they received.

[Schedule 1, items 18, subsection 280-102E(1) in Schedule 1 to the TAA 1953]

1.159 Shortfall interest charge is payable for each day starting from the day on which the entity received the benefit of the excessive amount (the day on which the excess was applied in accordance with Division 3 and 3A of the TAA 1953) and ending at the end of the day before the Commissioner provides notice of the amended assessment.

[Schedule 1, item 18, subsection 280-102E(2) in Schedule 1 to the TAA 1953]

1.160 Consistent with other circumstances in which the shortfall interest charge applies, if a person is liable to pay a shortfall interest charge on the excessive amount of tax offset they received, the amount is due 21 days after the Commissioner gives the person notice of the amended assessment. If the amount that the person is liable to pay remains unpaid after the time by which it is due to be paid, the person is liable to pay the general interest charge on the unpaid amount for each day in the period starting at the beginning of the day on which the amount was due, and finishing at the end of the last day on which the amount, or the general interest charge on the amount, remains unpaid.

[Schedule 1, items 8 to 12, subsections 172A(2A) and (3) of the ITAA 1936]

1.161 Previously, shortfall interest charge did not apply consistently if a taxpayer received an excessive amount of a tax offset. To the extent that the tax offset had been applied to reduce the income of the taxpayer, shortfall interest charge correctly applied. However, to the extent that the tax offset had resulted in a refund, shortfall interest charge did not apply. This change ensures that shortfall interest charge will now apply to the full amount of all tax offsets.

1.162 The amendments to address the shortfall interest charge for excessive tax offset refunds also include in consequential amendments to the TAA 1953 to:

•

update guide material;

•

clarify that the liability to general interest charge applies for unpaid amounts of shortfall interest charge for excessive tax offset refunds;

•

clarify that the shortfall interest charge for excessive tax offset refunds is a tax-related liability; and

•

extend the general rules for the calculation of the shortfall interest charge apply to shortfall interest charge for excessive tax offset refunds; and

•

provide that the Commissioner must give a person notice stating the amount of shortfall interest charge they are liable to pay for excessive tax offset refunds.

[Schedule 1, items 14, 15 to 17, 19 and 20, table item 10A of subsection 8AAB(4) of the TAA 1953 and table item 75 of subsection 250-10(1), sections 280-1 and 280-50, paragraph 280-110(a)(a) and subsection 280-110(1) in Schedule 1 to the TAA 1953]

Commencement, application, and transitional provisions

1.163 The main provisions in Schedule 1 to the Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after the later of:

•

the day the Bill receives Royal Assent; and

•

the day the Future Made in Australia (Guarantee of Origin) Act 2024 commences.

1.164 However, these provisions do not commence at all if the Future Made in Australia (Guarantee of Origin) Act 2024 does not commence.

1.165 The HPTI relies upon a number of concepts from the Future Made in Australia (Guarantee of Origin) Act 2024. In particular, it would not function without production profiles and PGO certificates.

1.166 These commencement provisions ensure that these amendments will not commence if they would not function due to the absence of the Future Made in Australia (Guarantee of Origin) Act 2024.

1.167 The amendments apply to hydrogen produced in income years commencing on or after 1 July 2027 and ending before 1 July 2040.

1.168 The consequential amendments to the ITAA 1936 commence at the later of the time the other amendments made by schedule 2 to the Bill commence and the time immediately after the time the related consequential amendments to the ITAA 1997 being made by schedule 2 to the Bill commence. However, they do not commence at all if the other amendments made by Schedule 2 do not commence.

1.169 As the consequential amendments to the ITAA 1936 made by this schedule and the consequential amendments to the ITAA 1936 made by Schedule 2 to the Bill relate to the same provisions, the amendments have been drafted to operate together harmoniously, requiring a linked commencement.

1.170 The amendments to Schedule 1 to the TAA 1953 and the ITAA 1936 relating to shortfall interest charge commence on the first 1 January, 1 April, 1 July or 1 October to occur after later of:

•

the day the Bill receives Royal Assent; and

•

the day the Treasury Laws Amendment (Multinational - Global and Domestic Minimum Tax) (Consequential) Act 2024 commences.

1.171 These amendments and amendments contained in the Treasury Laws Amendment (Multinational - Global and Domestic Minimum Tax) (Consequential) Bill 2024 both alter provisions relating to shortfall interest charge. This commencement provision ensures that the two sets of amendments apply in the proper sequence.

1.172 The amendments apply to amounts of excessive tax offset refunds where the liability to repay the amount arises on or after the amendments commence.

[Schedule 1, items 13 and 21]

Chapter 2: Critical Minerals Production Tax Incentive

Outline of chapter

2.1 Schedule 2 to the Bill establishes the CMTPI, in the form of a new refundable tax offset, the CMPTI tax offset, to support the processing of critical minerals in Australia.

2.2 Legislative references in this chapter are to the ITAA 1997 unless otherwise specified.

Context of amendments

Critical minerals and their significance for Australia

2.3 Critical minerals refer to metallic or non-metallic materials that are essential to modern technologies, economies and national security, and whose supply chains are vulnerable to disruption. Currently, the Australian Government has listed 31 'critical minerals'.^[2]

2.4 The global economy is making a long-term shift towards renewables and low carbon technologies. The supply of critical minerals will be crucial for facilitating this shift, as many critical minerals are essential components of technologies that will form part of the transition to net zero emissions. As a result, the world's demand for these minerals is expected to substantially increase in the coming decades.

2.5 Australia has a significant natural endowment of critical minerals and a highly developed mining sector with expertise in extraction and beneficiation (the basic cleaning and mechanical separation of ore before further substantive processing is performed). However, only a small amount of critical minerals mined in Australia are processed from ore to refined end-product entirely onshore.

2.6 Instead, after the initial 'upstream' phases are complete, the minerals are generally exported overseas to undergo further processing and refinement for ultimate use. For example, though Australia is the world's largest producer of lithium, there are currently only two operating downstream lithium processing plants onshore in Australia, with both only achieving first production in mid-2022.

2.7 In this context, many industry players in Australia are currently considering either investing in minerals processing, adding this activity to existing extraction projects, or onshoring existing processing activity that is currently performed offshore.

Existing support for critical minerals in Australia

2.8 Critical minerals are important to Australia's economy and security. In 2023, the Government published the Critical Minerals Strategy 2023-2030, a national framework intended to grow Australia's critical minerals sector.^[3] This Strategy outlined that the Government will take a 'concerted, targeted and proportionate approach to developing our critical minerals sector'.^[4]

2.9 To this end, the Government is providing significant support to critical minerals projects. The CMPTI tax offset will be in addition to:

•

The $4 billion Critical Minerals Facility administered by Export Finance Australia, which provides financing to critical minerals projects aligned with the Critical Minerals Strategy;

•

The Northern Australia Infrastructure Facility, with $500 million earmarked for investment in critical minerals projects;

•

The Resourcing Australia's Prosperity program, which invests $566.1 million over ten years from 2024-25 for Geoscience Australia to deliver new precompetitive geoscience data, information, and decision support tools. The program will focus on mapping the critical minerals, strategic materials, and groundwater, naturally occurring hydrogen or potential sites for geological storage of hydrogen and carbon dioxide and suitable sites for renewable energy infrastructure;

•

Grants programs to support early- to mid-stage critical minerals projects; and

•

The establishment of the Australian Critical Minerals Research and Development Hub.

Future Made in Australia agenda and the CMPTI

2.10 In the 2024-25 Budget, the Government announced its $22.7 billion Future Made in Australia package. The initiatives that form part of this package are intended to create new jobs and opportunities for every part of our country by maximising the economic and industrial benefits of the move to net zero and securing Australia's place in a changing global economic and strategic landscape.

2.11 Part of this package included a National Interest Framework to guide targeted public investment into priority industries and sectors. The processing of critical minerals was identified as a priority sector under the Economic Resilience and Security stream of the National Interest Framework.

2.12 Following from this and the Critical Minerals Strategy 2023-2030, the Government announced that it would introduce a CMPTI.

2.13 The CMPTI is intended to encourage and facilitate initial investment in downstream critical minerals processing, in order to move Australia "along the value chain" from these initial stages of mining and beneficiation to further processing and refinement.

Summary of new law

2.14 Schedule 2 to the Bill establishes the CMPTI, in the form of a new refundable tax offset, the CMPTI tax offset. The amount of the offset for an eligible company is equal to 10 per cent of the eligible expenditure of the company.

2.15 The CMPTI tax offset is only available for income years that start on or after 1 July 2027, and end on or before 30 June 2040.

2.16 Broadly, a company is eligible for the CMPTI tax offset in an income year if, at all times in the income year in which it is carrying on a registered CMPTI processing activity, it is a constitutional corporation that is either a tax resident of Australia that has an ABN or is a foreign resident with an Australian permanent establishment through which the relevant production activities will be carried on and has an ABN. The company will also have to comply with any rules implementing the community benefit principles for the CMPTI made by the Treasurer.

2.17 A company may register an activity for the CMPTI tax offset by applying to the Industry Secretary. This application must be in form approved by the Industry Secretary and identify the critical mineral processing activities, the facilities at which the activity will occur, and the basis on which the company considers it will satisfy the requirements to be eligible for the CMPTI tax offset. The Industry Secretary is required to register the activity for the company where the Industry Secretary is satisfied that the proposed activities will be CMPTI processing activities, and the Industry Secretary has no reason to believe the information provided is not true, correct and complete or that the company would not satisfy the eligibility requirements.

2.18 CMPTI processing activities are processing activities carried on at one or more facilities in Australia that:

•

involve substantially transforming a feedstock that contains a critical mineral through extractive metallurgical processing into a purer or more refined form of the critical mineral that is chemically distinct from the feedstock; or

•

are specified in regulations as producing an outcome in relation to one or more critical minerals;

provided that a substantial purpose in carrying on the activity is to produce the transformed critical mineral or achieve the specified outcome.

2.19 Certain activities, including mining activities and, beneficiation are excluded from being CMPTI processing activities. The regulations may prescribe further exclusions.

2.20 The amount of the CMPTI tax offset for an income year is 10 per cent of the CMPTI expenditure of the company. CMPTI expenditure for a company for an income year is expenditure incurred by the company during the income year in carrying on one or more of its registered CMPTI processing activities that is not excluded expenditure.

2.21 The Industry Secretary has responsibility for the registration of CMPTI processing activities, and the ATO has primary responsibility for administering the CMPTI tax offset. The CMPTI tax offset is self-assessed by the eligible company and an amount is included in its income tax return in relation to an income year. This means that the ATO's general administration, dispute and compliance powers and functions apply in relation to the CMPTI tax offset. Several amendments are made to ensure these powers are fit for purpose for the administration of the CMPTI.

Detailed explanation of new law

Part 1 - Main amendments

2.22 The CMPTI tax offset is a refundable tax offset for expenditure incurred in carrying out registered CMPTI processing activities.

2.23 The amount of the CMPTI tax offset for an income year is equal to 10 percent of CMPTI expenditure incurred by an eligible company in that income year, subject to any reduction that may occur if an entity does not comply with the implementing the community benefit principles for the CMPTI.

2.24 However, the CMPTI tax offset is only available in relation to a particular processing activity for a period of up to 10 income years during the period starting on 1 July 2027 and ending on 30 June 2040.

[Schedule 2, item 1, section 419-1, paragraph 419-5(1)(b) and section 419-10 of the ITAA 1997]

Eligibility requirements

2.25 A company is entitled to the CMPTI for an income year if it meets the following requirements:

•

it is a constitutional corporation;

•

the income year;

-

starts on or after 1 July 2027; and

-

ends on or before 30 June 2040;

•

it carries out one or more CMPTI processing activities for which it is registered within the income year;

•

it incurred CMPTI expenditure for the income year through carrying out one or more of these processing activities;

•

it is not an exempt entity;

•

if rules implementing the community benefit principles for the CMPTI apply to the company for that income year - the company meets the conditions specified in those rules; and

•

it satisfies the relevant residency requirements during the income year.

[Schedule 2, item 1, subsection 419-5(1) of the ITAA 1997]

2.26 These eligibility requirements are discussed further in turn. For the purpose of this discussion, we have separated the requirements relating to the company, the requirements relating to the activity and the requirements relating to the period.

2.27 Many core eligibility concepts for the CMPTI tax offset are identified using the acronym "CMPTI". These include:

•

CMPTI tax offset

•

CMPTI processing activity

•

Registered CMPTI processing activity

•

CMPTI expenditure

Constitutional corporation

2.28 The first requirement for the company is that it must be a constitutional corporation. A constitutional corporation is defined in subsection 995-1(1) as a corporation to which paragraph 51(xx) of the Constitution applies, or a body corporate that is incorporated in a Territory.

[Schedule 2, item 1, paragraph 419-5(1)(a) of the ITAA 1997]

2.29 Entities that are not corporations cannot be constitutional corporations and will never be entitled to the CMPTI tax offset. A constitutional corporation may be eligible for the CMPTI tax offset for an activity it is carrying on through an unincorporated joint venture. However, the corporation would only be eligible for the CMPTI tax offset for expenditure it incurred. It cannot claim the tax offset for expenditure incurred by other participants in the unincorporated joint venture.

2.30 In some cases, a company may be a member of a consolidated group for tax purposes. If a member company is a constitutional corporation and satisfies all of the other requirements to be eligible for the CMPTI tax offset, the head entity for the group will be able to claim the tax offset in respect of the member's entitlement.

Community benefit principles

2.31 The second requirement for the company is that it must have complied with the rules implementing the community benefit principles for the CMPTI made by the Treasurer (referred to as the CMPTI community benefit rules) that apply to the company during the income year.

[Schedule 2, item 1, paragraph 419-5(1)(f) of the ITAA 1997]

2.32 The community benefit principles are the principles set out in the Future Made in Australia Bill 2024. For grants programs and other spending initiatives that are designated Future Made in Australia supports, the Future Made in Australia Bill requires decision makers to have regard to these principles in deciding whether to provide these supports, allowing appropriate enforcement of community benefits.

2.33 While the CMPTI tax offset is provided through the tax system rather than being a spending initiative, it has been designed with regard to the community benefit principles. This includes providing for the making of rules implementing the community benefit principles in the context of the CMPTI tax offset.

2.34 The rules implementing the community benefit principles for the CMPTI are made by the Treasurer (or another Treasury Minister) by legislative instrument and specify conditions that must be met for a company to be eligible for the CMPTI tax offset for an income year.

[Schedule 2, item 1, paragraph 419-145(1)(a) of the ITAA 1997]

2.35 The rules may also specify that the amount of the critical minerals production tax offset that a company is entitled to for an income year is reduced by a specified amount or proportion if the company does not comply with specified requirements in the rules.

[Schedule 2, item 1, subsection 419-10(2) and paragraph 419-145(1)(b) of the ITAA 1997]

2.36 As the rules will need to be strict requirements, they may require regular updating to address current and emerging circumstances. Given this, it is not considered feasible to include the requirements in primary law. However, the rules will be subject to disallowance and sunsetting after 10 years and will therefore be subject to appropriate parliamentary scrutiny.

2.37 It is anticipated the rules implementing the community benefit principles for the CMPTI may involve requiring that entities arrange for the certification of their activities by expert bodies that their activities meet certain requirements, with the ATO needing to confirm the fact of that certification.

2.38 In making the rules, the Treasurer must have regard to the community benefit principles set out in the Future Made in Australia Act 2024. Further, when having regard to those principles, the Treasurer is required to treat the critical minerals production tax offset as if it were Future Made in Australia support within the meaning of the Future Made in Australia Act 2024. Given this, the Treasurer may only make rules implementing the community benefit principles for the CMPTI after the Future Made in Australia Bill 2024 has received royal assent and commenced.

[Schedule 2, item 1, paragraph 419-145(1)(a) and subsections 419-145(2), (3) and (4) of the ITAA 1997]

2.39 This ensures that the requirements under these rules are aligned with the requirement relating to community benefits for other support under the Future Made in Australia agenda despite the differing legislative context.

2.40 For further details on the community benefit principles, please see the Explanatory Memorandum to the Future Made in Australia Bill 2024.

Residency and income requirements

2.41 The third and fourth requirements for a company to be eligible for the CMPTI tax offset relate to the residency of the company and its income tax treatment.

2.42 A company will satisfy the residency requirements to be eligible for the CMPTI tax offset if at all times during the income year during which its registered CMPTI processing activities are carried on, either:

•

it is an Australian tax resident, has an ABN and is carrying on the activity; or

•

it is a foreign resident with a permanent establishment in Australia through which the registered CMPTI processing activities are carried on, and has an ABN.

[Schedule 2, item 1, subsection 419-5(2) of the ITAA 1997]

2.43 A permanent establishment is defined in subsection 6(1) of the ITAA 1936 as a place at or through which the person (including a company) carries on any business (excluding some arrangements where the person carries out the business through a broker or agent, or where the place of business is maintained solely for the purpose of purchasing goods or merchandise).

2.44 A company will satisfy the requirement relating to its income tax treatment for an income year provided that it is not an exempt entity. An exempt entity is defined in subsection 995-1(1) of the ITAA 1997 as, broadly, an entity all of the income of which is exempt from income tax. An indicative list of exempt entities is set out in section 11-5 of the ITAA 1997. This requirement ensures that companies whose income is not subject to income tax cannot access the CMPTI tax offset.

[Schedule 2, item 1, paragraph 419-5(1)(e) of the ITAA 1997]

2.45 The combined effect of these requirements is that any income from the processing activities for which the company is eligible for the CMPTI tax offset must be subject to Australian tax, either as the activities of an Australian resident or as activities carried on through a permanent establishment in Australia.

Registered CMPTI processing activities

2.46 For a company to be eligible for the CMPTI tax offset for an income year there must be one or more CMPTI processing activities registered for the company for the income year.

[Schedule 2, item 1, paragraph 419-5(1)(c) of the ITAA 1997]

2.47 An activity is a registered CMPTI processing activity for a company if either:

•

the activity is registered for the company and the registration is in force for the company and the income year, or

•

the registration of the activity is transferred to the company, and the registration is in force for the company and the income year.

[Schedule 2, item 1, subsection 419-35(1) of the ITAA 1997]

2.48 For an activity to become a registered CMPTI processing activity for a company, the company (the applicant) will need to apply to the Industry Secretary, in the approved form, to register the relevant activities. The application must include:

•

details of the activity and each facility where the activity is to be carried on;

•

confirmation that the applicant is the legal entity that is, or will be, carrying on the activity to which the application relates; and

•

the basis on which the applicant considers that they satisfy the eligibility requirements to claim the CMPTI tax offset in relation to the activity.

[Schedule 2, item 1, paragraphs 419-35(2)(a), (b), (c) and (d) of the ITAA 1997]

2.49 The application must additionally be accompanied by any other information, documents or materials (if any) as required by the approved form. The applicant must also pay any application fee prescribed by the regulations.

[Schedule 2, item 1, subsection 419-150(2) and paragraph 419-35(2)(g) of the ITAA 1997]

2.50 The Industry Secretary may request additional information from the applicant about their application. To ensure that an appropriate decision is based on complete information, the Industry Secretary does not need to consider the application while waiting for the applicant to provide this information.

[Schedule 2, item 1, paragraph 419-80(1)(a) and subsection 419-80(3) of the ITAA 1997]

2.51 The Industry Secretary must register an activity for a company if:

•

they are satisfied that the activities are CMPTI processing activities (the requirements for an activity to be a CMPTI processing activity are discussed at paragraphs 2.106 to 2.146; and

•

they have no reason to believe that:

-

the information in the application is not true, correct and complete; or

-

the applicant will not satisfy the eligibility requirements to claim the CMPTI tax offset for the income year.

[Schedule 2, item 1, paragraphs 419-35(2)(e) and (f) of the ITAA 1997]

2.52 Effectively, the Industry Secretary will register activities that are CMPTI processing activities unless there are reasons to doubt the correctness of the information provided or the Industry Secretary is not satisfied the company would be eligible for the CMPTI tax offset for the registered activity. The Industry Secretary does not have the power to register an activity for a company unless the requirements set out in paragraph 2.51 are met.

2.53 An activity is not a general statement of a company's purpose in undertaking processing ('the production of lithium hydroxide from spodumene') or vague description of the metallurgical processes being used. Instead, what is registered is the specific processing activity being described, based on a detailed outlined of what processes are being undertaken and the facilities at which they are being carried out.

2.54 Departures from what is described will mean that the activity being carried out is not the registered CMPTI processing activity (unless the registration is appropriately varied).

2.55 The Industry Secretary must provide written notice to the applicant and the Commissioner of their decision about whether to register the activities. If the Industry Secretary does register the activities identified in the application, the notice must include a certificate of registration, which includes:

•

the registered company's name and ABN;

•

the day the certificate is issued;

•

a description of the registered activity and of each facility where the activity is to be carried on; and

•

any other matters (if any) required by the regulations.

[Schedule 2, item 1, section 419-40 of the ITAA 1997]

2.56 After the Industry Secretary has registered the activities for the company, registration is ongoing. Unless registration of an activity is suspended or revoked, the registration will only cease at the end of the 10-year period for which the CMPTI tax offset is available for the activity. This eligibility period is discussed in paragraphs 2.195 to 2.214.

Requests for information about transfers, variations or the exercise of discretions

2.57 Similar to their power to request for information in relation to an application for registration of an activity, the Industry Secretary can request a company, applying for the variation or transfer of the registration of an activity or the exercise of the discretion to accept late material, to provide further information about the relevant activity. The request may require the information to be given in a form approved by the Industry Secretary at any time.

[Schedule 2, item 1, paragraphs 419-80(1)(b) to (d) and (4) of the ITAA 1997]

2.58 Consistent with application for registration, there is no time limit within which a company must respond to such a request. However, the Industry Secretary does not need to consider the relevant application while waiting for the information requested.

[Schedule 2, item 1, subsection 419-80(3) of the ITAA 1997]

Requests for further information after registration

2.59 The Industry Secretary may also request a company that has a registered CMPTI processing activity to give specified information, or specified kinds of information, about the registration in a form approved by the Industry Secretary.

[Schedule 2, item 1, subsection 419-80(2) of the ITAA 1997]

2.60 Upon receiving a request, the registered company must then provide this information within 30 days from the day of the request, or within a longer period as the Industry Secretary may allow.

[Schedule 2, item 1, paragraphs 419-80(2)(a) and (b) of the ITAA 1997]

2.61 A failure to comply with a request for information within the required period will result in the automatic suspension of registration of the related activity.

[Schedule 2, item 1, paragraph 419-65(1)(b) of the ITAA 1997]

2.62 If this failure continues until the end of the first income year to conclude more than 60 days after this suspension has effect, then the registration of the activity will be revoked for the income year in which the request was received and all subsequent income years.

[Schedule 2, item 1, subsection 419-70(2) of the ITAA 1997]

2.63 However, the company can apply to the Industry Secretary, in the form approved by the Industry Secretary, to accept the late material. Upon receiving this application in the approved form, accompanied by the prescribed fee, the Industry Secretary has the discretion to accept the late material if they are satisfied that this delay is the result of exceptional circumstances that were beyond the registered company's control. The result of the Industry Secretary accepting that late material is that the registration of the company will be treated as never having been revoked.

[Schedule 2, item 1, subparagraph 419-70(3)(a)(ii) and paragraphs 419-70(3)(b) to (e) of the ITAA 1997]

2.64 A request for further information must state that registration may be suspended or revoked if the request is not complied with.

[Schedule 2, item 1, subsection 419-80(2) of the ITAA 1997]

2.65 This power intends to maintain the integrity of the registration process by ensuring that registrations remain current. If the Industry Secretary becomes aware of any developments relevant to a company's registration (for example if the registered activity will be carried on at a different facility from the one identified in the registration), this power will assist the Industry Secretary to make an appropriate decision in relation to the registration (for example, to vary or revoke the registration as described at paragraphs 2.88 to 2.92 and 2.80 to 2.87).

Annual reporting requirements

2.66 A company for which an activity is a registered CMPTI processing activity for an income year must provide the Industry Secretary with an annual report. The report mut be provided within the period determined by Industry Secretary by legislative instrument. The reporting period for an income year must start at the end of the income year and cannot end for at least 30 days.

[Schedule 2, item 1, subsections 419-45(1), (4) and (5) of the ITAA 1997]

2.67 The report must be prepared in the form approved by the Industry Secretary which may require the report to include:

•

any specified information relating to the outputs of activity for the income year;

•

any specified information relating to the expected outputs of the activity for the next income year; and

•

any significant events that could affect the company's entitlement to the CMPTI tax offset or the registration of the activity and either occurred during the income year or are expected in the next income year.

2.68 The report must also contain any other information (if any) prescribed by the regulations. Due to the complexity and range of minerals processing projects, this flexibility will assist maintaining the integrity of the CMPTI tax offset by ensuring that the full breadth of considerations that may affect a company's eligibility is reported through this mechanism for DISR's consideration.

[Schedule 2, item 1, subsections 419-45 (2) and (3) and section 419-150 of the ITAA 1997]

2.69 The report should also contain any other information, documents or other materials as required by the Industry Secretary.

[Schedule 2, item 1, subsection 419-150(2) of the ITAA 1997]

2.70 Broadly, the information in the report on outputs and expected outputs will allow DISR (and the ATO when considering whether expenditure is CMPTI expenditure) to understand the nature and scale of the processing activities. The specified matters may include technical matters such as the average chemical composition of outputs, practical matters such as the volume of outputs and commercial matters such as the details of offtake arrangements.

2.71 The information in the report on significant events will inform DISR and the ATO about developments that may materially affect the processing activities and resulting tax offset claims. In this context, 'significant' is to be understood in light of the materiality of the event to the registration of the activity or entitlements to the CMPTI tax offset. The sorts of events that the Industry Secretary may determine to be significant include substantial changes in processing activities or outputs, changes in ownership arrangements, events that would substantially affect production levels, or events that would require the facility to be placed into care and maintenance.

2.72 If a registered company fails to provide the annual report to the Industry Secretary within the period determined by the Industry Secretary, its registration is automatically suspended. Suspension is effective until the annual report is provided, containing the information documents and materials outlined in paragraphs 2.67 to 2.69. Until this suspension is lifted, the company is not eligible to claim the CMPTI tax offset for the current income year and future income years.

[Schedule 2, item 1, paragraph 419-65(1)(a) of the ITAA 1997]

2.73 If the registered company has failed to provide the report for an activity by the end of the income year during which the report is due, its registration for that activity will be automatically revoked with effect for that income year and subsequent income years.

[Schedule 2, item 1, subsections 419-70(1) and 419-75(2) of the ITAA 1997]

2.74 The company will be ineligible to claim the CMPTI tax offset for an activity after its registration for that activity has been revoked. Nevertheless, the company can still apply for re-registration of that activity for future income years. It will need to follow the same application process for first-time registrations.

2.75 However, the Industry Secretary may treat a late annual report as being received within time in the same circumstances as is possible for a late response to a request for information - see paragraph 2.63. If the Industry Secretary exercises this discretion, the registration of the activity is treated as if it was never revoked.

[Schedule 2, item 1, subparagraph 419-70(3)(a)(i) and paragraphs 419-70(3)(b) to (e) of the ITAA 1997]

2.76 Once received, the Industry Secretary must provide the Commissioner with a copy of each annual report.

[Schedule 2, item 1, subsection 419-45(6) of the ITAA 1997]

Industry Secretary must annually advise the Commissioner about registered CMPTI processing activities

2.77 Based on all the information that the Industry Secretary has about a company's registration of a registered CMPTI processing activity for an income year, including the annual report, the Industry Secretary must for each income year, advise the Commissioner in relation to each registered CMPTI processing activity whether, in relation to the income year:

•

the activity is being carried on in accordance with the registration;

•

the company for which the activity is registered is carrying on any CMPTI processing activities during the income year that are not registered CMPTI processing activities; and

•

the company for which the activity is registered is carrying on any other activities that the Industry Secretary considers may be relevant to the Commissioner's administration of the CMPTI tax offset.

[Schedule 2, item 1, section 419-85 of the ITAA 1997]

2.78 This advice could be based on information from sources including the annual report by the company for which the activity is registered, any applications for registration, the transfer of a registration or the variation of a registration from the company, and any materials received from the company following a request for further information.

2.79 This advice will inform the Commissioner about whether the company is carrying on activities for which it may claim the CMPTI tax offset in an income year. It will also alert the Commissioner to processing activities that the company may be carrying on that are not registered to assist in ensuring that expenditure relating to such ineligible activities is not included when working out the CMPTI tax offset. However, advice provided is not conclusive proof that the activity is an eligible CMPTI processing activity.

Revoking a registration

2.80 In addition to the automatic suspension and revocation due to a failure to provide an annual report or a failure to provide requested information, the Industry Secretary has a discretion to revoke the registration of an activity.

2.81 The Industry Secretary may revoke all registration of an activity for a company or companies from the date the activity was originally registered if the Industry Secretary satisfied that:

•

the registration was based on untrue, inaccurate or incomplete information;

•

the registration was obtained by fraud or serious misrepresentation; or

•

no company was ever entitled to be registered for the activity.

[Schedule 2, item 1, subsections 419-70(4) and 419-75(1) of the ITAA 1997]

2.82 These are all cases where the initial registration should never have been granted. In such a case the company for which the activity is currently registered, and all other previous companies for which the activity was registered are treated as if the activity was never registered. If any company (including companies for which the activity was previously registered) has previously claimed the offset, the Commissioner will vary that company's past income tax assessments and recover any payments made or additional tax owning.

2.83 The Industry Secretary may also revoke the registration of a company with effect from the income year if the Industry Secretary either:

•

is satisfied that the company provided information relating to its registration that was fraudulent or involved a serious misrepresentation; or

•

reasonably believes that the registration for the income year is not based on accurate and complete information or that the company does not satisfy the requirements to be entitled to a CMPTI tax offset in relation to the activity and the income year.

[Schedule 2, item 1, subsections 419-70(5) and subsection 419-75(2) of the ITAA 1997]

2.84 In these cases, the revocation decision has effect for the income year during which the information was provided or to which the belief relates and subsequent income years.

2.85 However, the past registration of the activity continues to be recognised for the purposes of administrative and judicial review processes, as well as the rules relating to revocation, including the notice requirements. This ensures that companies are entitled to notice and effective review of any decision to revoke the registration of an activity for that company.

[Schedule 2, item 1, subsections 419-75(3) of the ITAA 1997]

2.86 After deciding whether to revoke a registration, the Industry Secretary must then provide written notice of their decision to any company that holds or held a registration affected by the decision and the Commissioner within 30 days of the day the decision was made.

[Schedule 2, item 1, subsection 419-70(6) of the ITAA 1997]

2.87 If registration of an activity is revoked, the company may still apply to re-register the activity through the same application process for first-time registrations. However, the registration of the activity will still end at the end of original 10-year period that applied, or would have applied, when the activity was first registered for any company.

[Schedule 2, item 1, paragraph 419-50(4)(b) and subsection 419-50(5) of the ITAA 1997]

Varying the registration of an activity

2.88 The Industry Secretary may vary the registration of an activity for a company.

2.89 The Industry Secretary may do so either at their own initiative, or if the company applies in the form approved by the Industry Secretary, accompanied any information, documents or materials the Industry Secretary may require and any required fee.

[Schedule 2, item 1, subsections 419-60(1) and (2) of the ITAA 1997]

2.90 When deciding whether to vary a registration, the Industry Secretary must have regard to any proposed changes, any matters prescribed by regulations and any other matters that the Industry Secretary considers relevant. For a decision made in response to a request for an amendment, the Industry Secretary must also consider if the information provided together with the application is true, correct and complete. Registrations may need to be varied for a wide array of reasons. Due to the complexity and range of critical minerals processing activities, it is not feasible to include all relevant matters in the primary law, as industry may evolve over time. However, such matters may still be integral in making the decision to vary a registration and therefore require clarification in the law to ensure appropriate policy outcomes.

[Schedule 2, item 1, subsection 419-60(3) of the ITAA 1997]

2.91 In general, it is expected that the Industry Secretary would decide to vary the registration of an activity if the Industry Secretary is satisfied that the activity as varied would be entitled to registration.

2.92 The Industry Secretary must provide notice to the applicant and the Commissioner about any decision to vary the registration of an activity or any decision to reject an application to vary the registration of an activity.

[Schedule 2, item 1, subsections 419-60(4) and (5) of the ITAA 1997]

Transferring a registration

2.93 A company (the acquirer) can apply for the transfer of the registration of another company's (the disposer) activity, if:

•

it acquires one or more of the facilities used by another company to carry on the registered CMPTI processing activities;

•

the acquirer commences carrying on the activity at the facilities after the activity's registration as CMPTI processing activity has come into force; and

•

the disposer has ceased carrying on that activity.

2.94 The effect of transferring registration is that the activity ceases to be registered for the disposer and becomes registered for the acquirer. Where a transfer occurs part way through an income year, each entity may claim the CMPTI tax offset for their respective expenditure incurred in carrying on the activity while it was a registered CMPTI processing activity for that entity. Where a transfer occurs part way through an income year, each entity must also separately prepare an annual report.

2.95 If the disposer's registration of the activity has not come into force, for example, it has not made a choice to commence the 10-year period, the acquirer should apply to register the activity under the process for initial registrations discussed in paragraphs 2.48 to 2.51.

[Schedule 2, item 1, subsections 419-55(1) of the ITAA 1997]

2.96 The application for a transfer of a registration must be made in the approved form and within the period determined by the Industry Secretary by legislative instrument. This period must commence on the day of the acquisition and must continue for at least 30 days.

2.97 The application must include the same information as is required in an application for first-time registrations, as described in paragraph 2.48. The application also needs to identify the acquirer as the legal entity that is or will carry on the activities for which registration is to be transferred and must also be accompanied by any additional information, documents or other materials the Industry Secretary may require as well as any prescribed fees.

[Schedule 2, item 1, paragraphs 419-55(2)(a) to (d) and (f), subsection 419-55(3) and section 419-150 of the ITAA 1997]

2.98 The Industry Secretary has the same power to request information in relation to a transfer application as for applications for registration - see paragraph 2.50.

[Schedule 2, item 1, paragraph 419-80(1)(b) of the ITAA 1997]

2.99 Similar to applications for registrations, the Industry Secretary must transfer the registration of relevant activities to the acquirer if they have no reason to believe that:

•

the information provided by the acquirer is not true, correct and complete; or

•

the acquirer will not satisfy the eligibility requirements to claim the CMPTI tax offset in relation to the activity.

[Schedule 2, item 1, paragraph 419-55(2)(e) of the ITAA 1997]

2.100 The Industry Secretary must provide written notice of their decision on an application to transfer the registration to the acquirer, disposer and the Commissioner. If the Industry Secretary does decide to transfer the registration, this notice must also include a certificate of registration that reflects the transfer.

[Schedule 2, item 1, subsections 419-55(4) and (5) of the ITAA 1997]

2.101 Transferring the registration of an activity from one company to another does not refresh the 10-year entitlement period for the CMPTI tax offset in relation to those activities. The acquirer will be entitled to the remainder of the 10-year period from the original CMPTI commencement date. This applies to registered activities that have been transferred multiple times.

[Schedule 2, item 1, paragraph 419-50(4)(a) and subsection 419-50(5) of the ITAA 1997]

Disregarding registrations

2.102 In some cases, one company may be paid by another company to undertake processing activities. Both companies will incur expenditure - the first company on undertaking the processing activity and the second company on paying the first company.

2.103 Were both companies able to claim the CMPTI tax offset, there would be a double benefit for the same expenditure.

2.104 To address this, the amendments provide that the registration of an activity for a company will be disregarded for an income year if it is paid by another entity for carrying on the activity and the activity is or could be a registered CMPTI processing activity for the other entity or any constitutional corporation with which it is connected or affiliated, or of which it is an affiliate within the meaning of the income tax law.

2.105 The size and timing of the payment is not relevant for this purpose.

[Schedule 2, item 1, section 419-105 of the ITAA 1997]

CMPTI processing activities

2.106 The key requirement for an activity to be a registered CMPTI processing activity is the Industry Secretary must be satisfied that it is a CMPTI processing activity.

2.107 A CMPTI processing activity is:

•

a processing activity that is carried on at one or more facilities in Australia;

•

that either:

-

involves the substantial transformation of a feedstock containing a critical mineral through extractive metallurgical processing into a purer and chemically distinct form of the critical mineral, and a substantial purpose for carrying on the activity is to achieve this transformation; or

-

relates to critical minerals, is of a kind prescribed by the regulations, produces an outcome of a kind as prescribed by the regulations, and a substantial purpose for carrying on the activity is to achieve this prescribed outcome; and

•

is not an excluded activity.

2.108 While what constitutes a CMPTI processing activity will need to be considered in light of the particular facts and circumstances, it is a purposive concept. In many cases individual steps in a processing activity in the overall process may not individually satisfy the requirements, but the requirements apply to the overall processing activity, not each individual step.

[Schedule 2, item 1, subsections 419-20(1) and (2) of the ITAA 1997]

Processing activity carried on at one or more facilities located in Australia

2.109 To be a CMPTI processing activity, an activity must be a processing activity carried on at one or more facilities in Australia.

[Schedule 2, item 1, subsection 419-20(1) of the ITAA 1997]

2.110 "Processing activity" is not defined, and has its ordinary meaning as, broadly, a systematic set of actions to treat, prepare or modify an input for a particular end.

2.111 The phrase "carried on" is used frequently in the taxation law and it is intended that its established interpretations in other contexts will apply here.

2.112 "Facility" is not defined and is intended to take its ordinary meaning. In this context it means a physical location utilised for a particular purpose, here being processing activity. A singular facility may also host more than one registered CMPTI processing activity.

2.113 In this context, "Australia" includes Norfolk Island, the Coral Seas Islands, Ashmore and Cartier Islands, Christmas Island, Cocos (Keeling) Islands, Heard and McDonald Islands, and the coastal seas of Australia, but will not include any other external Territory - see section 960-505 of the Act and sections 2B and 15B of the Acts Interpretation Act 1901.

Substantial transformation through extractive metallurgical process and the regulation-making power

General definition

2.114 Only specified kinds of processing activities will qualify as CMPTI processing activities.

2.115 To satisfy the general definition, first, the activity must relate to a feedstock, a thing that is being processed, and this feedstock must contain a critical mineral.

2.116 Second, the processing activities must be a form of extractive metallurgical processing - that is the activity must be directed towards obtaining the critical minerals contained in the feedstock.

2.117 Thirdly, the activity must involve the substantial transformation of the feedstock into a purer or more refined form of the critical mineral. As a result, the outputs of the processing activity must be chemically different to the feedstock and at least one of the outputs must contain more of the critical mineral than the feedstock.

2.118 This means that, for example, the mechanical processing of ore to remove waste rock and dirt will not qualify as there has been no chemical change in the output. It also means that, for example, a process that solely involves the transformation of spodumene-a (an ore containing lithium) into spodumene-ß (a chemically distinct form of that ore) may not on its own constitute a CMPTI processing activity, if there is no material change in the proportion of lithium in the output.^[5]

[Schedule 2, item 1, paragraph 419-20(1)(a) of the ITAA 1997]

2.119 Whether a transformation of a feedstock to an output is a substantial transformation needs to be considered in the specific metallurgical and commercial context. However, a process that simply results in an incremental one per cent increase in purity of a low purity feedstock would be unlikely to constitute a substantial transformation.

Additional activities specified in the regulations

2.120 Even if a processing activity does not meet these requirements, it will still be a CMPTI processing activity if it relates to critical minerals and is an activity of a kind prescribed in regulations.

[Schedule 2, item 1, paragraph 419-20(1)(b) of the ITAA 1997]

2.121 This power is necessary to accommodate the variety of processing activities that can occur in relation to critical minerals and that it is intended that the CMPTI tax offset incentivise, but which may not meet the general definition discussed above.

2.122 Given the range and complexity of both critical mineral and processing activities as well as the constant evolution of technology used in these activities, it is not possible to guarantee that any principle will appropriately address all processing activities being undertaken now and in the future.

2.123 Additionally, where special rules are required by the nature of the mineral in question, it is anticipated that the rules may require a level of technical detail more appropriately reserved for subordinate legislation.

2.124 This is complemented by a similar power to exclude activities, discussed below.

2.125 The regulations would be subject to parliamentary scrutiny, including disallowance and sunset after no more than 10 years.

Substantial Purpose

2.126 In addition to the other requirements, for an activity to be a CMPTI processing activity, one of the substantial purposes for carrying out the activity must be producing the substantial transformed critical mineral output outlined in paragraphs 2.114 to 2.119 or achieving the outcome prescribed in the regulations.

2.127 This does not have to be the sole or dominant purpose for carrying out the processing activity. Instead, the term 'substantial' is used in this provision in its relative sense and is intended to signify something that is real or of substance. That is, the actual outcomes of the processing activity and their significance for the company must be examined to determine if achieving the transformation or outcome is a substantial purpose.

2.128 It is sufficient if this purpose is one of a number of purposes, provided that it is a substantial purpose. This means that, for example, processing activities that produce critical minerals as one of several valuable outputs may still be CMPTI processing activities if the other requirements are met.

2.129 The mere fact that a processing activity produces a purer form of a critical mineral does not mean that this is a substantial purpose for which the activity is carried out. Instead, the production of the purer form of the critical mineral must have been a desired goal rather than an incidental consequence or by-product.

2.130 In the context of this provision, the word 'purpose' looks to the effect which is sought to be achieved, including the immediate intended result. Whether an activity is undertaken with such a substantial purpose is to be determined based on the facts and circumstances of the activity. However, given these activities are being undertaken by a company in a commercial context, the fact that an output does not produce any substantial value for the company will be strong evidence that the production of the output is not a substantial purpose of a processing activity carried on by the company.

2.131 This substantial purpose test is intended to exclude processing activities that produce critical minerals as a waste product or as an incidental by-product. For example, the production of gold may produce arsenic (a critical mineral - see paragraphs 2.132 and 2.136), which is then disposed of as a waste product. The CMPTI tax offset is not intended to incentivise such activities, as they do not advance downstream critical minerals processing.

Critical mineral

2.132 Both processing activities that meet the 'extractive metallurgical processing requirement' or which are of a kind specified in the regulation must involve a critical mineral. A "critical mineral" is a thing that is either included in the list specified in the legislation or is prescribed in regulations.

2.133 The list of minerals specified in the legislation reflects Australia's Critical Minerals List, on the website of DISR, as at 14 May 2024. Any minerals added to or removed from the Critical Minerals List after this time will not automatically result in changes to the status of critical minerals in the legislation for the purposes of the CMPTI tax offset.

2.134 This list is set out below. The listed minerals can be categorised into general critical minerals, platinum-group elements, and rare earth elements. Paragraph or sub-paragraph references in column 1 of the table below are to the relevant provisions of the Bill.

[Schedule 2, item 1, section 419-15 of the ITAA 1997]

Table 2.1 - Critical minerals list

2.135 The power for regulations to specify other things as critical minerals for the purposes of the CMPTI is required to ensure that the CMPTI tax offset can continue to be updated to reflect changing global conditions. For example, if the supply chain for another material is suddenly threatened by an unforeseen global event, it may be desirable to add that material to this list to incentivise domestic production of the material. This would ordinarily, though not necessarily, follow the listing of that mineral on Australia's Critical Minerals List.

[Schedule 2, item 1, paragraph 419-15(zf) of the ITAA 1997]

2.136 As noted above, any regulations made for this purpose will be legislative instruments, subject to requirements including tabling in both Houses of Parliament and disallowance under section 38 of the Legislation Act.

Excluded activities

2.137 However, a processing activity will not be a CMPTI processing activity if it is or includes an excluded activity.

2.138 The excluded activities are:

•

mining - that is, the process of extracting ores or other resources from the earth.

•

beneficiation - that is, the dressing or processing of ore by mechanical means such as grinding, crushing, floating.

•

manufacturing - that is, the production of goods valuable for reasons other than their mineral content (manufacturing is used with its ordinary meaning in this context, consistent which does not include refining and some other activities considered manufacturing for the purposes of the Australian and New Zealand Standard Industrial Classification (ANZSIC) code).

•

activities contrary to Australian law.

•

other activities prescribed in regulations for this purpose.

[Schedule 2, item 1, subsection 419-20(2) of the ITAA 1997]

2.139 In many cases these activities would not, in any case, involve extractive metallurgical processing or a substantial transformation of the feedstock and so would not meet the requirements to be a CMPTI processing activity. However, they have been specifically excluded to provide clarity to stakeholders and address ambiguous cases.

2.140 It does not matter if these excluded activities occur as part of a wider processing activity. If an activity involves one of these excluded activities it is not a CMPTI processing activity. For example, even if undertaken as part of a unified process, the beneficiation of ore through crushing and froth floatation prior to processing cannot be a CMPTI processing activity.

2.141 The regulation making power is included as given the range and complexity of both critical mineral and processing activities as well as the constant evolution of technology used in these activities, it is not possible to guarantee that any principle will appropriately addresses all processing activities being undertaken now and in the future. It provides a mechanism to ensure that the CMPTI tax offset does not end up supporting activities not substantially related to critical minerals processing or which are found to cause unacceptable harm to communities or the environment.

2.142 Additionally, where special rules are required by the nature of the mineral in question, it is anticipated that the rules may require a level of technical detail more appropriately reserved for subordinate legislation.

2.143 This is complemented by a similar power to include activities, discussed at paragraph 2.120.

2.144 The regulations would be subject to parliamentary scrutiny, including disallowance and sunset after no more than 10 years.

2.145 The exclusions for beneficiation and manufacturing do not apply to activities that are prescribed as CMPTI processing activities in regulations made for the purposes of these provisions. This ensures that should these exclusions give rise to ambiguity for any new forms of critical minerals processing, this can be appropriately addressed in the regulations.

[Schedule 2, item 1, paragraphs 419-20(2)(b) and (c) of the ITAA 1997]

2.146 No such exclusion is required for mining or unlawful activities which are intended to be strictly and categorically excluded, or activities excluded by the regulations, which can be addressed in the drafting of the regulations.

[Schedule 2, item 1, subsection 419-20(2) of the ITAA 1997]

CMPTI expenditure

2.147 For a company to be entitled to the CMPTI tax offset for an income year, it must have incurred CMPTI expenditure for the income year.

[Schedule 2, item 1, paragraph 419-5(1)(d) of the ITAA 1997]

2.148 CMPTI expenditure for an income year is expenditure to the extent that it is:

•

incurred during the income year in carrying on one or more of the company's registered CMPTI processing activities for the income year, at facilities specified in the certificates of registration for those activities; and

•

not excluded expenditure.

[Schedule 2, item 1, subsections 419-25(1) and (2) of the ITAA 1997]

General rules for expenditure

2.149 To be CMPTI expenditure for an income year, expenditure must be incurred by the company in that income year. It does not matter at what time the registered CMPTI processing activity to which the expenditure relates occurred, only that the activity is registered for the income year during for which the company claims the CMPTI tax offset. It does not include expenditure incurred by other entities, even if the other entity does so on behalf of the company.

2.150 When expenditure is "incurred" has an established interpretation for the purposes of taxation law, and in brief relates to when the taxpayer definitely commits themselves to the expenditure.

2.151 However, if expenditure is incurred by the company to another entity, and this transaction is not at arm's length, or if it is incurred to an associate (within the meaning of section 318 of the ITAA 1936) - such expenditure is only CMPTI expenditure if it is actually paid during the income year for which the company claims the CMPTI tax offset. Therefore, notional payments or promises to pay an amount may be insufficient. There are also additional integrity rules that apply to intra-group mark ups or non-arm's length transactions discussed below from paragraph 2.246.

[Schedule 2, item 1, paragraph 419-25(1)(b) of the ITAA 1997]

2.152 Additionally, the activity in relation to which the expenditure is incurred must be a registered CMPTI processing activity for that income year. Even if a processing activity was previously a registered CMPTI processing activity or becomes a CMPTI processing activity for a later income year, expenditure relating to the activity will not be CMPTI processing expenditure if it is incurred in an income year for which that activity is not registered.

2.153 This requirement that the expenditure is incurred in carrying on registered CMPTI processing activities makes use of concepts with established interpretation for the purposes of taxation law. To satisfy the requirement the expenditure must have a sufficient connection to the registered CMPTI processing activity.

2.154 Whether particular expenditure is incurred in carrying on the relevant company's registered CMPTI processing activity will depend upon the nature of the expenditure and the activity in question. However, in general, the costs of obtaining reagents required for a processing activity, including the costs of transporting the reagents, and of disposing of waste generated by the activity will be costs incurred in carrying on the relevant activity.

2.155 In determining an amount of expenditure incurred for the purpose of the CMPTI tax offset, the expenditure excludes the amounts paid relating to goods and services tax (GST). This replicates similar provisions in other refundable tax offsets, in particular for tax offsets for Australian film production expenditure (section 376-185 of the ITAA 1997) and for the digital games tax offset (section 378-50 of the ITAA 1997). It ensures the CMPTI tax offset is not available for amounts for which the company may be entitled to an input tax credit.

[Schedule 2, item 1, section 419-30 of the ITAA 1997]

Excluded expenditure

2.156 However, CMPTI expenditure does not include any expenditure the company incurs to the extent that the expenditure is of specific kinds, discussed below, even if this expenditure may meet the general definition.

[Schedule 2, item 1, subsection 419-25(2) of the ITAA 1997]

Capital

2.157 Expenditure is not CMPTI expenditure to the extent that it is capital, or is of a capital nature.

[Schedule 2, item 1, paragraph 419-25(2)(a) of the ITAA 1997]

2.158 Capital expenditure and expenditure of a capital nature are well-understood concepts in the taxation law. In particular, the exclusion of this kind of expenditure from being CMPTI expenditure mirrors the non-deductibility of losses or outgoings of capital, or of a capital nature, in paragraph 8-1(2)(a) of the ITAA 1997. The exclusion also picks up expenditure on capital works as dealt with in Division 43 of the ITAA 1997, such as costs to construct buildings or to make structural improvements.

2.159 As capital expenditure is typically one-off significant expenditure that precedes processing or particular processing activity, regardless of the output produced from ongoing processing activity, excluding capital expenditure ensures that the CMPTI tax offset is targeted to the ongoing and scalable expenditure of processing activity that increases the supply and export of value-added critical minerals targeted by the CMPTI tax offset.

Depreciation

2.160 Expenditure is not CMPTI expenditure to the extent that it is taken into account when calculating the decline in value of an asset for the purposes of a taxation law.

[Schedule 2, item 1, paragraph 419-25(2)(b) of the ITAA 1997]

2.161 In most cases, it is expected that expenditure taken into account in this way will be amounts used to work out the decline in value of depreciating assets under Division 40 of the ITAA 1997. However, the exclusion captures decline in value calculated for the purposes of the taxation law generally.

2.162 The exclusion of depreciation expenditure supports and serves a similar purpose to the exclusion of capital expenditure or expenditure of a capital nature. While depreciation does not involve recognition of significant upfront expenditure, the inclusion of expenditure reflecting depreciation of capital assets would nonetheless be contrary to the purpose of the CMPTI in targeting the ongoing and scalable expenditure of processing activity that increases the supply of value-added critical minerals.

Financing

2.163 Expenditure is not CMPTI expenditure to the extent that it is incurred by way of, or in relation to, the financing of registered CMPTI processing activities. Financing expenditure will take its ordinary meaning. It will include, but is not limited to, interest, payments in the nature of interest, and borrowing charges.

[Schedule 2, item 1, paragraph 419-25(2)(c) of the ITAA 1997]

2.164 The exclusion of financing expenditure supports and serves a similar purpose to the exclusion of capital expenditure or expenditure of a capital nature, and exclusion of depreciation expenditure, both discussed above. These are not the ongoing and scalable costs of directly undertaking processing activities but indirect costs linked to funding these activities.

Feedstock

2.165 Expenditure is not CMPTI expenditure to the extent that it is on feedstock.

[Schedule 2, item 1, paragraph 419-25(2)(d) of the ITAA 1997]

2.166 Feedstock, in the context of the CMPTI tax offset, has its ordinary meaning, in brief referring to the initial input containing the critical minerals used by the company to process critical minerals as part of the registered CMPTI processing activity. What will constitute feedstock in a particular case will depend on the general processes for extractive metallurgical processing of the critical mineral in question as well as the precise registered processing activity to be undertaken by a company.

2.167 However, feedstock does not include materials such as reagents or catalysts that are used in processing activities to assist in the extraction of the critical mineral but do not contain the mineral.

2.168 The legislation gives two examples of feedstock, being raw materials (such as ores or mineral concentrates) and intermediate outputs from a previous processing step.

2.169 Ores are naturally occurring resources comprising a valuable mineral or minerals, embodied in a host material made up mainly of rocky substances or sediments. Mineral concentrate, also known as ore concentrate, is the product generally produced from ore mines after basic crushing, waste removal or beneficiation or ore.

2.170 Some feedstocks will also be intermediate outputs from previous processing undertaken by another entity. An example is smelted nickel matte, which is a feedstock for the processing of pure nickel, a critical mineral. Another example is lithium battery 'black mass' which can be used as a feedstock for producing critical minerals including lithium, cobalt and nickel.

2.171 However, intermediate outputs will only be feedstock where these are acquired from another entity as the initial input to a processing activity by a company. Feedstock does not include the outputs of the company's own early-stage processing activities where the output is further processed as part of the same CMPTI processing activity. This is because in, this context, the feedstock is the feedstock for the overall activity. This is the initial input containing critical minerals. The fact that over this process the initial input is transformed a number of times does not change what the feedstock was for the overall activity.

2.172 The Australian mining industry already has highly developed capability in preparation and beneficiation of ore and mineral concentrates. As noted above, it is the intent of the CMPTI tax offset to move industry further along the supply chain, to processing activity that performs a substantial transformation of critical minerals for subsequent use in manufacturing and other critical supply chains or purposes. Accordingly, it is not the intent of the incentive to subsidise expenditure associated with mining and otherwise obtaining feedstock.

2.173 While this category of excluded expenditure does not preclude vertical integration of processing activity, and either physical or operational collocation of registered CMPTI processing activities and mining or beneficiation activities, a company that incurs expenditure in obtaining feedstock, including through mining and beneficiation, cannot claim the CMPTI tax offset for that expenditure.

Intellectual Property

2.174 Expenditure that is incurred on or in relation to intellectual property are also excluded to the extent that the expenditure on or in relation to intellectual property would constitute more than 10 per cent of the company's CMPTI expenditure for the income year. Amounts of expenditure on or in relation to intellectual expenditure constituting 10 per cent or less of a company's CMPTI expenditure may be included to the extent those amounts are CMPTI expenditure.

[Schedule 2, item 1, paragraph 419-25(2)(e) of the ITAA 1997]

2.175 Intellectual property is defined in subsection 995-1(1) of the ITAA 1997 and includes rights under a Commonwealth law as a patentee or licensee of a patent, registered design or copyright.

2.176 This cap reflects the policy intent to directly support processing activities. Intellectual property costs, such as licensing fees, should at most be a small component of the expenditure incurred on or in relation to a processing activity that increases the supply and export of value-added critical minerals. The exclusion also addresses risk integrity of the CMPTI tax offset arising from the scope for structuring of intellectual property arrangements.

Excluded by regulations

2.177 Expenditure is not CMPTI expenditure to the extent that it of a kind prescribed by the regulations.

[Schedule 2, item 1, paragraph 419-25(2)(f) of the ITAA 1997]

2.178 Similarly with other regulation-making powers created by this Division, this power is necessary to accommodate the variety of types of expenditure that may arise with the development of the critical minerals processing industry, but that it is not appropriate for the CMPTI tax offset to subsidise. This is particularly the case where the appropriate models, ownership and control structures, financial and commercial arrangements, and governance of critical minerals processing ventures, as well as the integrity risks they pose, is unclear and likely to evolve significantly over the time limited period during which the CMPTI is in effect. It is therefore, as noted above, not possible to guarantee that any principle will appropriately addresses all kinds of expenditure covered by the definition of CMPTI expenditure (discussed in paragraphs 2.147 to 2.155), undertaken now and in the future.

2.179 As noted above, the regulations would be subject to parliamentary scrutiny, including disallowance and sunset after no more than 10 years.

Apportionment of expenditure

Valuable non-critical outputs and waste

2.180 Registered CMPTI processing activities will often result in more than one output.

2.181 In many cases, one of more of these outputs will not contain a purer or more refined form of any critical mineral (a "non-critical output").

2.182 In some cases, the outputs that do not contain the critical mineral will have no value and constitute waste. There is no requirement to apportion expenditure merely because a registered CMPTI processing activity produces waste. Expenditure associated with waste arising solely from the production of a critical mineral is considered CMPTI expenditure. This recognises that the production of waste is an undesired cost, not an objective.

2.183 However, in some circumstances the non-critical outputs are not waste. A company with non-critical outputs must reasonably apportion its expenditure on the registered CMPTI processing activity between the critical minerals output and the non-critical output, if the company disposes of the non-critical output, or uses the non-critical output to produce another output that is disposed of:

•

for value; or

•

in a dealing with another entity that not conducted at arm's length; or

•

to an associate.

[Schedule 2, item 1, subsection 419-25(3) of the ITAA 1997]

2.184 The first circumstance in which the apportionment requirement will apply is where an activity involves the production of both a purer or more refined form of a critical mineral and some other valuable substance. This recognises that some part of the expenditure is attributable to the production of the valuable non-critical output. It ensures that the CMPTI tax offset is not available in respect of expenditure that is appropriately attributed to the production of that other output.

2.185 The second and third circumstances are integrity rules to ensure that companies cannot artificially inflate the value of CMPTI expenditure by structuring transactions involving non-critical outputs through non-arms length arrangements. Any disposal of a non-critical output that involves non-arm's-length dealing, or to an associate, will require the apportionment of the expenditure between all of the outputs of the registered CMPTI processing activity on a reasonable basis, with the expenditure attributable to the non-critical output being excluded expenditure.

2.186 "Arm's length" and "associate" have generally applicable definitions set out in section 995-1 of the ITAA 1997 and section 318 of the ITAA 1936 respectively.

2.187 Expenditure that is apportioned to a non-critical output is not CMPTI expenditure.

2.188 If apportionment is required, it must be done on a reasonable basis, requiring the determination of what reasonable attributable to the non-critical output. While what is reasonable will depend upon the particular facts, it will usually require consideration of the significance of each output to the expenditure being incurred (with undesirable outputs such as waste disregarded). In some cases, it may be clear that the non-critical output has no or negligible value (for example, if it is in substance waste but was provided to a related entity for disposal), and in these cases it may be reasonable to apportion little or no expenditure to the non-critical output.

Other apportionment

2.189 In addition to non-critical outputs, there will also be other cases in which a loss or outgoing is incurred where only part of the loss or ongoing relates to the carrying on of a registered CMPTI processing activity.

2.190 Since expenditure is only CMPTI expenditure to the extent that it is covered by the definition discussed in paragraphs 2.149 and 2.155 and is not excluded expenditure, it may be necessary to apportion expenditure so that the CMPTI tax offset is calculated and claimed only on that parts that relates to CMPTI expenditure. Where this is required, apportionment must be reasonable in the circumstances. Several examples of where apportionment would be required are provided here.

2.191 Expenditure may relate to one or more activities, only some of which may be registered CMPTI processing activities. Similarly, expenditure may relate to one or more CMPTI processing activities, only some of which are registered. An example of this second case is where the CMPTI processing activity extends across two income years, but only the first income year is within the 10-income-year window during which an activity may be registered for a company (registration can only continue for 10 income years - see section 419-50). The company would need to reasonably apportion expenditure and only claim in respect of that part of the expenditure that related to the activities that were registered CMPTI activities.

2.192 Where a company's expenditure relates to registered CMPTI processing activities, but some of those activities occur at a facility specified in the company's registration and some occur at another facility, the company would need to reasonably apportion expenditure and only claim in respect of that part that related to the activities the occurred at the first, registered facility.

2.193 Expenditure may relate partly to the processing of critical minerals, and also relate to the processing of valuable, non-critical outputs or byproducts of CMPTI processing activity. For example, a company's registered CMPTI processing activity in relation to certain rare earth minerals may necessarily result in recovering gold which the company also disposes of for value. In this case, the company would have to reasonably apportion expenditure and not claim in respect of so much of the expenditure as related to the processing of the gold.

2.194 Part of an amount of expenditure may be CMPTI expenditure and the rest may be excluded expenditure. The CMPTI tax offset can only be claimed in respect of the part that is CMPTI expenditure. For example, if a company incurs an amount of expenditure part of which relates to feedstock, but the rest of the amount relates to the direct costs of preparing that feedstock and using it in carrying on registered CMPTI processing activities, the two amounts must be apportioned and the amount relating to feedstock cannot be used to calculate the company's CMPTI tax offset.

Period for which the CMPTI is available

2.195 The CMPTI tax offset is available for an activity for a period of up to 10 consecutive income years.

[Schedule 2, item 1, subsection 419-50(1) of the ITAA 1997]

2.196 The company may choose that this period of registration for an activity begins either:

•

at the start of the income year in which the Industry Secretary first receives the application for registration of a CMPTI processing activity; or

•

at the start of a later income year.

[Schedule 2, item 1, subsection 419-50(2) of the ITAA 1997]

2.197 The company does not need to notify the Commissioner of this choice. However, similar to choices made for the purposes of capital gains tax, how a company completes its income tax return is sufficient evidence that is has made a choice. This means that, for example, a company claiming the CMPTI tax offset for an activity in a tax return for an income year will demonstrate that the company chose for the registration period to commence for that activity for that income year.

2.198 Any choice as to the commencement of the 10-year period is irrevocable and cannot be varied.

[Schedule 2, item 1, subsection 419-50(3) of the ITAA 1997]

2.199 The registration period expires at the end of the ninth consecutive income year following this income year. The registration period cannot be paused or extended, even if processing activities cease, the registration of the activity is transferred or the registration of the activity is suspended or revoked for some or all of the period.

[Schedule 2, item 1, subsections 419-50(1) and (2) of the ITAA 1997]

2.200 If the day that the Industry Secretary received the application that resulted in the first registration for a registered CMPTI processing activity falls in the 2028-2029 income year, and the registration holder claims the CMPTI tax offset in its tax returns for the 2028-29 year, then the last income year that the CMPTI tax offset could possibly be available in relation to that registered CMPTI processing activity would be the 2037-2038 income year.

2.201 The period commencing from the start of the income year in which the Industry Secretary first receives the application that results in registration ensures that an eligible company can claim the CMPTI tax offset for the income year in which they first submitted the application, even when the Industry Secretary does not register the activity until the following income year.

2.202 If an activity is transferred or re-registered after the original registration period had started, for example because registration for that activity was revoked for that period, then the registration:

•

comes into force at the start of the income year that includes the day the Industry Secretary receives the transfer or re-registration application; and

•

as noted above, ceases to be in force at the end of the registration period that applied when the activity was first registered - specifically, at the same time as the time the first registration of the activity under for any company would have ended if that first registration had continued for its full 10-year period.

[Schedule 2, item 1, subsections 419-50(4) and (5) of the ITAA 199 7]

Similar activities

2.203 If the Industry Secretary decides that a registered CMPTI processing activity is similar to another registered CMPTI processing activity or a previously registered CMPTI processing activity then the registration date for both activities ends at the same date - the first date the registration period for either activity would have ended.

[Schedule 2, item 1, subsection 419-50(6) of the ITAA 1997]

2.204 It is irrelevant whether the other activity is currently a registered CMPTI processing activity. It is also irrelevant whether either activity is currently being carried on.

2.205 In this context, 'similar' does not merely mean that the activity involves the same mineral or chemical process. Instead, an activity must be similar when viewed in light of the assets and facilities used or proposed to be used in carrying on the activity, the processes and operations it involved or is proposed to involve and the inputs to and outputs of the activity. If the activities are being carried on by different companies, regard must also be had to the nature of any arrangements between the companies regarding the activities. Due to the complexity and range of critical minerals processing activities, it is difficult to include all considerations that may be relevant to this decision. The ability to prescribe relevant considerations can accommodate for developments in this industry, such as advances in technology.

[Schedule 2, item 1, subsection 419-50(7) of the ITAA 1997]

2.206 Being similar means that there must be a substantial similarity between the two activities (or between one of the activities and a part of the other activity) considered across most or all of these factors. The two activities must largely involve doing the same things to the same feedstock in the same places. However, complete consistency is not necessary - the activities need only be similar, not entirely the same. In this respect the test is aligned with the similar business test for the availability of losses, set out in section 165-211 of the ITAA 1997.

2.207 On the extent to which the assets and facilities used in carrying on one activity are used in carrying on the other activity, the use of new standalone processing equipment or assets, for example, would point away from the new activity being a similar activity. Similarly, the use of existing assets and equipment, even with some modifications, would point towards it being a similar activity. The extent to which any new assets may rely on assets or infrastructure from the existing processing activity is also a relevant consideration.

2.208 On the extent to which the processes and operations undertaken as part of one activity are the same as those undertaken as part of the other activity, a new processing flowsheet, for example, would point away from being a similar activity whilst a modification to the existing processing flowsheet would point towards it being a similar activity.

2.209 On the extent of similarity between the inputs to and outputs of the activities, this factor is not directed simply toward feedstock having the same chemical composition. While the fact that inputs and outputs are substantially chemically distinct (for example if the new activity produces nickel rather than lithium) would clearly mean that the activities are not similar, the fact that the input and outputs have the same composition would not justify a conclusion that the activities are similar in this context. Instead, this factor also involves consideration of whether the materials that would have been transformed in the earlier activity are now being used in the new activity. If a batch of feedstock used in a processing activity is independent of a feedstock batch that is used in an earlier processing activity, then this would point away from it being a similar activity.

2.210 The most common case in which activities are similar activities involves a similar activity replacing the previous activity to which it is similar. However, in some cases, both similar activities may be carried on at the same time. For example, in an unincorporated joint venture involving joint processing, the activities of each participant are very likely to be similar activities.

2.211 The question of similarity may arise where one activity represents an expansion of existing processing activities. While this will need to be considered in light of the particular facts and circumstances, where an expansion is sufficiently separate and distinct from the original activity, it may well not be a similar activity in the sense that is being used here. While the nature of the process may be the same, it will have separate assets or facilities as well as distinct inputs and outputs (even if they may be the same materials).

2.212 As discussed in relation to registration, an activity is specifically constituted by the details of the processing activities that are to be carried on. This rule ensures that minor changes to these details will not result in an effective extension of the 10-year period (being in substance a variation to the earlier registration). It provides a simpler and more practical test than requiring the Industry Secretary and companies to engage exhaustively with the detail of what is registered to determine if two activities are the same activity.

Example 2.1 Example of a similar activity

In 2027-2028, Company A produces separated rare earth oxides from monazite concentrate feedstock sourced from its own mining operation. The company uses its own extractive metallurgical processing facility to produce separated rare earth oxides.

Company A applies to the Industry Secretary who makes a decision to register Company A's separated rare earth oxide processing activity as a CMPTI processing activity commencing in 2027-28. The registration is valid for 10 years until 2036-37.

In 2036-37, Company A sources monazite feedstock (essentially the same quality and chemical composition as their own mineral concentrate) from other rare earth mining companies in Australia in order to increase production levels from their facility. Only minor changes to Company A's solvent extraction process (increased temperatures and pressures) are made to produce separated rare earth oxides of an acceptable standard.

In 2036-37, Company A applies to register its modified separated rare earth oxide processing activity as a new CMPTI processing activity,. At the time of registration, the Industry Secretary determines that the modified processing activity is similar to the registered CMPTI processing activity. The Industry Secretary makes this determination as:

•

The extractive metallurgical processing line equipment used in the modified processing activity is the same equipment that is used in carrying on the registered CMPTI processing activity.

•

A new flowsheet was not required as only minor changes have been made to the solvent extraction process. The processes and operations undertaken as part of the modified processing activity are substantially the same as those undertaken as part of the registered CMPTI activity.

•

Minor changes were made to Company A's feedstock profile, however the batch of feedstock that goes into the same line equipment for the modified activity is the same batch of feedstock which is used for the registered activity.

Since the modified processing activity has been determined to be similar to the registered CMPTI processing activity, the registration end date for both activities is 30 June 2037.

Example 2.2 Example of an activity that is not similar

In 2027-2028, Company B produces lithium hydroxide from spodumene concentrate using its own extractive metallurgical processing line (Train 1).

Company B applies to the Industry Secretary who makes a decision to register Company B's Train 1 as a CMPTI processing activity from 2027-2028 with a registration end date of 30 June 2037.

In 2031-2032, Company B commences construction of a new lithium hydroxide processing line (Train 2). Train 2 uses the spodumene feedstock from the same source as Train 1. Train 2 also uses the same type of extractive metallurgical processing equipment to produce the same output as Train 1.

In 2034-2035 Company B is producing lithium hydroxide from Train 1 and Train 2.

In 2034-2035, Company B applies to the Industry Secretary for Train 2 to be registered as a new CMPTI processing activity. The Industry Secretary considers that the modified processing activity is not similar to the registered CMPTI processing activity and decides not to make a similar activity determination at this time. The relevant considerations for the Industry Secretary in reaching this decision include:

•

Although the processing line equipment used in Train 2 is the same type of equipment used for Train 1, the equipment in Train 2 is new and is not used for carrying on the activities for Train 1.

•

Although the processes and operations undertaken as part of Train 2 are the same type of processes and operations undertaken as part of Train 1, a new flowsheet for Train 2 is required as it is functionally distinct, with its processes operating separately to Train 1.

•

Train 2 uses a sub-batch of the same type of feedstock used for Train 1, however the Train 2 sub-batch of feedstock used in the Train 2 processing line equipment is not the same sub-batch that is used in the Train 1 processing line equipment. Rather than simply replacing some or all of the processing done by Train 2, the combined inputs and outputs of the two trains are now double what they were.

The Industry Secretary registers Train 2 as a registered CMPTI processing activity in 2034-35 with a registration end date of 30 June 2040.

Limited availability of the CMPTI for income years

2.213 The CMPTI tax offset is only available for income years beginning on or after 1 July 2027, and ending on or before 30 June 2040. This is true even if, as a result, the registration period for a particular registered CMPTI processing activity has been less than ten years.

[Schedule 2, item 1, paragraph 419-5(1)(b) of the ITAA 1997]

2.214 The CMPTI tax offset is intended to provide support for the establishment of the critical minerals processing industry in Australia. The limited duration of availability is intended to reward early commitment and support projects in the establishment and early processing phases.

Administration of the CMPTI

Administrative arrangements between the ATO and DISR

2.215 As discussed in paragraphs 2.46 to 2.101, the Industry Secretary will be responsible for administering the registration of CMPTI processing activities.

2.216 The Industry Secretary is defined in the ITAA 1997 as the Secretary of the Industry Department. The Industry Department is defined as the Department administered by the Minister administering the Industry Research and Development Act 1986. As of November 2024, this is DISR.

2.217 The Industry Secretary is given power to delegate, in writing, all or any of their powers under the amendments, including the powers to register CMPTI processing activities and vary registration, to an SES employee or acting SES employee, in the Industry Department. "SES employee" and "acting SES employee" are defined in the Public Service Act 1999. This power to delegate powers helps ensure that applications in relation to applications and the provision of late material can be progressed in a timely manner by persons possessing the appropriate training, skills and experience to undertake the required assessments in making these decisions.

[Schedule 2, item 1, section 419-155 of the ITAA 1997]

2.218 The Industry Secretary can also approve a form, by notifiable instrument, for the following purposes: an application to register an activity, to transfer a registration and to vary a registration, in relation to the content of an annual report about a registered CMPTI processing activity, a request for further information, an application to provide late material (the late provisions of an annual report or further information that has been requested), and an application for to review a reviewable decision by the Industry Secretary.

[Schedule 2, item 1, section 419-150 of the ITAA 1997]

2.219 The Commissioner remains responsible for administering the income tax law, including claims for the CMPTI tax offset included in the income tax return. Therefore, while the Industry Secretary is responsible for registering CMPTI processing activities, the Commissioner is responsible for determining if particular expenditure is CMPTI expenditure.

2.220 The CMPTI tax offset will generally be self-assessed, and the process for which such assessments and audits are conducted will be the same as under the existing Australian income tax law framework.

2.221 However, the Commissioner can amend the assessment given to a company in relation to the CMPTI tax offset, as appropriate, if the registration of an activity for that company has been transferred, varied, suspended or revoked. The Commissioner is not prevented by the time limits to amend assessments set out in section 170 of the ITAA 1997. As companies will be eligible to claim the CMPTI tax offset between 1 July 2027 and 30 June 2040, such flexibility is intended to maintain the integrity of this offset. Should a company's entitlement to the CMPTI tax offset change due to an alteration to their registration or de-registration, the Commissioner will be able to amend the relevant assessment accordingly.

[Schedule 2, item 1, section 419-90 of the ITAA 1997]

2.222 Companies claiming the CMPTI tax offset are subject to all of the existing tax obligations, including the requirement to keep records that explain all transactions and other acts engaged in by the company that are relevant for the purposes of the income tax law (see section 262A of the ITAA 1936). For the CMPTI, this may include, for example, the results of the output testing conducted on products.

2.223 The two regulators may each request the other to provide information they may have relating to the CMPTI tax offset, which is reasonably necessary or convenient for the administration of the offset. The other regulator must comply with this request.

2.224 This amendment ensures that the two regulators can effectively co-operate and share information to best administer the CMPTI tax offset. It does not extend to the sharing of information beyond what is necessary or convenient for the administrative of the CMPTI tax offset.

[Schedule 2, item 1, section 419-140 of the ITAA 1997]

2.225 The Commissioner must also publicly report the following information about companies that have indicated they are entitled to claim the CMPTI tax offset for an income year: the company's name, its ABN and the amount of its CMPTI tax offset for that income year. The Commissioner must report this information as soon as practicable after the second 30 June after the financial year that corresponds to the income year during which the company is entitled to claim the CMPTI tax offset.

2.226 Consistent with the arrangements for the research and development tax incentive, the Commissioner may publish information on an entity for an income year for which the entity claims the CMPTI tax offset even if the entity is later found not be entitled to the CMPTI tax offset for the income year.

2.227 The company may notify the Commissioner in the approved form if there is an error in the information, including an appropriate correction of the error. The Commissioner may make the correction publicly available at any time, Further, if the Commissioner is satisfied that the reporting of the required information is incomplete, his Commissioner at any time make publicly available other information to correct this failure.

[Schedule 2, item 15, section 3K of the TAA 1953]

2.228 This reporting serves as a transparency mechanism to maintain the integrity of the CMPTI tax offset by making public what support has been provided to which entities.

Review entitlements

2.229 Companies are entitled to administrative review of decisions made by the Industry Secretary or the Commissioner under these amendments.

2.230 For relevant decisions by the Commissioner, taxpayers' existing objection, review and appeal rights under Part IVC of the TAA 1953 will continue to apply.

2.231 No existing mechanism exists for decision of the Industry Secretary. To address this, Schedule 2 to the Bill includes amendments to provide for internal review and review by the Administrative Review Tribunal.

2.232 The process for internal review of decisions by the Industry Secretary is based on the existing provisions of the Industry Research and Development Act 1986.

2.233 Decisions made by the Industry Secretary for which review is available include decision about registering an activity, whether an activity is similar to another activity, transferring a registration, varying a registration, refusing to accept late material, revoking a registration and refusing to allow a further period to apply for an internal review.

[Schedule 2, item 1, section 419-110 of the ITAA 1997]

2.234 The Industry Secretary must provide written notice to a company when making a reviewable decision in relation to the company. This notice must notify the company of its right to have the decision reviewed. The validity of this decision is not affected by a failure of the Industry Secretary to give such notice.

[Schedule 2, item 1, subsections 419-115(1), (2) and (4) of the ITAA 1997]

2.235 The company or Commissioner may request in writing that the Industry Secretary to provide a statement of reasons for the decision. The Industry Secretary must comply with this request.

[Schedule 2, item 1, subsection 419-115(3) of the ITAA 1997]

2.236 A company may obtain internal review of a decision by the Industry Secretary by applying in the approved form. The application must be made within 28 days after the company is provided written notice of the decision or a further period as allowed by the Industry Secretary.

[Schedule 2, item 1, subsections 419-120(1) to (3) of the ITAA 1997]

2.237 The Commissioner can also apply to the Industry Secretary for an internal review. This ensures that should the ATO have any concerns, when conducting compliance activities, about the correctness of a claimant's registration, it can seek assurance that the activities on the entity's registration meet the legislative requirements of CMPTI processing discussed in paragraphs 2.106 to 2.146.

[Schedule 2, item 1, subsection 419-120(4) of the ITAA 1997]

2.238 The Industry Secretary may request the applicant to give specified information, or specified kinds of information, to the Industry Secretary about the application.

2.239 On receipt of an internal review application, the Industry Secretary must review the decision, and:

•

confirm the reviewable decision; or

•

vary the decision; or

•

set aside the decision and substitute a new decision.

2.240 An internal review decision has effect from the day the reviewable decision took effect, and there is no limitation on the matters that may be considered in the review process. The Industry Secretary may also request the applicant to provide specified information, or specified kinds of information, about the application for internal review.

[Schedule 2, item 1, subsections 419-125(1) to (3) of the ITAA 1997]

2.241 If the Industry Secretary does not complete the internal review within a 60-day period that starts on the day the Industry Secretary receives the application for review, they are taken to have confirmed the reviewable decision (the deemed decision). If the Industry Secretary has requested the applicant to give specified information, or specified kinds of information, to the Industry Secretary about the application, this period also pauses while the Industry Secretary waits for that information. However, the deemed decision is not taken to be made if the Industry Secretary confirms, varies or substitutes the reviewable decision after conducting an internal review, after the period ends and the company has not made a review application to the Administrative Review Tribunal.

[Schedule 2, item 1, subsections 419-125(4) to (5) of the ITAA 1997]

2.242 If a company remains dissatisfied after internal review, they can apply to the Administrative Review Tribunal for a review of the Industry Secretary's internal review decision.

[Schedule 2, item 1, section 419-135 of the ITAA 1997]

2.243 As a decision that is reviewable by the Administrative Review Tribunal, obligations apply to the Industry Secretary under the ART Act. In particular, section 266 of the ART Act requires that any person whose interests are affected by the decision must be given notice of the decision and their entitlement to seek review. Additionally, sections 268 and 269 of the ART Act oblige the Industry Secretary to provide reasons for a reviewable decision on request.

2.244 The availability of administrative review does not affect the entitlement of companies to seek judicial review.

2.245 Separately, the Industry Secretary must give the Commissioner written notice of the outcome of an internal review. The applicant or the Commissioner may request, in writing, the Industry Secretary to give a statement of reasons for the internal review decision. The Industry Secretary must comply with the request.

[Schedule 2, item 1, subsections 419-130(2) to (3) of the ITAA 1997]

Integrity rules

2.246 The amendments include integrity rules that operate to ensure that claimants' CMPTI expenditure is actually incurred by the claimant in carrying on one or more of their registered CMPTI processing activities and are not increased as a result of dealings with related parties.

2.247 None of these rules limits the ability of the Commissioner to apply existing anti-avoidance rules, including the general anti-avoidance rule in Part IVA of the ITAA 1936.

Expenditure not at arm's length

2.248 First, Schedule 2 to the Bill includes an integrity rule in relation to non-arms length expenditure. This rule is similar to an existing integrity rule for the research and development tax incentive in section 355-400.

2.249 As a result of this rule, the amount of expenditure incurred in carrying on a registered CMTPI processing activity or part of such an activity will be treated as being equal to the market value of what is obtained by the expenditure if:

•

the expenditure is incurred to another entity;

•

either:

-

the other entity is an associate of the company (within the meaning of section 318 of the ITAA 1936), or

-

the two entities are otherwise not dealing with each other at arms' length; and

•

the expenditure is in excess of market value.

[Schedule 2, item 1, subsection 419-95 of the ITAA 1997]

2.250 This rule will prevent non-arms length arrangements being used to artificially inflate an entity's CMPTI expenditure.

Intra-group mark-ups

2.251 Second, Schedule 2 to the Bill includes a supplementary integrity rule on expenditure a company incurs to 'group entities'. In this context a group entity is an entity that is connected with the company (within the meaning of section 328-125 of the ITAA 1997), an affiliate of the company (within the meaning of section 328-130 of the ITAA 1997) or an entity of which the company is an affiliate.

2.252 This rule provides that expenditure obtaining goods or services from a group entity will be disregarded for the purposes of the CMPTI to the extent it exceeds the actual cost to the group entity of providing those goods and services.

[Schedule 2, item 1, subsection 419-100 of the ITAA 1997]

2.253 This rule ensures that groups of entities that are able to provide goods and services within a group below the general market price cannot inflate the price of those goods and services to artificially increase CMPTI expenditure. This rule is similar to an existing integrity rule for the research and development tax incentive in section 355-415 of the ITAA 1997.

Consequential amendments and guide material

2.254 Schedule 2 to the Bill also makes a range of consequential amendments to the ITAA 1936 and the ITAA 1997. These include amendments to the ITAA 1936 to ensure that the CMPTI tax offset is treated consistently with other tax benefits for the purposes of the general anti-avoidance rule in Part IVA of the ITAA 1936. It also includes amendments to the ITAA 1997 to ensure that the CMPTI tax offset is administered under the current framework for refundable tax offsets, insert guide material and to define concepts relating to the CMPTI tax offset in the Dictionary.

[Schedule 2, items 1 to 14; subsection 177A(1), paragraph 177C(1)(be), paragraph 177C(1)(i), paragraph 177C(2)(g), subsection 177C(3), paragraph 177C(3)(cc), subsection 177C(3)(j), paragraph 177CB(1)(g), paragraph 177F(1)(g) and paragraph 177F(3)(g) of the ITAA 1936, and section 13-1, table item 27 in section 67-23, section 419-1 and subsection 995-1(1) of the ITAA 1997]

Commencement, application, and transitional provisions

2.255 Schedule 2 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives Royal Assent.

2.256 The amendments apply to income years starting on or after 1 July 2027 and ending before 1 July 2040.

[Schedule 2, item 1, paragraph 419-5(1)(b) of the ITAA 1997]

Chapter 3: Amendments relating to Indigenous Business Australia

Outline of chapter

3.1 Schedule 3 to the Bill supports the Government's Future Made in Australia agenda by amending the ATSI Act to enable IBA to leverage their capital to invest in First Nations individuals, communities and businesses. The amendments reform IBA's borrowing powers to enable greater investment in First Nations individuals, communities and businesses, and to drive First Nations economic self-determination.

3.2 Schedule 3 of the Bill gives IBA the power to borrow for a purpose in connection with their functions in accordance with the PGPA Act or where the Minister for Finance has agreed to rules prescribing the borrowing.

3.3 Schedule 3 of the Bill removes the restriction on IBA's ability to borrow in s 183 of the ATSI Act. The Bill inserts a new section 183 into the ATSI Act to enable IBA to borrow and raise money in connection with the performance of its functions.

Context of amendments

3.4 The Government's Future Made in Australia agenda in the 2024-25 Budget Papers includes initiatives to boost IBA's investment, borrowing and lending power to enable IBA to deliver on Government priorities by investing in First Nations communities and businesses and driving First Nations economic self-determination.

3.5 IBA promotes First Nations economic self-determination through lending, investment and ancillary support across its 3 activity streams - home ownership, business support, and assets and investments. These activities support First Nations people to start, grow and sustain businesses, purchase homes and invest in commercial ventures. IBA's objective is to foster self-sufficiency and long-term economic empowerment for First Nations communities across Australia.

3.6 Access to capital continues to be a significant barrier to First Nations economic development and empowerment. Without amendments to the ATSI Act, IBA is constrained in its ability to pursue opportunities to finance activities that align with Government priorities.

3.7 Enabling IBA to directly borrow, for the purposes of investing in First Nations ventures, will allow increased investment to support First Nations economic empowerment, enabling IBA to further contribute to the CTG and supporting the delivery of government priorities.

Summary of new law

3.8 Schedule 3 to the Bill amends the ATSI Act to give IBA a power to borrow money in connection with the performance of its functions where it is authorised by the PGPA Act or where the Minister for Finance has agreed to rules prescribing the circumstances and limits of the borrowing.

Detailed explanation of new law

Powers of Indigenous Business Australia

3.9 Schedule 3 to the Bill inserts a new provision into the ATSI Act to include a specific power for IBA to borrow money for a purpose in connection with IBA's functions. This is a supporting provision to provide scope to the new borrowing power under section 183 of the ATSI Act.

[Schedule 3, item 1, and section 152 of the ATSI Act]

Borrowing by Indigenous Business Australia

3.10 Schedule 3 to Bill 2024 repeals and substitutes a new section 183 of the ATSI Act. These amendments set out the conditions and circumstances under which the IBA can borrow money.

3.11 These amendments will modernise the ATSI Act by allowing IBA to borrow for a purpose connected to its functions, where the borrowing is authorised by rules agreed to by the Minister for Finance or under section 57 of the PGPA Act. These amendments provide a mechanism for IBA's borrowing powers to be tailored, whilst maintaining appropriate controls to limit financial risks.

3.12 These amendments provide a rule-making power, under which the Minister can make rules with the written agreement of the Minister for Finance, setting out the circumstances in which IBA may borrow and imposing limits or conditions on borrowing.

3.13 These amendments provide that the IBA rules prevail over written authorisations or rules made under the PGPA Act, to the extent of any inconsistency.

3.14 These amendments define 'borrow' for the purposes of this Part of the ATSI Act.

[Schedule 3, item 2, and section 183 of the ATSI Act]

3.15 Schedule 3 to the Bill repeals subsection 184(2) of the ATSI Act. This is a consequential amendment to the insertion of a new section 183 and definition of 'borrow'.

[Schedule 3, items 3 and 4, and section 184 of the ATSI Act]

3.16 Schedule 3 to the Bill enables the minister to make rules, in the form of a legislative instrument for the purposes of the Legislation Act, prescribing matters required or permitted to be prescribed, or necessary or convenient for giving effect to the borrowing power. These rules are called the Indigenous Business Australia rules. The rules will be subject to the same level of parliamentary scrutiny as regulations (including consideration by the Senate Standing Committee for the Scrutiny of Delegated Legislation), and a motion to disallow the rules may be moved in either House of the Parliament within 15 sitting days of the date the rules are tabled.

3.17 The amendments provide that the rules cannot create offences or penalties, provide arrest, entry, search or seizure powers, impose taxes, or provide for amounts to be appropriated from the Consolidated Revenue Fund. The rules can also not directly amend the text of the ATSI Act.

3.18 The amendments clarify that rules that are inconsistent with regulations made under the ATSI Act have no effect to the extent of the inconsistency, but the rules are taken to be consistent with the regulations to the extent that the rules are capable of operating concurrently with the regulations.

[Schedule 3, item 5]

Commencement, application, and transitional provisions

3.19 Schedule 3 to the Bill 2024 commences the day after Royal Assent.

[Schedule 3]

Chapter 4: Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Schedule 1 - Hydrogen Production Tax Incentive

Overview

4.1 Schedule 1 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

4.2 Schedule 1 to the Bill amends the tax law to establish the HPTI, in the form of the hydrogen production tax offset, a refundable tax offset of $2 for each kilogram of eligible hydrogen.

4.3 To be eligible for the hydrogen production tax offset for hydrogen in an income year, a company must, broadly:

•

be a constitutional corporation that is subject to tax in Australia;

•

hold the production profile (within the meaning of the Future Made in Australia (Guarantee of Origin) Act 2024) under which the hydrogen was produced, allowing it to issue the PGO certificate for the hydrogen; and

•

have complied with the rules implementing the community benefit principles for the HPTI made by the Treasurer.

4.4 Further, to be eligible for the hydrogen production tax offset for an income year, a kilogram of hydrogen must:

•

have been produced in Australia in the income year, which must have commenced on or after 1 July 2027 and ended before 1 July 2040;

•

have been produced during the offset period (the period in which the hydrogen production tax offset can be claimed) for the production profile under which it was produced and at a time when that production profile was certified by the CER for the purposes of the hydrogen production tax offset;

-

for the profile to be eligible to be certified, the facility set out in the profile must be a single site located in Australia with a production capacity at least equivalent to an electrolyser with 10 MW and a final investment decision must have been made in relation to the facility before 1 July 2030;

•

be the subject of a registered PGO certificate (within the meaning of the Future Made in Australia (Guarantee of Origin) Act 2024) for which the initial reconciliation period has expired and for which no correction notice is in force, that indicates:

-

the hydrogen has been produced with an emissions intensity of not exceeding 0.6kg of carbon dioxide for each kilogram of hydrogen; and

-

if produced using electricity from a grid, the electricity meets the grid matching requirements; and

•

be the subject of a correction notice for the PGO certificate for the hydrogen is in force.

Human rights implications

4.5 Schedule 1 to the Bill does not engage any of the applicable rights or freedoms.

4.6 The sole effect of the schedule 1 to the Bill is to provide for payments and reductions in tax liabilities to companies that produce hydrogen.

Conclusion

4.7 Schedule 1 to the Bill is compatible with human rights as it does not raise any human rights issues.

Schedule 2 - Critical Minerals Production Tax Incentive

Overview

4.8 Schedule 2 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

4.9 It implements a new refundable tax offset, the CMPTI tax offset, to support the processing of critical minerals in Australia.

4.10 The offset is only available to constitutional corporations for income year that start on or after 1 July 2027 and end on or before 30 June 2040. The amount of the offset for an eligible company is equal to 10 per cent of the CMPTI expenditure of the company.

4.11 Broadly, a company that is a constitutional corporation and not an exempt (untaxed) entity is eligible for the CMPTI tax offset in an income year if it is either a tax resident of Australia and has an ABN or a foreign resident with an Australian permanent establishment through which the relevant production activities will be carried on, and has an ABN. The company will also have to comply with any rules implementing the community benefit principles made by the Treasurer.

4.12 A company's CMPTI expenditure is its expenditure incurring in carrying on its registered CMPTI processing activities.

4.13 A company may register an activity for the CMPTI tax offset by applying to the Industry Secretary. The company registering this activity must be the legal entity that will carry out the activity. This application must be in the form approved by the Industry Secretary and identify the critical mineral processing activities, the facilities at which the activity will occur, and the basis on which the company considers it will satisfy the requirements to be eligible for the CMPTI tax offset. The Industry Secretary is required to register the activity for the company where the Secretary is satisfied that the proposed activities will be CMPTI processing activities, and the Secretary has no reason to believe the information provided is not true, correct and complete or that the company would not satisfy the eligibility requirements.

4.14 CMPTI processing activities are processing activities carried on at a facility in Australia that:

•

involve substantially transforming a feedstock that contains a critical mineral through extractive metallurgical processing into a purer or more refined form of the critical mineral that is chemically distinct from the feedstock, and the substantial purpose for carrying on the activity is to achieve this transformation; or

•

are specified in regulations in relation to one or more critical minerals and produces the outcome prescribed by the Regulations, and the substantial purpose for carrying on the activity is to achieve this outcome.

4.15 Certain activities, including mining activities or beneficiation, are excluded from being CMPTI processing activities. The regulations may prescribe further exclusions.

Human rights implications

4.16 Schedule 2 to the Bill does not engage any of the applicable rights or freedoms.

4.17 The sole effect of Schedule 2 to the Bill is to provide for payments and reductions in tax liabilities to companies that engage in specified activities.

Conclusion

4.18 Schedule 2 to the Bill is compatible with human rights as it does not raise any human rights issues.

Schedule 3 - Amendments relating to Indigenous Business Australia

Overview

4.19 Schedule 3 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

4.20 Schedule 3 to the Bill amends the ATSI Act to enable IBA to borrow and raise money in connection with the performance of its functions. IBA's functions involve driving First Nations economic empowerment through lending, investment and ancillary support across its three activity streams, home ownership, business support, and assets and investments.

Human rights implications

4.21 Schedule 3 to the Bill engages the right to self-determination in Article 1 of the International Covenant on Civil and Political Rights (ICCPR) and Article 1 of the International Covenant on Economic, Social and Cultural Rights (ICESCR).The right to self-determination, as set out in Article 1 of the ICCPR and Article 1 of the ICESCR, entails the entitlement of peoples to have control over their destiny and to be treated respectfully. This includes peoples being free to collectively pursue their economic, social and cultural development without outside interference. The right to self-determination is a collective right applying to groups of 'peoples'. The right is widely understood to be exercisable in a manner that preserves the territorial integrity, political unity and sovereignty of a country.

4.22 The right to self-determination is also contained in Articles 3 and 4 of the United Nations Declarations on the Rights of Indigenous Peoples (UNDRIP). While UNDRIP is not included in the definition of 'human rights' under the Human Rights (Parliamentary Scrutiny) Act 2011, it informs the way governments engage with and protect the rights of First Nations people. Article 18 of UNDRIP also provides that 'Indigenous peoples have the right to participate in decision-making in matters which would affect their rights, through representatives chosen by themselves in accordance with their own procedures, as well as to maintain and develop their own Indigenous decision-making institutions'.

4.23 Access to capital continues to be a significant barrier to First Nations economic development and empowerment.

4.24 Schedule 3 to the Bill 2024 will allow IBA to borrow and raise funds, providing IBA with flexibility to pursue a range investment opportunities and ultimately deploy a greater amount of finance and investment to support First Nations economic empowerment.

Conclusion

4.25 Schedule 3 to the Bill 2024 is compatible with human rights as it promotes the right to self-determination in Article 1 of the International Covenant on Civil and Political Rights (ICCPR) and Article 1 of the International Covenant on Economic, Social and Cultural Rights (ICESCR).

Attachment 1: Impact Analysis - Hydrogen Production Tax Credit

Glossary

Terminology on hydrogen

1. Executive Summary

The purpose of this Impact Assessment is to inform a decision by Government on options to support additional renewable hydrogen production and provide information on the policy and regulatory impacts of Australia adopting a production tax credit that applies to the renewable hydrogen sector, also known as a production tax incentive.

A production tax credit is a refundable tax credit provided by the Australian Government that allows the recipient to receive a direct reduction in their tax liability to the Australian Taxation Office (ATO) related to the production of the eligible product. It assists to make the eligible product more price-competitive with, in this case, non-renewable energy sources. If a recipient did not have a tax liability, they would receive a cash refund.

Problem

There are several hard-to-abate industrial sectors that require new energy sources to be decarbonised. These include ammonia and methanol production, steelmaking and the heavy transport sector. Renewable hydrogen can be a low-emissions substitute for hydrogen that is produced through emissions-intensive methods and has potential to replace natural gas in steelmaking.

Renewable hydrogen would support decarbonisation of these sectors. However, the current costs of producing renewable hydrogen make it uncompetitive compared with hydrogen produced through more emissions-intensive methods. There are two main cost barriers in the renewable hydrogen sector: the cost of electrolysers, and the input cost of renewable electricity.

There are some existing Government support mechanisms which address the capital cost of electrolysers. However, the gap between the expected sales price and levelised cost of hydrogen produced through renewable electricity is not fully addressed by these. The only measure designed to address this, the Hydrogen Headstart program, is a competitive, merit based program designed to provide grant funding to a small number of projects.

Government Objective

The Government's key objective in tackling this policy problem is to support the growth of a competitive renewable hydrogen industry and Australia's decarbonisation.

Options and Impacts

Three options are considered in this Impact Assessment:

•

Option 1: maintain the status quo and not intervening to address the cost gap of renewable hydrogen production,

•

Option 2A: introduce a Hydrogen Production Tax Incentive (HPTI) with a deadline for final investment decision (FID) by 2030, and

•

Option 2B: introduce a HPTI with deadline for commencement of production by 2033.

The second and third options involve the same design parameters, but different forms of deadlines for a project's eligibility. A deadline was considered essential to ensure that the policy achieves the intent of bringing forward new investment.

Design Considerations

The proposed production tax credit would provide a $2 refundable credit per kilogram of renewable hydrogen produced for up to ten years, between 1 July 2027 and 30 June 2040. To be eligible, a taxpayer would need to be corporation subject to income tax in Australia. Only facilities with an electrolyser or equivalent with a capacity of 10 megawatts (MW) or above would be eligible to claim the credit, and credits would only be provided for hydrogen produced with an emissions intensity of under 0.6 kilograms of carbon dioxide equivalent per kilogram of hydrogen (as certified by the Clean Energy Regulator (CER) through the Guarantee of Origin (GO) scheme).

The design parameters were informed by analysis of data available to the Government through the Hydrogen Headstart program, consideration of comparable international regimes and targeted and public consultation.

Recommendation

The three options are assessed against the problem and the Government's objectives. Option 1 - the status quo - would not produce sufficient renewable hydrogen to support decarbonisation over the long term or production at scale. The net benefits of Options 2A and 2B are then compared against the status quo and each other, finding that the greatest net benefit is expected from Option 2A.

Option 2A - introducing a HPTI with a FID deadline of 30 June 2030 - will support the development of additional renewable hydrogen production capacity to meet Australia's decarbonisation goals and support production at scale. The FID deadline will support the Government's objectives and target the policy problem of increasing production of renewable hydrogen, while incentivising the bring forward of new investment and providing greater certainty to investors regarding their project's eligibility for the HPTI during earlier stages of project development.

Consultation

Consultation was taken with industry and other relevant stakeholders prior to the announcement of the HPTI in the 2024-25 Budget. This consultation informed the design parameters that were included in the budget announcement and the consultation paper released in June 2024.

Subsequent to the announcement, public consultation was undertaken, with the public invited to submit written submissions to the Treasury between 28 June 2024 and 12 July 2024. Eighty-two written submissions were received in response.

Targeted consultation was also undertaken by the Treasury and the Department of Climate Change, Energy and the Environment (DCCEEW) with project proponents, state and territory governments, peak industry bodies and government special investment vehicles (specifically, the Clean Energy Finance Corporation (CEFC) and Australian Renewable Energy Agency (ARENA)).

Implementation

The HPTI will rely heavily on the GO scheme, which will be administered by the CER and the delivery of the credit will be through the tax system, which is administered by the ATO. Consequently, a co-administration system for implementing the HPTI via both the CER and ATO has been proposed.

Evaluation

Treasury and DCCEEW will provide advice to the Treasurer and Minister for Climate Change and Energy on the performance of the incentive.

The policy will be evaluated over time through observing the number of facilities registering to access the concession, the amount of production verified under the GO scheme, the quantity of credits accessed and feedback from the ATO and taxpayers on the administration of the tax system. The ATO will produce annual reports on the amount of incentive provided, and the GO scheme will also produce a regularly updated publicly available register.

The GO scheme will provide a transparent and verified emissions accounting framework covering hydrogen.

2. Background

In 2022, the Australian Government ('the Government') committed to a target of reducing domestic net greenhouse emissions to 43 per cent below 2005 levels by 2030, and to net zero greenhouse gas emissions by 2050 through the introduction of the Climate Change Act 2022. The Government's legislated targets gave effect to Australia's international commitment to emissions reductions under the Paris Agreement through its Nationally Determined Contribution submission - updated in 2022.

These emissions reduction targets require an urgent and substantial transformation of Australia's economy. The Government is developing sectoral plans which look beyond 2030, covering electricity and energy, transport, industry, resources, the built environment, and agriculture and land.

The Government is taking steps to reach its emissions reduction targets across these sectors through significant initiatives, including progressing priority transmission projects and accelerating investment in dispatchable energy and storage. The Government is also taking steps to reach its target of 82 percent renewable electricity by 2030, which is critical to delivering cheaper, more reliable energy in a decarbonising economy.

Reaching net zero emissions will require abatement across all sectors of the economy, and in some cases, this will require new technologies, fuels and feedstocks to emerge and to be deployed at scale.

Australia's economy includes several industrial sectors that face significant challenges to decarbonise, often referred to as 'hard-to-abate' sectors. These include the production of iron and steel, refining of mineral resources, long haul transportation (including heavy road, aviation and shipping) and production of ammonia. These sectors and activities currently rely on fossil fuel-based carbon-emitting production processes including the use of coal, gas and diesel. Decarbonising Australia's electricity grids will also require dispatchable energy solutions suited to managing seasonal renewable variability. Low carbon energy and resources markets will need to develop rapidly to facilitate the decarbonisation required of these sectors in the coming decades.

To support emissions reduction in these hard-to abate sectors, the Government has introduced the Safeguard Mechanism which will require Australia's largest carbon emitters to reduce their emissions in line with Australia's climate targets. Meeting targets under the Safeguard Mechanism will require the development and adoption of new technologies in many sectors.

For some hard-to-abate sectors, electrification will be unsuitable or impractical as a decarbonisation pathway. For such sectors, renewable hydrogen will play an important role in addressing emissions reduction in these sectors as it can directly substitute hydrogen produced through emissions intensive methods and has shown potential as a substitute for natural gas, particularly in steel-making.

2.1 Hydrogen production processes

Hydrogen can be produced through a variety of different processes with varying emissions intensities. While the end product of these processes, hydrogen, is chemically identical, colour coding language is used in the energy industry to differentiate between the different processes used to produce hydrogen and their emissions intensities.

For the purposes of this Impact Analysis, renewable hydrogen refers to hydrogen produced through methods using renewable technologies. The vast majority of renewable hydrogen that is expected to be produced over the coming decade will be through electrolysis.^[6]

The other key processes discussed in this Impact Assessment are:

•

Green hydrogen refers to hydrogen produced through renewable energy sources such as solar and wind power through electrolysis;

•

Blue hydrogen refers to hydrogen produced through natural gas (or methane) using steam methane reforming (or coal gasification), with a significant proportion of the carbon dioxide emissions created as a by-product captured and stored in deep subsurface geological formations (carbon capture and storage technology);^[7]

•

Grey hydrogen refers to hydrogen produced through natural gas (or methane) using steam methane reforming, but without the use of carbon capture and storage used to capture emissions as in the case of blue hydrogen, and

•

Black and brown hydrogen, refers to hydrogen produced through black coal or lignite (brown coal) through a process known as coal gasification.

Often, clean hydrogen refers to both 'green' and 'blue' hydrogen. However, as the International Energy Agency (IEA) notes, there are no agreed definitions for these terms internationally and this can obscure the potential emissions intensity of these processes.^[8]

The International Partnership for Hydrogen and Fuel Cells in the Economy (IPHE) has developed a standard methodology for calculating the greenhouse gas emissions intensity of different hydrogen production routes.^[9] The Government has introduced legislation to establish a domestic scheme,^[10] the GO scheme, which is aligned with the methodologies of the IPHE.

2.2 Importance of renewable hydrogen

For the purposes of this Impact Analysis, renewable hydrogen refers to hydrogen produced through methods using renewable technologies. The vast majority of renewable hydrogen that is expected to be produced over the coming decade will be through electrolysis.^[11]

Renewable hydrogen is a broader term that encapsulates all green hydrogen allowing for other production methods that use renewable technologies to produce hydrogen with little to no emissions. Other production methods that can produce renewable hydrogen include biomass conversion (which converts organic material into hydrogen)^[12] and photocatalytic hydrogen (which uses sunlight to directly split water into hydrogen and oxygen without requiring electrical energy input).^[13] While the gasification of organic material in biomass conversion may produce some emissions, it can be considered renewable if the organic material used extracts carbon dioxide from the atmosphere during growth, thereby reducing the lifecycle emissions of the process.

At present, the vast majority of projects in the pipeline to produce renewable hydrogen are those using electrolysis which is powered by electricity sourced from renewable energy (either directly, or indirectly where the project is grid-connected).

The Australian Government, working with the states and territories, released the inaugural National Hydrogen Strategy in 2019. This included a number of actions that established the early foundations for a future Australian hydrogen industry, including infrastructure assessment, review of regulatory frameworks, workforce, skills and training, and a focus on hydrogen hubs.

To build on these early activation measures, in 2024 the Australian Government released two significant policy frameworks focussed on scaling up Australia's hydrogen industry - the Future Made in Australia package through the 2024-25 Budget,^[14] and the updated 2024 National Hydrogen Strategy (National Hydrogen Strategy from hereon).

2.3 Comparative Advantage in Renewable Hydrogen

As discussed in the Future Made in Australia National Interest Framework Supporting Paper, Australia holds several key advantages that suggest it will have a comparative advantage in producing renewable hydrogen. Principally, Australia has world class renewable energy resources at prices that should be internationally competitive. This can provide Australian producers an advantage because energy costs make up more than half the cost of producing hydrogen using present-day electrolyser technology.

Australia's skilled workforce will also be advantageous to establish a domestic renewable hydrogen industry, but our clean energy workforce will need to be scaled up to meet the full potential of renewable hydrogen in Australia.

3. The policy problem

3.1 Renewable hydrogen is needed for Net Zero

Renewable hydrogen has the potential to be a low-emissions substitute for hydrogen and natural gas in several hard-to-abate industrial sectors that require new energy sources to be decarbonised. While electrification will play a significant role in the decarbonisation of several sectors in Australia, it will not be an effective or economical substitute in specific sectors, particularly those which rely on natural gas or hydrogen produced through emissions intensive production methods (sectors which hydrogen is already an important component of). These sectors currently use fossil fuels and hydrogen as a source to produce heat or require the hydrogen molecules in chemical processes.

While renewable hydrogen is potentially the most suitable solution to support decarbonisation of these sectors, the costs of producing renewable hydrogen currently make it uncompetitive compared with hydrogen produced through more emissions-intensive methods noting most hydrogen today is made using either gas or, less commonly, coal. There are two main cost barriers in the renewable hydrogen sector: the cost of electrolysers, and the input cost of renewable electricity. The cost of both of these is expected to reduce over time.

Analysis under the National Hydrogen Strategy 2024 suggests that Safeguard Mechanism facilities could drive demand of 0.03-0.3 million tonnes of hydrogen by 2030 and 0.2-0.6 million tonnes of hydrogen by 2035.^[17] The demand for hydrogen by the safeguard mechanism facilities is used as a proxy for the hydrogen required to support Australia's decarbonisation ambitions.

Potential uses for renewable hydrogen

Hydrogen is a flexible fuel, which is transportable and storable to varying degrees depending on the derivative. Hydrogen has high calorific value, good thermal conductivity and a high reaction rate. Therefore, hydrogen has the potential to replace fossil fuels in processes such as the manufacturing of steel, which currently relies on the burning of metallurgical coal and natural gas.^[18]

Analysis commissioned for the National Hydrogen Strategy 2024 identified numerous hard-to-abate sectors for which hydrogen represents a prospective decarbonisation pathway. ^[19]

Ammonia: Eighty per cent of all fossil-fuel based hydrogen producers are associated with ammonia production (with the remaining 20 per cent associated with crude oil refining).^[20] The main use of ammonia in Australia is for making fertiliser, which is essential to Australia's agriculture sector. It is also used for producing explosives. The production of ammonia, fertilisers and commercial explosives accounted for approximately 5.4 million tonnes (or 1.1 per cent) of Australia's carbon dioxide or equivalent emissions in 2020.^[21]

Iron and steel: Steel production is also responsible for significant emissions due to the reliance on fossil fuels for iron ore processing. Globally, the steel production industry (encompassing iron ore processing, as 98 per cent of iron ore is used in steel making, and steel is an alloy consisting mostly of iron, and less than 2 per cent carbon)^[22] is estimated to be responsible for 7 to 9 per cent of all greenhouse gas emissions.^[23] Australia produces almost half of the world's iron ore, making it a significant contributor to these figures.

Decarbonising this sector requires the elimination of metallurgical coal in the iron-making process and gas in high temperature heating, which electrification is ill-suited for. The use of renewable hydrogen in facilities involving direct reduced iron and electric arc furnaces is a prospective pathway for achieving this.

Alumina: Australia is the world's second largest exporter of alumina, currently producing around 20 million tonnes of alumina per year.^[24] Australia's alumina refining industry currently relies on natural gas or coal as the main source of energy for process heating requirements in refineries. Both electrification and hydrogen are potential pathways for achieving decarbonisation, with the most prospective option likely to depend on site-specific factors. The alumina refining industry produced 14.9 million tonnes (or 3.0 per cent) of Australia's carbon dioxide or equivalent emissions in 2020.^[25]

Heavy transport: Transport was responsible for 21 per cent of Australia's emissions in 2023. The decarbonisation pathways are expected to vary across different segments of the industry. For example, battery electric vehicles have emerged as the leading means of decarbonising light and medium-sized road vehicles, but it is currently unclear if battery technologies will be suitable for long-distance, heavy payload transport applications.

Support for grid-firming: Australia's future electricity system is expected to be dominated by renewable energy generation, specifically wind and solar, under the Australian Energy Market Operator's (AEMO) Step Change Scenario.^[26] However, to balance these variable power sources the grid also needs dispatchable power, such as hydropower or natural gas, which is available as needed and keeps the grid stable. AEMO, and the Government's hydrogen strategy propose that hydrogen could provide an alternative dispatchable capacity, augmenting the role of grid-scale batteries.

3.2 Renewable hydrogen is at an early development stage

Renewable hydrogen projects currently face several challenges to deployment. Most renewable hydrogen is produced through an electrolyser which is reliant on electricity generated by renewable energy. The cost of electrolysers and renewable electricity are the key drivers of upfront capital costs and ongoing production costs, respectively. First-mover projects, referring to those investing in the industry in the coming decade, face a gap between the levelised cost of hydrogen for renewable hydrogen production and its expected sales price for the foreseeable future.^[27]

Without Government support, renewable hydrogen will not be price-competitive with natural gas or hydrogen produced through more emissions-intensive production methods, to be a commercially viable substitute in hard-to-abate sectors. The need for Government intervention to focus on supporting renewable hydrogen production, over other hydrogen production methods including use of natural gas with carbon capture and storage, is discussed in greater detail in Section 4.2 (Rationale for Government intervention).

The IEA reports the hydrogen production cost from unabated natural gas was estimated at USD 0.8-5.7/kg H2 in 2023 depending on market and the cost of natural gas, while the production cost from renewable sources ranged from around USD 3.5-12/kg.^[28]

In Australia, DCCEEW's assessment of the emerging pipeline of renewable hydrogen projects suggests there remains a significant difference between the levelised cost of hydrogen produced through renewable electricity ($6-$10/kg H2) and offtake prices associated with assessed projects ($3-$7/kg H2).^[29] This assessment accords with analysis undertaken by CSIRO for the National Hydrogen Strategy 2024, which suggests the levelised cost of renewable hydrogen production through electrolysis in 2025 is expected to fall within a range of $5-$11/kg H2, depending on the electrolyser employed.^[30] Similarly, analysis from Bloomberg New Energy Finance, suggests the levelised cost of renewable hydrogen sits between $5-$10/kg H2, depending on the varying costs in electrolysers and renewable electricity, and the capacity factors across markets.^[31]

Renewable hydrogen production costs are projected to decline over the medium to long-term. Cost reductions are expected to be driven both by reductions in renewable electricity (as the biggest ongoing component of the hydrogen costs) and electrolysers.

In covering the cost of electrolyser-projects more generally, in its recently published report, Global Hydrogen Review 2024, the IEA stated:

Full development of the entire electrolyser project pipeline of almost 520 GW would achieve similar global cost reductions as in the NZE [Net Zero Emissions] Scenario. In China, global deployment at such a level would mean that the vast majority of the production from its current electrolyser project pipeline (1 Mtpa) would be cheaper than hydrogen produced from unabated coal. Globally, by 2030, more than 5 Mtpa could be produced at a cost competitive with production from unabated fossil fuels, and up to 12 Mtpa with a cost premium of USD 1.5/kg H2.^[32]

The cost of renewable electricity is projected to decline by 40 to 60 per cent by 2050.^[33] Similarly, electrolyser costs are projected to decline by 88 to 94 per cent in the same period.^[34]

However, the narrowing of the cost gap for hydrogen production will depend on a number of factors including achieving cost reductions through economies of scale in deployment. This is also noted by the IEA in its recently published review, Global Hydrogen Review 2024, where it notes the future cost evolution for low-emissions hydrogen will depend on numerous factors, 'particularly on the level and pace of deployment'.^[35]

A positive externality can arise from catalysing investment in early mover large scale projects to support workforce and supply chain development, and building experience within industry and the finance sector with large scale hydrogen projects. As such, growing a large-scale, commercially viable hydrogen industry can contribute to further cost reductions for the renewable hydrogen sector. However, achieving scale in Australia's hydrogen industry this decade is unlikely without Government intervention, due to the challenges outlined.

Further, modelling for the National Hydrogen Strategy 2024 found that in 2035 around 1 million tonnes of hydrogen produced using renewable energy or fossil fuels with substantial carbon capture and storage would be required annually in its central scenario, as part of a national net zero pathway by 2050 (not including additional hydrogen for export), and about 2 million tonnes in 2040.^[36] This target is part of a growth trajectory aligned with driving the economies of scale to drive down prices, accelerate growth and build industry experience.^[37] This has been observed in solar energy, where relevant markets became economically sustainable once production economies of scale reached a 'tipping point', particularly in China. Utility scale solar PV, operating without government assistance, is now generating attractive returns on investment.^[38]

This figure of hydrogen production, expressed as a range of 0.5-1.5 million tonnes annually by 2030 and 3-5 million tonnes annually by 2035 is used as a proxy for the growth required to support production at scale. ^[39]

Importing hydrogen would be a costly alternative to producing renewable hydrogen in Australia for domestic use. Importing renewable hydrogen would require converting hydrogen into liquid or conversion of the hydrogen into a carrier such as ammonia from the exporting destination, shipping costs to transport the product to Australia and a further process to convert the liquid hydrogen or ammonia back to hydrogen in Australia.^[40]

3.3 Existing supports do not address the gap in operating costs for sufficient producers

The Australian Government has several existing initiatives to support growth and innovation in the emerging hydrogen sector (see Appendix B for greater detail). These include funding for research and development, grants for capital and infrastructure projects and low-interest concessional finance, capital grant funding to encourage innovation and research, support for common-user infrastructure and development of appropriate regulatory frameworks. Addressing these barriers are essential foundations for industry growth, but will not, by themselves, address the cost gap impeding large-scale projects from progressing from feasibility to operation phases.

The cost gap facing these projects is driven largely by ongoing operational expenses, such as renewable electricity, which exceed the revenues these projects expect from the sale of their product in the near term. Industry consultation for the National Hydrogen Strategy 2024 reinforced that grant funding for capital projects and concessional finance are not adequate to fully close this cost gap and support early mover projects to reach large-scale production. Early mover projects face higher costs that are likely to persist over the life of the project. However, supporting these early projects will be essential to achieving economies of scale, stimulating demand for hydrogen, and strengthening domestic and international supply chains.

Market analysis, as well as industry consultation conducted for the National Hydrogen Strategy review and the design of the Hydrogen Headstart program, revealed ongoing revenue support would be necessary to address the cost gap for early mover projects. To make an early-stage project bankable, industry advised that they need cost support to cover the gap between production cost and sale price, a stable policy environment and long term offtake agreements. As a first step to addressing this barrier, the Australian Government introduced the Hydrogen Headstart program. This program will provide revenue support to a small number of early-mover, large-scale projects. It will help these projects bridge the cost gap and build experience across industry through knowledge sharing requirements. This is a competitive program with a limited budget and will otherwise not be available for wider take-up by the broader base of projects needed to scale up the industry.

While programs such as Hydrogen Headstart are essential to supporting the initial investment in the industry, greater investment in renewable hydrogen is necessary to achieve the economies of scale that will drive cost reductions over the longer term that will ultimately support the reduction of the cost gap.

This barrier could become entrenched over time if renewable hydrogen industries are established in other jurisdictions and other countries succeed in capturing early global offtake opportunities.^[41]

4. Case for government action/objective of reform

4.1 Rationale for government intervention to address decarbonisation commitments

As the IEA noted in 2020, the global pathway to net-zero emissions by 2050 "requires all governments to significantly strengthen and then successfully implement their energy and climate policies... the path to net-zero emissions is narrow: staying on it requires immediate and massive deployment of all available clean and efficient energy technologies."^[42]

Australia has demonstrated its commitment to addressing the international impacts of climate change through a number of actions, including through its role as a party to the Paris Climate Accords (the Paris Agreement).

In its most recent National Determined Contribution in 2022, Australia increased its ambition of its 2030 target, committing to reduce greenhouse gas emissions 43 per cent below 2005 levels by 2030 and reaffirmed its commitment to achieve net zero emissions by 2050.^[43] As discussed in previous sections, the Government has also demonstrated its commitment to these international obligations introducing legislation reflecting these targets in 2022 through the introduction of Climate Change Act 2022.

4.2 Rationale for Government intervention in renewable hydrogen sector specifically

As discussed in Section 3, intervention to support the development of the renewable hydrogen sector is justifiable in the context of the Government's decarbonisation agenda and domestic emission reduction targets. Beyond decarbonising existing uses of hydrogen in the economy, such as in producing ammonia, renewable hydrogen is an enabler of green manufacturing, with the potential to underpin green commodity production in a range of sectors, particularly where electrification is not an option.

Various analyses have demonstrated that, in the long-term, hydrogen produced through renewable electricity will be more cost-effective than other hydrogen production techniques. For example, Figure 1 demonstrates the costs of current technologies such as steam methane reforming using natural gas (SMR) are less than hydrogen produced through electrolysis. However, CSIRO's modelling indicates that the current high costs faced by using electrolysis technologies are expected to fall to similar, or lower, levels than those faced by SMR by around 2035. This cost reduction will depend significantly on the scale and pace of deployment, as noted in Section 3.

Figure 1: Cost Projections for Hydrogen Production

Source: National Hydrogen Strategy 2024, based on data from CSIRO 2024 Scenario modelling of the production and consumption of hydrogen in Australia. ^[44] Note: PEM =Proton exchange membrane electrolyser. AE = Alkaline electrolyser. SMR = Steam methane reforming, SMR + CCS = Steam methane reforming + Carbon Capture and Storage

The Government recognised this in the National Hydrogen Strategy 2024, noting the following:

The Australian policy landscape has subsequently shifted, with commitments to a net zero economy by 2050 and ambitious goals for emissions-reduction and renewable generation in 2030... In light of these commitments, the Australian Government has prioritised its policy efforts and financial support towards renewable hydrogen projects, which are clearly aligned with Australia's net zero goals.^[45]

The National Hydrogen Strategy 2024 also notes a number of key considerations for prioritising renewable hydrogen specifically:

•

the Australian project pipeline, based on IEA data, is overwhelmingly focussed on renewable hydrogen production projects, which is consistent with the global trend;

•

expectation of future offtake preferences for renewable hydrogen in some global market;

•

modular and scalable nature of electrolyser-based production;

•

high cost of achieving high carbon capture rates (greater than 90%), and

•

expectation that electrolyser-based production will decrease in cost compared to a relatively static cost of carbon capture and the increasing cost of fossil fuels.^[46]

Without action to enable renewable hydrogen to compete with its more emissions intensive counterparts, renewable hydrogen is unlikely to be produced at scale in Australia, limiting its availability for hard-to-abate sectors to decarbonise in the coming years.

4.3 Objective of Government intervention

Primary objective of Government intervention

The primary objective of government intervention is to narrow the gap between the cost of producing renewable hydrogen and the cost of producing emissions-intensive hydrogen, over the period during which renewable energy prices fall and renewable hydrogen production becomes cost-competitive. Closing this gap now is important, as doing so will allow the domestic industry to keep pace with growth in the international hydrogen market as well as supporting our decarbonisation commitments.

Specifically, the government intervention aims to:

•

Bring forward investment decisions in large-scale renewable hydrogen projects to make renewable hydrogen available sooner, supporting the development of an industry, and

•

Increase renewable hydrogen production over the near- and medium-term to facilitate decarbonisation, and in support of Australia's

•

long-term target to produce 15 million tonnes of hydrogen by 2050 (including milestones of 0.5 million tonnes by 2030 and 3 million tonnes by 2035).

Without the availability of a low-cost pathway to decarbonise, such as domestically produced renewable hydrogen, Australia's industry may not be able to meet its emissions reductions targets. This is especially true for high heat industrial processes, such as steelmaking. The costs of transporting, converting and storing hydrogen means it is unlikely to be commercial to import hydrogen in the short to medium term. In addition to this, the energy required to produce renewable hydrogen will prevent many of Australia's trading partners being able to decarbonise their own industries, let alone export hydrogen. This may lead to decreased production or higher costs being passed on to consumers.

Catalysing investment in early mover large scale projects will also support cost reductions by learning-by-doing, workforce and supply chain development, and building experience within industry and the finance sector with large scale hydrogen products.

Constraints and barriers to achieving the primary objectives outlined include:

•

Sustained high renewable electricity prices which could result in the cost gap not resolving over the medium term as projected;

•

Insufficient investment in renewable electricity generation and related infrastructure, such as transmission lines;

•

A slower than expected growth in demand for hydrogen and derivative products, which impacts the case for investment;

•

Unforeseen supply chain issues and price hikes in capital costs, such as for electrolysers (due to the nature of the energy transition worldwide, supply chain issues in clean energy projects are not uncommon and could cause projects, and therefore potential production, to stall), and

•

Possibility of a slower transition in the economy to invest in assets that are hydrogen powered rather than fossil fuel powered.

Further objectives of Government intervention

Early market intervention could position Australia to be a reliable global supplier of renewable hydrogen

Australia has a comparative advantage with renewable hydrogen. Australia has abundant renewable energy resources that are expected to be globally competitive. Energy costs make up a significant proportion of the costs of producing hydrogen. With early market intervention, Australia could become a competitive and leading supplier of renewable hydrogen globally.^[47]

In contrast to many international neighbours, Australia has vast renewable energy resources and land. Geoscience Australia notes that around 3 per cent of Australia's land is suitable for green hydrogen production based on access to renewable electricity and water supplies.^[48] Australia also has high-capacity-factor renewable energy. These will be enduring comparative advantages, allowing the Australian renewable hydrogen industry to be commercially viable once the period of support ends.

•

Without support, the Australian renewable hydrogen industry is still expected to have these comparative advantages in the long-term. However, with the current cost gap and a range of competitive subsidy regimes introduced in foreign jurisdictions^[49] investment is unlikely to occur at the scale required in coming years for Australia to meet our decarbonisation goals or stake its position as a supplier in the global market.

Australia's transition is not occurring in isolation. Australia's neighbours and key trading partners that rely on Australia for natural gas and coal for energy generation are also increasing efforts to meet net zero. Australian exports could play an important role in supporting decarbonisation in countries that will be reliant on importing low-emissions energy and products from other nations to meet their climate targets.

Several economies such as Japan, Republic of Korea and Germany are considering clean or low-emissions hydrogen as a key source for powering vehicles, generating electricity, powering their manufacturing sector and heating - uses that extend beyond those anticipated in Australia. In certain economies, renewably-sourced hydrogen is also one of the most commercially feasible low-emissions options for grid-firming and for decarbonising the transport sector.

Developing a renewable hydrogen industry could facilitate a comparative advantage in energy-intensive, low-emissions industries

The 2024-25 Budget National Interest Framework Supporting Paper also highlights the importance of renewable hydrogen production at scale for developing Australia's comparative advantage in energy-intensive, low-emissions industries, noting the interdependencies of multiple sectors and low-cost renewable hydrogen being a 'key enabler of commercial green metals operations.'^[50] The paper notes that building new low-emissions industries at scale requires sustainable energy and fuels (such as renewable hydrogen) to be available at-scale, and accelerating the delivery of such energy is foundational to this.^[51]

Renewable hydrogen is the most economically viable opportunity long-term for producing green metals.^[52] Using locally produced hydrogen in the production of green iron (and other green metals) can deliver cost and emissions benefits compared to a scenario where the iron ore and energy are shipped separately to international destinations. Increasing Australia's onshore value-adding of our commodity exports to produce lower embedded emissions metals is a prospective and relatively low-cost pathway to indirectly export Australia's renewable energy resources.

Global demand for green iron and steel is forecast to grow significantly by 2050. As hydrogen can provide a clean source of industrial process heat to the refining of our mineral resources, greater availability of competitively-priced renewable hydrogen would enable the export of hydrogen embodied green metals, such as iron and alumina.^[53]

The National Hydrogen Strategy 2024 drew on the economic modelling published by Accenture, which estimated Australia's renewable hydrogen industry development and related exports could contribute $28.9 billion in GDP per year and create around 33,000 direct and indirect jobs in 2040, with further economic benefits from other industries like green metals.^[54]

4.4 Alternatives to Government action

There are no alternatives to addressing the problems outlined besides Government action, due to the misalignment of commercial incentives and public interest in the case of renewable hydrogen production in the short-term.

Government intervention in the market is justified where particular market failures are present, intervention can partially or wholly address those market failures, and the benefits of such intervention outweigh the costs. A market failure exists where negative externalities from more emissions-intensive production methods are not appropriately priced into global markets, so that cleaner production methods that present lower total costs (taking into account environmental impacts) or cost effective abatement opportunities are not able to compete.

A market failure can also exist for nascent sectors where the important learnings of early movers can help those that come later to produce at a lower cost, as these learnings are not factored into the commercial benefits of the early investments. Given the presence of positive externalities, without government support, there will be an underinvestment in cleaner production methods, which slows down the learning-by-doing process and prolongs the use of more emissions-intensive production processes.^[55]

5. Policy options

Although there are several options the Government could pursue, three key options that would specifically address the problem covered above are discussed in this section. Option 1 is to not introduce further measures specifically addressing the cost gap between producing renewable hydrogen and emissions-intensive hydrogen. That is, retain the status quo. Option 2 is to introduce a HPTI consistent with the Government's announcement.

Within Option 2, two design options are considered below:

•

Option 2A is to introduce the HPTI with a FID deadline.

•

Option 2B is to introduce a HPTI with a first eligible production deadline.

Details on the net benefits and impacts of each option are considered in Section 6.

The Government announced an intention to introduce the HPTI with a FID deadline of 30 June 2030 (Option 2A). To inform the detailed design of the HPTI, the Government carried out a 2-week public consultation and two targeted consultations with stakeholders (see Section 8 below).

5.1 Option 1 - Maintain Status Quo

The Government has the option of not introducing new measures to intervene in the renewable hydrogen industry.

Existing policies already provide some support for the renewable hydrogen industry. This includes the Hydrogen Headstart Program and the Regional Hydrogen Hubs Program. ARENA provides funding for clean energy technology research, development and deployment and supports improvements in hydrogen technologies and projects and renewable energy generation. The government also provides some support for large scale projects by proving new commercial models and providing confidence to capital markets provide, this includes via concessional finance through government special investment vehicles (the CEFC and the National Reconstruction Fund).^[56] Greater details on Government support for the renewable hydrogen sector are outlined in Appendix B.

However, as covered in Section 3, these policies may not be sufficient to support the development of the renewable hydrogen industry at scale. Most of these policies are targeted at addressing the capital costs faced by a relatively small number of renewable hydrogen projects. The Hydrogen Headstart Program will provide a production credit to a small number of projects to address the cost gap the selected projects face. None of these policies address the cost-gap that a wider base of renewable hydrogen projects will face until the costs of production decrease, and they would be inadequate to meet the objectives set by Government.

The net benefits and impacts of maintaining the status quo are discussed in greater detail in Section 6.

5.2 Option 2: Introduce a HPTI

The Government has the option of introducing a tax incentive to support the production of renewable hydrogen. A HPTI could be designed to: incentivise producers to bring forward investment; reach a large number of eligible producers; support the establishment of a renewable hydrogen industry; and scale-up as the industry grows. Each of the options below are expected to achieve the Government's objectives .

Common Features of a HPTI

The following parameters have been considered as suitable parameters for a tax credit. These have been considered in line with the intention to narrow the cost gap compared with unabated fossil-fuel based hydrogen production methods, incentivise early movers, generate production at scale, and support only the cleanest hydrogen.

Nature of payment

Incentive flat rate of $2

The proposed flat rate of payment (paid per kilogram of renewable hydrogen produced) is AU$2. This figure was reached after assessing Australia's pipeline of hydrogen projects, and analysing the current and expected costs associated with hydrogen production in Australia over time as well as the project's ability to leverage other forms of support, such as state and territory support and international schemes.

This figure was also considered in the context of international regimes, where a flat-rate of $2 was considered competitive.

A flat-rate was considered more appropriate and administratively simpler than a tiered-rate (providing a credit of different amounts for hydrogen produced with different levels of emissions intensity). The intensity threshold proposed (0.6 kg carbon dioxide equivalent per kg of hydrogen produced) would capture only the cleanest hydrogen, consistent with the Government's Net Zero objectives.

Refundable

It is expected that many of these producers will not be making a profit for a number of years after commencing production, and will therefore not pay tax in those years. A refundable offset would provide value to these producers in these early years, supporting their cash-flows. Without this refundable design, they would receive no benefit in these early years which could reduce its effectiveness as an incentive. This is also aligned with international regimes, such as the United States' comparable tax credit for clean hydrogen.

Eligibility criteria

Time-limited to 10 years with a final end date of 30 June 2040

As outlined in Section 2 (Problem), the cost of producing renewable hydrogen relative to emissions intensive hydrogen is expected to decline over time. From approximately 2040, it is expected that hydrogen produced from renewable electricity through electrolysis, which will be the vast majority of renewable hydrogen production in the coming decade, will be commercially competitive, reflecting Australia's natural competitive advantages in renewable energy production.^[57]

The 10-year limit and 2040 end date were chosen to ensure sufficient assistance is provided to have a meaningful impact on investment decisions and incentivise potential producers to bring future investment plans forward, and to ensure the regime is competitive with comparable international schemes.

Threshold requirement of a 10MW electrolyser or equivalent

Support must be provided to projects that are able to produce renewable hydrogen at-scale which are able to support decarbonisation of hard-to-abate sectors and position Australia to be an exporter. The cost of hydrogen from electrolysis can also be reduced significantly via scaling of plant capacities.^[58]

The 10MW threshold strikes a balance between supporting large-scale production, while recognising that renewable hydrogen projects are still in the early stages of scaling up in Australia, and a range of use cases which can benefit from smaller production facilities.

In nascent industries such as renewable hydrogen, smaller projects can be important for market-making capability and technical learnings that may benefit the wider industry.

Emissions intensity threshold

The threshold of 0.6kg CO2e/kgH2 is intended to be an achievable standard that is not prohibitively burdensome on producers, while ensuring that support is targeted to renewable hydrogen. This figure is similar to the cleanest tiers of support under other international tax credits (0.45kgCO2e/kgH2 for the US Clean Hydrogen Production Tax Credit and 0.75kgCO2e/kgH2 for the Canadian Clean Hydrogen Investment Tax Credit).

Time-capped with deadline for eligibility

To incentivise investors to bring forward investment so that production commences sooner, a deadline for eligibility and time-limiting of the incentive were considered essential. Two forms of deadlines were considered (Options 2A and 2B).

Administration of the Scheme

The HPTI will be co-administered by the ATO and the CER.

Hydrogen producers seeking to claim the HPTI will be required to register with the CER, as the administrator of the GO Scheme, which will be used to verify the details of their eligible hydrogen production.

Hydrogen producers will claim the HPTI from the ATO through their annual tax return. The ATO will report publicly on the amount of incentive claimed by participants.

Option 2A: Introduce HPTI with a FID Deadline by 2030

This option would require a taxpayer to have made a FID on the relevant hydrogen production facility by 30 June 2030 in order to access the HPTI. Considering the renewable hydrogen industry in Australia is in the early stages of emerging, this deadline strikes a balance between allowing projects to have a realistic opportunity to meet the deadline and be eligible for the incentive, while limiting the eligibility from projects which enter production in later years and have fewer challenges due to the projected decline in production costs.

This is in line with the policy intent to incentivise a bring-forward in investment, rather than subsidising projects that are anticipated to come online regardless.

Option 2B: Introduce HPTI with a First Production Deadline by 2033

This option would require a taxpayer to have commenced production of eligible hydrogen by 30 June 2033 in order to access the HPTI.

A first production deadline by 2033 is approximately equivalent to the 2030 FID deadline. Consultation for the HPTI suggested the average gap between FID and project operation was approximately three years. However, this timeline is not consistent across all projects, with ranges reported from around 18 months for smaller projects, to up to around five years for some large projects. Therefore, the impact of the first production deadline relative to the FID deadline may differ depending on the nature of the project and the entity's own decision-making processes.

6. Net benefits of each option

The options will be evaluated based on their ability to address the problems identified. In particular, they will be evaluated based on the quantity of hydrogen produced relative to Australia's decarbonisation needs, the complexity of the policy and its administrative requirements, and relative fiscal costs. A comparison of how the three options meet the Government's objectives is discussed in Section 7; that section also includes a discussion of caveats and modelling context for this evaluation

6.1 Option 1 - Maintain status quo

Benefits

Under the status quo the Government would not introduce further support for renewable hydrogen. Existing Government support under the status quo includes the first announced round of Hydrogen Headstart and other State and Federal Government programs. The status quo does not include further expenditure by the Government.

The hydrogen produced under the status quo would reach the lower bound of the level of hydrogen expected to be demanded by Safeguard Mechanism facilities in 2030 (0.03-0.3 million tonnes of hydrogen), but would be insufficient to support decarbonisation in 2035 (0.2-0.6 million tonnes of hydrogen by 2035).^[59]

Maintaining the status quo would also impose no additional compliance and administrative costs on regulators or industry. Costs of introducing new or amending legislation would also be avoided. Producers of hydrogen under any option would be expected to register a production profile with the Clean Energy Regulator to verify emissions under the Guarantee of Origin (GO) scheme. GO certificates will be necessary to sell hydrogen given the link to emissions abatement.

Costs

The cost of Option 1 is not nil, but does not impose additional costs to Government. Round 1 of Hydrogen Headstart has a budget of $2 billion. ARENA has separately committed over $315 million to 48 renewable hydrogen projects since 2017. Around $500 million of Australian Government funding administered by the Department of Climate Change, Energy, the Environment and Water has separately been committed for regional hydrogen hubs in places such as the Hunter, Gladstone and the Spencer Gulf.^[60] This makes comparisons between options difficult to assess on a like-for-like basis.

Under the status quo, there would be no generalised mechanism for supporting renewable hydrogen producers across the industry to address the cost gap. As a result, there would be no measures to enable the industry to scale up to the level necessary to deliver the hydrogen needed for Australia's net zero goals. Industry would be limited in how they could decarbonise, relying on more expensive imported hydrogen or purchasing credit units from other emitters, in either case resulting in higher costs passed on to Australian consumers.

The estimates of production under the Status Quo do not meet the targets set out under the National Hydrogen Strategy that link to the industry growth objectives. As this number is used as a proxy to assess whether the option will drive the production at scale, this option will not meet this objective.

Therefore, under Option 1 Australia's hard-to-abate sectors would likely require alternative pathways to reach Net Zero targets, which will involve costs of their own. Delayed action could reduce the competitiveness of some of Australia's industries, particularly given the scale of direct investment in clean energy technology in other jurisdictions.

Who will be impacted

The Australian community will be impacted if Australia fails to meet its decarbonisation goals and commitments. The risk of rising temperatures will present new economic challenges ,that could impact labour productivity, capital investment, and demand for our exports. As shown in the 2023 Intergenerational Report (IGR), rising temperatures are expected to result in reductions in labour productivity and hours worked, particularly for employees who work outdoors such as in agriculture, construction and manufacturing. Agricultural yields are expected to decline with climate change. The increased frequency and severity of natural disasters will also lead to reductions in output through disruptions to economic activity and destruction of property and infrastructure.^[61]

Facilities under the Safeguard Mechanism in hard-to-abate sectors may need to curtail their activities or face higher costs from purchasing credits if they cannot find alternative sources of clean energy, depending on government and market requirements. This would likely lead to lower employment in such facilities, lower prosperity in the communities in which they are located, and weaker growth in the broader economy.

Rather than waiting for more favourable conditions in Australia, investors looking to invest in the renewable hydrogen industry may choose jurisdictions with more extensive production support or other conditions that make production more cost-competitive. This could delay scale, as well as the establishment of a green hydrogen industry relative to our emissions reductions goals.

6.2 Option 2A: Introduce a HPTI with a 30 June 2030 FID deadline

Benefits

The table below shows the production estimated to be eligible for the HTPI.

Table 2: Estimated production of renewable hydrogen (tonnes) eligible for the PTI under Option 2A

Table 2 shows production estimated to be eligible for the HPTI is less than the total production estimated for Australia, as not all production will meet the eligibility requirements. Eligible production declines from 2037-38 onwards in the table above, as individual facilities reach their 10-year limit and are no longer eligible for the HPTI. However, production by these facilities is expected to continue.

In consultation with DCCEEW, Treasury has sourced aggregated production forecasts of green hydrogen from private sector forecasts, and then applied the proposed policy's eligibility triggers and limits to determine eligible production. These eligibility triggers and limits include the emissions intensity threshold, timing requirement for project commencement and final investment decision, and the 10-year facility-level eligibility cap. Other information on the modelling methodology is set out in section 7.2.

The above process specifically addresses the level of hydrogen supported by the HPTI. Additional production of hydrogen that does not meet all of the eligibility criteria of the incentive is not captured above, such as hydrogen from projects that take FID after 2030, or hydrogen from smaller scale producers with a capacity below 10MW. Total hydrogen produced will likely exceed that supported by the HPTI, particularly in the latter years of the incentive.

Option 2A is expected to support production of approximately 0.6 million tonnes of renewable hydrogen annually from 2029-30 onwards, and a total of 7.1 million tonnes by the end of the policy in 2039-40. These estimates are inclusive of production expected to be supported by the Hydrogen Headstart program and/or other State and Federal Government support. There is difficulty isolating the precise amounts of production eligible under each policy (i.e. HPTI and Hydrogen Headstart) through the aggregated private sector forecasts.^[62] Due to the nascency of the sector, changes in economic conditions, as well as the wide range of global support options that could be available to a particular project it is not possible to disaggregate current projections from projections that were made at a different time, under different conditions.

The 0.6 million tonnes of renewable hydrogen production supported by the HPTI in 2029-30, is roughly enough to decarbonise all renewable hydrogen-replaceable processes in our existing ammonia and vertically integrated steel facilities in Australia.^[63] Doing so can abate about 11.7 million tonnes CO2-e or 2.7 per cent of domestic emissions (based on 2022 and 2023 production and emissions).^[64]

•

For ammonia, this involves using renewable hydrogen in place of carbon-intensive hydrogen produced using gas.

•

For steel, this involves using hydrogen in place of metallurgical coal to produce iron from iron ore.

This is of a sufficient level to support aspects of Australia's decarbonisation ambition, meeting the anticipated demand of the Safeguard covered firms (0.03-0.3 million tonnes of hydrogen in 2030, 0.2-0.6 million tonnes of hydrogen by 2035).^[65]

The estimated production is also consistent with the National Hydrogen Strategy's growth targets to support production at scale (0.5-1.5 million tonnes annually by 2030). Estimated production supported by the HPTI will not alone be sufficient to satisfy the 2035 target of 3-5 million tonnes, however this does not take into account green hydrogen projects coming online that will not be eligible for the HPTI due to FID occurring after 2030, or projects that otherwise do not meet the eligibility criteria.

Who will be impacted

Renewable hydrogen producers will benefit through the HPTI support they receive. The credit would impact the commercial prospects of producers in the longer-term, as renewable hydrogen production costs are expected to fall over time and ultimately be lower than other forms of hydrogen production. This could provide the foundation for a renewable hydrogen industry in Australia.

Directly and indirectly, Australia's economy is likely to benefit from greater investment in this industry. As noted previously, Australia's renewable hydrogen industry development and related exports could contribute $28.9 billion in GDP per year by 2040 and create around 33,000 direct and indirect jobs, with further economic benefits from other downstream industries like green metals.^[66] The hydrogen produced under Option 2 would contribute to this.

The broader Australian community would benefit to the extent that the HPTI increases the use of renewable hydrogen and assists Australia's decarbonisation goals. For example, if renewable hydrogen were used in the production of green steel, displacing all current steel production in Australia using iron ore, domestic emissions could fall by about 7.5 Mt CO2-e or 1.7 per cent (based on 2023 production and emissions). Further, if Australia were to produce and export green iron using renewable hydrogen and abundant Australian iron ore, this could displace carbon-intensive iron production overseas and lead to a larger global abatement impact.

Australia's manufacturing sector, hydrogen users and related supply chains will benefit from greater availability of lower cost renewable hydrogen and derivative products.^[67] In particular, businesses in hard-to-abate sectors in Australia will benefit from access to a viable option for reducing emissions, which will assist them to comply with their Safeguard Mechanism requirements and meet demand from customers for a lower-emissions product.

Regional Australia is also likely to be impacted by the transition to net zero. The development of a renewable hydrogen industry to underpin new clean manufacturing industries will support Regional Australia transition from being dependent on emissions intensive industries.

Costs

Compared to the status quo, the primary risk associated with introducing a HPTI is the potential cost of the policy to the Government. Option 2A was costed by Treasury in the Federal Budget 2024-25 context as having an estimated cost to the budget of $6.7 billion over ten years from 2024-25, and an average of $1.1 billion per year from 2034-35 to 2040-41. Treasury's costing of the 2024-25 Budget HPTI measure assumed that eligible production from 2030-31 until 2037-38 is equal to 2029-30 levels, reflecting the requirement to have entered production or take FID before 30 June 2030.

Policy benefits and costs with using a FID Deadline

Benefits

To incentivise investors to bring forward investment so that production commences sooner, a deadline for eligibility and time-limiting of the incentive is necessary. The benefit of using a FID deadline is that this is a critical milestone in all resource and energy infrastructure projects and represents the commitment of substantial financial resources to proceed with the execution of the project. Using FID as an eligibility criterion would act as a threshold to ensure that a project proponent seeking to claim the HPTI is committed to executing the renewable energy project in a timely way. For taxpayers seeking to claim the HPTI, it is a milestone that is broadly within their planning and control, and is therefore relatively at low risk of being impacted by factors outside of their control (for example, construction delays or supply chain disruptions).

Delays due to unforeseen circumstances or factors outside of the control of the business that impact the commencement of production would not affect the business' ability to access the incentive, although it could impact the value and duration of access to the incentive depending on the circumstances. A comparison of Options 2A and 2B is discussed in greater detail in Section 7 (Recommended Option).

However, a consequence of such a deadline is that businesses that do not take FID prior to this deadline would not be eligible for the incentive. It is expected to limit the number of participants to the scheme as there are several announced or planned projects that would likely come online at the end of the next decade. This also limits the cost of the incentive as projects that do not make the deadline would not be eligible for support.

Costs

FID is not a legally defined concept and this could be an integrity risk. However, this risk could be mitigated by clear legislative or regulatory requirements of the HPTI claimant to demonstrate evidence of and steps taken to reach FID. FID would need to be assessed by a regulator, such as the CER, however claimants would document such a decision as part of the normal course of business. This is considered a minor regulatory cost.

Option 2A is expected to result in a medium overall compliance cost impact, comprising a medium implementation impact and a low increase in ongoing compliance costs. The options are expected to cost $100,000 per claimant for implementation, and $12,000 per year for ongoing reporting requirements.

The regulatory impact cost assessment assumes that the compliance cost will vary between companies and that there will be some new reporting and verification activities that will need to be designed and dealt with.

6.3 Option 2B: Introduce a HPTI with a 30 June 2033 production deadline

Net Benefits (in comparison to Option 2A)

A deadline for first production by 2033 to qualify for the HPTI is a clear and measurable criterion, consistent with the principles of tax law. A production deadline is expected to impose lower compliance costs, as commencement of production can be evidenced through GO certificates. The production deadline would target support to early mover projects and incentivise the bring forward of investment.

Option 2B could provide the same type of benefits to Option 2A, that is, better commercial prospects for renewable hydrogen producers in Australia, economic benefits for the community and greater supply of renewable hydrogen for downstream industries. The date for commencement of production chosen, that is 2033, was proposed as it would have provided the closest equivalent proxy to a FID in 2030. This is because industry feedback during consultation indicated that a typical period between FID and first production was three years, however it was also noted that individual project factors mean that the range could be between approximately 18 months to five years.

However, a production deadline presents an inflexible hurdle that some companies may not be able to meet due to factors outside of their control. The uncertainty that this policy change introduces may cause some projects to be ineligible and this may affect investment. The impact of a production deadline on projects would greatly vary based on their individual circumstances, such as their specific financing arrangements and stage of project development. On the basis of the greater policy certainty provided by Option 2A, it is expected that the net benefit from a regulatory perspective would not support Option 2B.

6.4 Comparison of Regulatory Costs

Businesses seeking the support from the Government through the incentives contemplated under Options 2A and 2B are expected to be large, sophisticated taxpayers who would generally obtain tax and legal advice in the course of doing business and in lodging their returns.

Table 3: Regulatory cost comparison

7.0 Recommended Option

The three options are assessed against their ability to meet the Government objective of supporting the growth of a renewable hydrogen industry and Australia's decarbonisation. In some cases these are binary decisions, where the policy will either be able to meet the objective or not. In other cases this may be a matter of degree and policies can be assessed on net benefit terms. The policies are further assessed based on qualitative assessments of the policy outcomes they support. This results in an outcome where the policy that has the greatest net benefit is identified.

Production milestones

To determine whether the policy can support the growth of a renewable hydrogen industry, production volumes are assessed against the National Hydrogen Strategy's production targets.^[68] As noted in section 3, these figures are used as a proxy to understand the impact of the policy on the required level of hydrogen production growth to support production at scale and industry growth. This outlines that Australia's progress will be measured against the following annual hydrogen base and stretch production milestones:

•

2030: 0.5 - 1.5 million tonnes

•

2035: 3 - 5 million tonnes

•

2040: 5 - 12 million tonnes

Decarbonisation objectives

To determine whether the policy can meet Australia's decarbonisation goals the hydrogen production volumes are assessed against the volume of hydrogen required to meet the demand of the Safeguard Mechanism covered facilities (covered in Section 2). Analysis for DCCEEW's emission projections suggest that Safeguard facilities could drive demand of 0.03 to 0.3 million tonnes of renewable hydrogen by 2030 and 0.2 to 0.6 by 2035.^[69] As noted in section 3, these figures are used as a proxy to understand the impact of the policy on the required level of hydrogen production to support decarbonisation.

Caveats, estimations and limitations have been noted in the prior sections, including the difficulty in disaggregating individual forms of Government support to isolate impacts, as well as the uncertainty in projections for a nascent sector such as hydrogen.

7.1 Recommended option and decision-making process

The preferred option is Option 2A, that is, to introduce a HPTI with the requirement that eligible projects have a FID taken by 2030. In Table 4, the decision-making process and factors used to analyse the degree to which each option will support meeting the government's objectives are summarised.

Table 4: Overview of alignment of options with government objectives

Below, the decision-making process for concluding on this option is covered, including the key factors that were considered and the alignment with the options considered with the objectives of resolving the problem.

Overview

In Section 6, the benefits and costs of the key three options were considered, these being:

•

Option 1: maintain the status quo (Government chooses not to intervene to address the problem);

•

Option 2A: introduce a HPTI with a deadline for a FID by 2030 and

•

Option 2B: introduce a HPTI with a deadline to have commenced production by 2033.

Option 1, the status quo, will not lead to the production of hydrogen at a scale necessary to support the policy objective of establishing a renewable hydrogen industry (discussed in greater detail in Section 6.1) at scale and bring forward investment. A quantitative analysis based on estimates of this are above. While the status quo will not present additional costs or regulatory impacts, it fails to achieve the Government's objectives.

The key consequences of an absence of market intervention are described below.

•

Decarbonisation: Australia's highest greenhouse gas emitting facilities, covered by the Safeguard Mechanism, include steel, iron and ammonia producers. Renewable hydrogen is the most viable long-term solution to decarbonising these sectors. Considering the demand that could be driven by Safeguard facilities by 2030 and 2035, the level of renewable hydrogen produced under Option 1 could be sufficient to meet demand from Safeguard facilities by 2030 but not 2035.

•

Comparative advantage: If scale is not achieved, Australia's comparative advantage in capturing its market share of renewable hydrogen production could be reduced. This has the potential to impact Australia's export economy and gross domestic product (GDP)=.

Options 2A and 2B were considered as the preferable options for addressing the problem as they have a greater chance of meeting the Government's objectives. Introducing a production tax credit for the renewable hydrogen industry with several common design parameters means most benefits and risks are common to both options. The projected benefits on decarbonisation of Australia's hard-to-abate sectors and the Australian economy are outlined above. As such, introducing a production tax credit with these common parameters is considered preferable to maintaining the status quo.

Option 2A is expected to support a total of 7.1 million tonnes of renewable hydrogen by the end of the policy in 2039-40, with annual production by 2030 of over 0.6 million tonnes. Complementary support from other Australian Government initiatives and the ability to leverage international support could see annual production increase beyond this in the 2030s.

A deadline for the HPTI was considered necessary to ensure the policy intent of bringing forward new investment is achieved. The primary difference between these two options is what form and year the deadline takes - a deadline for a FID by 2030 or a deadline for first production by 2033.

Advantages of a deadline for FID over commencement of production

Option 2A is considered preferable to Option 2B, as the second poses a higher investment risk in comparison to the first for projects within four to five years of the proposed production deadline.

Consultation undertaken during policy development, and analysis by DCCEEW, found that typically there was approximately a three-year period between a FID being taken on a renewable hydrogen project and the project first commencing production, with this varying between 18 months and 5 years according to the project size and individual arrangements. As such, the intention of considering production deadline of 2033 in place of a FID deadline in 2030 was based on the intent to capture and incentivise as similar a pool of projects as possible.

However, consultation with the CEFC informed Treasury's view that the risks of a production deadline (which are briefly covered in Section 6) were significantly more severe for industry stakeholders seeking to benefit from the tax credit. Informed by consultation with the CEFC and its own analysis, Treasury considered the key risks of a deadline of first production by 2033 over a deadline for FID by 2030.

A deadline for commencement of production would likely disadvantage projects taking FID between 2028 and 2033 over those taking FID in the mid-2020s, as the former would be more likely to be affected than the latter both in terms of the project's own viability and their debt-financing arrangements. This has the potential to lower the number of projects which are able to take FID and come into operation at all, particularly in the context of Australian hydrogen industry which is still in its infancy.

While CEFC noted many projects of this nature have a build time of approximately three years, any projects taking a FID four to five years before the proposed production deadline would lead to greater project uncertainty. The risk of not meeting the deadline and resulting disqualification from eligibility for the PTI would have a material impact on project returns.

There are a number of factors that are outside of the control of project proponents when developing a renewable energy infrastructure project. This can include supply chain disruptions and construction issues. In particular, renewable markets have experienced high volatility because of the fluctuations in the supply and price of raw materials and regulatory environments.^[73] This can impact on the "bankability" of infrastructure projects taking FID. Bankability is explained briefly below:

A bankable contract is a contract with a risk allocation between the Contractor and the Project Company that satisfies the Lenders. Lenders focus on the ability (or more particularly the lack thereof) of the Contractor to claim additional costs and/or extensions of time as well as the security provided by the Contractor for its performance. The less comfortable the Lenders are with these provisions, the greater amount of equity support the Sponsors will have to provide. In addition, Lenders will have to be satisfied as to the technical risk of the technology proposed and other project-specific features. Obviously price is also a consideration, but that is usually considered separately to the bankability of the contract because the contract price (or more accurately the capital cost of the facility) goes more directly to the bankability of the project as a whole.^[74]

Contrasting a deadline where the project proponent(s) have much greater control - FID - in comparison to a production deadline, which is much more vulnerable to delays for reasons described above, a lender would reasonably be highly cautious of incorporating the tax credit into a project's cash flow modelling and ability to repay their loan - particularly for projects closer to the first production deadline of 2033. The consequence is that projects closer to this first production deadline may be required to provide greater equity support or demonstrate a higher hurdle rate of return for the project, which has the likelihood of preventing some projects (which under a FID scenario would have proceeded) from proceeding.

The risks of introducing a HPTI with a first production deadline were considered to outweigh the administrative concerns with defining FID and ensuring integrity in determining if a FID is eligible. The binary nature of the outcome if the deadline, whether this was a production or FID deadline, being that the taxpayer would be wholly ineligible for the credit for a particular project lent weight to the idea that the deadline should not be one that could be missed due to factors outside of the control of the taxpayer, such as a production deadline.

7.2 Caveats and modelling context

Like most policies, there are uncertainties and unknown events that can impact the effectiveness of the policy. For example, the renewable hydrogen industry is in its infancy in Australia and is still evolving. The time-capped design of the policy and inclusion of a deadline may also constrain production if there are broader supply chain or cost increases across the industry.

Similarly, in understanding the quantitative impacts outlined in sections 6 and 7 there are uncertainties around the outlook for renewable hydrogen production reflecting the nascency of the sector, noting only 1 per cent of global hydrogen production is produced from renewable energy through electrolysis.^[75]

Proponents of hydrogen production facilities may also utilise one or more forms of support before making investment decisions, making isolating the impacts of individual programs difficult. Assessments of these projects may also change where other governments introduce new forms of support that impact the economics of projects in a particular location. Production under the status quo includes assumptions of support from foreign and domestic programs.

For Option 2 estimated eligible hydrogen production was based on third-party production estimates with assumptions to adjust for eligibility and demand based on estimates and information from Treasury and DCCEEW. Through these consultations, it was established that the level of production in these profiles (particularly over the nearer term), had assumed that a degree of generic policy support would be provided.

7.3 Implementation of recommended option

Implementation overview

The HPTI relies on two regulatory functions: administration of the GO scheme by the CER and the tax system by the ATO.

The Government has consulted with both bodies and considered it appropriate that a pre-registration process with the CER would allow for a 'pre-assessment' of the eligibility of the taxpayer and facility, including whether criteria such as FID by 2030, the 10 MW electrolyser equivalent threshold and corporation status are satisfied. It is reasonable that this step is available to the taxpayer anywhere between their point of registration with the CER for a production profile under the GO scheme and seeking to claim the HPTI.

Eligible entities, in accordance with the GO scheme, are able to produce their own certificates as long as they hold a production profile. Under the legislation for the GO, currently in Parliament, the certificates go through a registration process and verification with the CER. This provides a natural point for ensuring integrity in the process.

Following this verification process, the entity may use their registered certificates to seek the tax credit from the ATO, lodging their certificates with their annual tax return.

Implementation risks

Possible risks to implementation have been identified as follows.

Multiple owners

A risk identified is the delivery of the tax credit benefit where there are multiple owners of a project or facility. Often, energy and resource projects are undertaken by multiple owners, usually in the form of an 'unincorporated joint venture' which allows them to pool their assets and equity, while sharing the risk. Careful management of how the credit can be administered in these scenarios will be necessary to ensure that all eligible entities have a fair entitlement to the credit, but the credit is not overpaid (for example, through double-payment).

Scaling up of production

During targeted and public consultation undertaken in June to July 2024, a further potential issue identified was the scaling up of projects. Several stakeholders noted that renewable hydrogen project proponents start with a small amount of production and (in the case of green hydrogen) smaller electrolyser, but 'stack on' further electrolysers (as these are modular in nature). This allows the project proponents to test the technology and feasibility of the production before scaling up. It is important to ensure that the FID is defined in a way to ensure that only production capacity outlined at FID is eligible, to avoid significant expansions of a project which were not planned prior to taking FID, are not entitled to the benefit.

These risks were taken into account in drafting and finalising the legislation.

8. Consultation

Treasury and DCCEEW held consultation on the early design ('pre-budget consultation') and detailed design of the HPTI measure announced by the Government as part of the Future Made in Australia plan in the 2024-25 Federal Budget. While consultation prior to the 2024-25 Budget announcement of the measure was targeted and confidential in nature, consultation subsequent to this included both targeted and public consultation. Stakeholder views and feedback is summarised below for each stage of consultation, including how this was incorporated or considered in the early and detailed design of the policy.

8.1 Pre-budget consultation (prior to announcement)

Treasury, DCCEEW and the Net Zero Economy Agency held targeted, confidential targeted consultations prior to the Government's announcement of the HPTI measure.

The purpose of this consultation was to test the key features of the HPTI. These features included the incentive rate of $2 per kilogram of hydrogen, the emissions intensity threshold of 0.6 kilogram of carbon dioxide equivalent per kilogram of hydrogen produced, the 10MW electrolyser equivalent threshold, the FID deadline criterion and the time-limited nature of the measure.

During this consultation, Treasury and DCCEEW also considered the interaction between the proposed HPTI with existing hydrogen support policies, and the specific implications of the HPTI on Government Business Enterprises.

Consultation was held with a range of stakeholders including hydrogen industry bodies, prospective and operating hydrogen producers, Government special investment vehicles, and state governments.

Consultees welcomed the proposal and indicated it would make a meaningful improvement to the financial prospects for renewable hydrogen production in Australia. Stakeholders considered it would help narrow the current cost gap for renewable hydrogen and would help attract investment. Consultees broadly agreed with the proposed project parameters. Treasury and DCCEEW noted the issues raised in the confidential consultations and agreed they could be explored further during public consultation before finalising the proposed design.

8.2 Detailed Policy Design Consultations

The Government announced HPTI in the 2024-25 Budget, to support the growth of a competitive renewable hydrogen industry as a part of the Government's Future Made in Australia package.

After the announcement, Treasury published a consultation paper and conducted a two-week public consultation from 28 June to 12 July 2024. The purpose of this consultation was to seek stakeholder feedback on the proposed design and administration details ahead of the finalisation of the policy.

Eighty-two written submissions were provided by a range of stakeholders, including 46 project developers, 7 industry bodies, 4 tax advisors, 5 unions and 3 state and territory governments.

Alongside the public consultation, Treasury and DCCEEW conducted targeted consultation discussions with 23 key stakeholders to discuss the proposed design and administration in greater detail.

Stakeholder Views and Impact on Policy Design

Stakeholders again welcomed the HPTI and the support it would provide for renewable hydrogen production.

The main issues raised were:

•

The rate of support ($2/kg) on its own will not close the cost gap entirely;

•

The duration of support (10 years) may be insufficient;

•

Taking a FID by 30 June 2030 would be difficult for projects;

•

The 10MW equivalent capacity and single site requirements preventing smaller scale and dispersed projects from claiming the support including those that could support the heavy mobility sector through re-fuelling stations;

•

That companies ought to be able to elect when the 10 year period commences (in cases where they have commenced production prior to 2030), as projects tend to scale up over time and would want to optimise the support they receive;

•

That the incentive should support other forms of low-carbon hydrogen production, such as hydrogen produced through emissions-intensive processes with carbon-capture and storage to capture emissions;

Grid matching, which was raised in the consultation paper as a potential requirement was broadly accepted, with stakeholders agreeing with the need to ensure that hydrogen production does not inadvertently increase emissions across the relevant electricity grid.

The policy was adjusted by allowing projects to elect when the 10 year claim period for their project commences. All other policy design specifications were retained. These issues were identified during the development of the policy, and it was considered that a change in the policy was not required.

The following sections provide further detail on consideration these issues raised in the stakeholder feedback.

Incentive Rate

Stakeholders noted throughout the consultation that although the $2/kg rate of support would have a meaningful impact on the financial prospects for renewable hydrogen production in Australia, it may not fully offset the gap between production costs and prices for all projects.

Stakeholders who suggested the cost gap was larger than $2/kg estimated the current cost gap to range from $4 to $8 per kilogram of hydrogen.

This feedback was in line with information that was considered prior to the consultation discussions. Insights from the first round of the Hydrogen Headstart program showed a significant variance in cost gaps between renewable hydrogen projects.

Stakeholders also noted that there are other forms of support in the renewable hydrogen space that will be introduced, that will also help address the cost gap if they are able to work alongside the HPTI. For example, NSW government initiatives and Japan's contracts for difference scheme.

Following consultation, the decision was made to retain the $2/kg rate of support. Taking other prospective support into account providing support above $2/kg would provide a windfall gain to some renewable hydrogen projects that are able to stack a range of initiatives, while increasing the fiscal impact to the federal budget.

Duration of support

Many consultees considered that extending the support over 15 years would be beneficial as many of their costs are locked in for this timeframe. These costs include their offtake arrangements, renewable energy contracts and their financing arrangements.

Following consultation, the decision was made to retain the 10-year limit on each facility. This is consistent with the support provided under the Hydrogen Headstart program and the US Inflation Reduction Act.

FID by 30 June 2030

Stakeholders noted that the FID by 30 June 2030 cut-off was generally feasible for projects currently under consideration, but any projects that were not already quite progressed would be unlikely to meet this timeframe. This would encourage projects currently under consideration to bring forward their FID in a timely manner, but may not provide sufficient time for new projects to complete the necessary steps to reach a FID and bring forward their investment.

The FID deadline is considered important to ensure that the policy aligns with the intent to bring forward investment and provide support to first movers.

As outlined above, a production deadline was considered as an alternative to the FID deadline. However, this was considered to be just as difficult for projects to achieve, and would also increase the uncertainty of the investment as delays in the construction phase that are out of a project's control could jeopardise its ability to access the credit.

Single site and 10MW equivalent requirements

Several stakeholders suggested that the 10MW equivalent capacity requirement and requirement to be on a single site be removed. This would allow for smaller scale projects or dispersed projects such as refuelling highways to be eligible for the HPTI. The 10MW threshold was suggested to be too large given the current largest electrolyser in Australia is 1.25MW.

In contrast, other stakeholders recommended the 10MW threshold be increased, so that support is targeted at the projects that will produce at-scale and represent value for investment. However, most stakeholders did not have an issue with the threshold.

Following consultation, the decision was made to retain these design specifications. The minimum capacity requirement strikes a balance between pursuing large-scale production and supporting a range of use cases which can benefit from smaller production facilities.

Regarding dispersed production (such as refuelling highways), other initiatives, such as ARENA funding through the Advancing Renewables Program or the Future Made in Australia Innovation Fund, or bespoke initiatives like Hydrogen Highways are better placed to support pilot and demonstration scale projects.

Exclusion of blue hydrogen

A few stakeholders suggested that the HPTI should not be limited to renewable hydrogen, and that other lower-emissions hydrogen production (such as blue hydrogen) can help provide a broader suite of clean energy solutions.

J-Power and Sumitomo Corporation in their joint submission outlined the following:

"Limiting the eligibility of the HPTI to renewable hydrogen will marginalise these nascent industries, which offer numerous benefits to Australia including job creation, technological advancements, skill transfer in emissions intensive industries, and a significant reduction in overall greenhouse gas emissions. Clean hydrogen industries are pivotal for transitioning to a sustainable, long-term hydrogen economy."

Following consultation, the decision was made to retain this design specification. Excluding blue hydrogen production is aligned with the intention of the policy to only support renewable hydrogen production. This will ensure that Government support is targeted to projects that will provide the most value in terms of emissions reduction.

Ability to elect when the claim period begins

Some stakeholders requested the design of the HPTI allow entities to elect when the 10-year period for a project commences, rather than it automatically starting once they begin eligible production.

This would allow for entities to maximise the amount they can receive in scenarios where their electrolyser during first eligible production is not operating at full capacity. Stakeholders suggested some projects go through various testing phases in the commencement period. If the 10-year period was to automatically commence, they would be required to claim for this testing phase where they are not operating at the optimal capacity.

Noting the incentive is not indexed to inflation, and the HPTI has the 2040 end date, entities do not have an incentive to unduly delay claiming. It is consistent with the policy intent that the entity can claim for larger scale production.

Following consultation, the decision was made to adopt this suggestion in the design specifications, allowing an entity to choose when their 10-year period commences in relation to a project.

8.3 Confidential Consultation on draft legislation

In October 2024, Treasury, with representatives from DCCEEW undertook confidential consultation with participants and peak bodies in the hydrogen industry. The purpose of this consultation was for consultees to provide feedback on draft legislation and explanatory materials.

Consultees welcomed the draft legislation and indicated that the legislation would provide further certainty for investors and would assist with Australia's ambition to establish a renewable hydrogen industry.

Evaluation/Review

The effectiveness of the preferred option can be monitored and evaluated against the Government's objectives as outline in the table below.

The policy will be evaluated by Treasury and DCCEEW, in consultation with the ATO and CER, at milestones based on the availability of the following data:

•

periodic reporting on the GO Scheme public register by the CER, which will include the number of registered hydrogen producers, the quantity of hydrogen produced and associated emissions intensity levels;

•

annual reporting by the ATO on the level of tax incentive claimed under the HPTI;

•

regular (at least annual) surveys and reports on investment intentions and capital expenditure, such as those produced by data and analytics providers and the Australian Bureau of Statistics;

•

modelling commissioned as part of future updates to the National Hydrogen Strategy or similar initiatives on the quantity of hydrogen produced and quantity required to meet Australia's net zero goals.

•

Treasury and DCCEEW will also monitor the implementation and effectiveness of the policy over time through regular outreach and engagement with the hydrogen industry, industries expected to be consumers of renewable hydrogen, regulators and relevant community groups.

•

This monitoring and evaluation will compare the actual and updated projections of hydrogen production with updated estimates of expected demand and requirements to meet Australia's net zero goals. It will also monitor the number of hydrogen producers and recipients of the HPTI, and developments in the cost of producing renewable hydrogen in Australia relative to traditional production methods and production of green hydrogen overseas. It will also identify feedback from stakeholders on the administration arrangements, such as the application process and claiming of the incentive through annual tax returns, and developments in the hydrogen industry more broadly.

•

Key milestones in this ongoing evaluation include the start date of 1 July 2027, the FID cut-off date of 1 July 2030, the dates at which the Government has expressed hydrogen production targets (2030 and 2035) and the preparation of future National Hydrogen Strategy updates.

Treasury and DCCEEW will provide advice to the Treasurer and Minister for Climate Change and Energy on the performance on the incentive, including the production during the duration of the incentive, number of recipients, and feedback from stakeholders.

Appendix A: Status of the IA at each major decision point

Appendix B: Renewable hydrogen policy context

Existing policies

The Australian Government has several existing initiatives to support growth and innovation in the emerging hydrogen sector. These initiatives comprise grant programs for research and development and capital projects, low-interest concessional finance, and production support designed to address commercial barriers to large-scale production.

The Government has also released the National Hydrogen Strategy 2024 in Partnership with States and Territories.

ARENA Support

ARENA plays an important role in funding clean energy technology research, development, and deployment, including in the hydrogen sector and for related technologies.

Through the 2024-25 Budget, the Australian Government provided a $5.1 billion to boost ARENA and support it to develop and commercialise technologies critical to net zero. This funding includes $1.9 billion over 10 years to continue its core investments in renewable energy and related technologies over the long term.

To date, ARENA has $236 million to 43 renewable hydrogen projects from early-stage research to deployment projects and studies. Projects have included hydrogen refuelling and hydrogen trucks, hydrogen for producing green ammonia, hydrogen for use in alumina refining, gas blending and remote power.

Regional Hydrogen Hubs Program

The Government is investing in the Regional Hydrogen Hubs Program to support the development of hydrogen hubs in key regional locations in Australia. Hydrogen hubs are locations where producers, users and exporters of hydrogen work side by side to share infrastructure and expertise. They will help the hydrogen industry springboard to scale.

This funding will be delivered to successful applicants as grant funding to support capital projects and development and design studies. Hub funding has been announced for projects in the Pilbara and Kwinana in Western Australia, Bell Bay in Tasmania, Gladstone and Townsville in Queensland, and Port Bonython in South Australia.

Concessional Finance

The novel nature of renewable hydrogen technology adds risk to projects, which is directly proportional to a hydrogen project's financing costs. The risk of not realising a return can mean projects struggle to secure sufficient capital to see them through early development.

The Australian Government has engaged and developed a core of specialist investment groups to support hydrogen projects with a range of financial products, including the CEFC, the Northern Australia Infrastructure Facility, Export Finance Australia, and the National Reconstruction Fund.

The CEFC established the $300 million Advancing Hydrogen Fund in 2020. To date, there have been limited viable investment opportunities, due mainly to a mismatch between investment return and risk settings, as well as the maturity of projects.

Production Support - Hydrogen Headstart Program

Hydrogen Headstart is a competitive program which is designed to bridge this commercial gap through a production credit provided to large scale renewable hydrogen projects in Australia, over a maximum 10-year period. The program aims to the accelerate development of Australia's hydrogen industry, catalyse clean energy industries and help Australia connect to new global hydrogen supply chains to take advantage of renewable hydrogen's jobs and investment potential.

In the 2023-24 Budget, the Australian Government announced it would invest up to $2 billion in the Hydrogen Headstart Program. In the 2024-25 Budget, the Government committed an additional $2 billion to the program, bringing total support to $4 billion.

Hydrogen Headstart provides targeted, time-limited support for a small number of early-mover, innovative projects that face higher barriers to deployment. It will provide a production credit to a small number of selected projects to address the respective cost gaps they face.

Attachment 2: Impact Analysis - Critical Minerals Production Tax Credit

Executive Summary

The Critical Minerals Production Tax Incentive (CMPTI) is part of a targeted national plan to support objectives under the economic resilience and security stream of the Future Made in Australia National Interest Framework. A robust, resilient and adaptable supply-chain is central to supporting the many demands ranging from meeting net-zero targets to sustainable economic growth ^[76], enabling the economy to adapt to and withstand the challenges of an uncertain world.^[77],^[78] This Impact Analysis outlines the challenges of the critical minerals market and identifies where a CMPTI can be effective to build domestic sovereign capability in the critical minerals sector.

This analysis provides a summary of the problem, options and impacts, recommendation, consultation and implementation/evaluation.

Problem

The problem that is identified in this Impact Analysis, leading to the lack of processing activity on critical minerals is split out into two key areas.

First, the problem that is identified is supply chain concentration and the vulnerability of the critical minerals supply chain to market shocks due to the concentrated nature of the downstream processing and refining of critical minerals. Private firms are failing to appropriately price in the required level of economic resilience and security in critical sectors and supply chains.

Second, a further problem is identified as the cost gap between production costs in Australia and other overseas markets due to high labour costs, environmental standards and the cost of capital. This is exacerbated by industry support being provided by other Governments to attract investment.

Options and Impacts

The Impact Analysis considers three options that have been contemplated. The first option is to retain the status quo, with Options 2 and 3 presenting variations of a production tax incentive policy reflecting changes made as a result of industry consultation.

These options are assessed against their ability to deliver on the Government's objectives and the policy problem. Options that address related issues such as capital costs have been excluded from this.

Recommendation

Based on feedback from consultation, and ability to meet the Government's objectives the option that is recommended on the basis that it provides the greatest net benefit is Option 3. This is the production tax incentive that incorporates policy changes in response to feedback to best address the identified problem.

Consultation

A summary of consultation conducted by Treasury and the Department of Industry, Science and Resources is included. It outlines the pre- and post-Budget consultation, detailing stakeholder views and how the policy was adapted to respond to these, or not. Stakeholders broadly supported the design of the incentive, but key changes were made as distinguished between Option 2 and Option 3 of the proposed options.

Background and existing policies

Critical minerals

Australia's Critical Minerals List^[79] consists of 31 minerals (see Appendix B) . These minerals have been deemed 'critical minerals' as they are

•

essential to our modern technologies, economies, specifically the priority technologies set out in the Critical Minerals Strategy;

•

essential for our national security, especially for defence industry technologies;

•

for which Australia has geological potential for resources;

•

in demand from our strategic international partners; and

•

that are vulnerable to supply chain disruption.

Critical Minerals value chain

The critical minerals value chain can, at a high level, be split into three sections:

The upstream activity, being largely the extraction and beneficiation process which includes mechanical processing of the ore and some waste removal;

The midstream activity, being the processing and refining of the critical minerals; and

The downstream activity, being largely the use of the processed critical minerals in manufacturing.

The value-chain is summarised at Figure 1, which illustrates the three stages and the respective industry/market structures characterising the critical minerals sector.

Figure 1. Summary overview of stages in the critical minerals supply chain (original source: Critical Minerals Association)

Source: University College London Institute for Sustainable Resources (2024) L. Pickett - Critical minerals; potential next steps ^[80]

The 'midstream' processing step shown in Figure 1 is expanded below. Figure 2 shows the process flow diagram for the midstream processing/refining operations for the proposed Arafura Nolans rare earth refining facility^[81].

The refining step of the mid-stream process is a multi-stage extractive metallurgical process where the ore is progressively refined to extract the critical mineral in a form that is suitable for further downstream processing. The facilities are large and complex to operate and require significant upfront capital investment. A newly built plant typically undergoes a period of optimisation to ensure efficiency and reproducibility of product quality.

Figure 2. Arafura rare earth processing flowsheet showing the stages and inputs associated with the midstream processing of beneficiated ore^[82]

Criticality of critical minerals to Australia's economic resilience and national security

Critical minerals are important as they enable a range of technologies required for the basic functioning of a modern society. They are the essential inputs to important sectors such as clean energy manufacturing, transport, agri-tech, medicine, defence, space, computing, and telecommunications. A stable and diversified supply of critical minerals can also support the net zero transformation in Australia.

In particular, the net zero transformation will increase the demand for critical minerals that are required for renewable energy technologies such as hydrogen electrolysers, batteries and solar panels. Global demand for critical minerals will need to increase by around 350 per cent by 2040 to meet the world's net zero carbon emissions commitments.^[83]

The global race to secure supplies of critical minerals is accelerating rapidly. Critical mineral supply chains are also prone to disruption because mineral production and processing is heavily concentrated in particular locations, facilities or companies. Supply chains that are highly concentrated, are typically fragile, volatile and lack transparency. Under these conditions markets and their participants cannot adequately price and manage risks, making it hard for businesses to access commercial investment and compete on a level playing field.^[84]

Australia is home to some of the world's largest reserves of critical minerals such as lithium, cobalt and rare earths needed to diversify supply chains and support low emissions technologies. Australia is already the world's largest producer of lithium and is well placed to meet future global demand, with exports projected to double over the next five years.^[85]. Australia has the ability to leverage its track record as a trusted and reliable trade partner, with established links into key markets in North Asia, the United States and Europe, to be a reliable supplier into the growing markets of the future. Growing industries further down the critical mineral value chain also presents significant potential economic benefits for Australia, that will build on our established mining industry.

The policy problem

Policy problem

Australia does not process critical minerals domestically at scale. This is a problem as the critical minerals on Australia's list, and the technologies they enable, are key inputs to support Australia's renewable energy requirements, manufacturing and defence industries and a range of other applications essential to our economy and modern way of life^[86]. As such, lack of domestic processing capacity presents a national security risk.

Critical minerals processors are not developing operations at scale in Australia due to the barriers of investment in Australia. These barriers in the critical minerals supply chain are:

•

the supply chain concentration and consolidation and

•

the cost gap.

Most notably, private firms are failing to appropriately price in the required level of economic resilience and security in critical sectors and supply chains, resulting in unacceptable levels of risk to Australia's national interest or broader economy.

If these barriers to investment are not addressed, Australia risks not having a well-developed and stable critical minerals supply chain domestically leaves Australia vulnerable to external market-related supply shocks, adverse Government policies in foreign jurisdictions, and market manipulation by major players in the global industry. This exposure could lead to upwards prices for processed critical minerals, downwards prices for raw feedstock, and a lack of consistent access to the supply of processed critical minerals in Australia.

Australia's current market share in the critical minerals and energy transition minerals sector is 5.66 per cent overall, based on Australia's 2023 market value when compared to the global equivalent^[87]. This figure is heavily driven by Australia's mining and extraction of critical minerals, rather than the downstream processing, where the largest value add occurs and primarily occurs offshore. For example, in the battery minerals value chain, the majority of value-adding occurs in the mid- and down-stream stages of production^[88].

Supply chain concentration and consolidation

Key suppliers of critical minerals are located in a small number of countries. According to a working paper published by the Peterson Institute for International Economics, China's control over global value chains involving critical minerals extends beyond what is commonly assumed if control of production is taken into consideration.^[89]

As Figure 1.2 shows, the US dominates the supply chain of oil and gas while China is the dominant actor in the supply chains of clean technologies, with the US only a minor player. In the markets of critical minerals where China is not a main source of reserves, it hosts many companies that exploit them.

Figure 1.2 Global supply chain concentration

Source: Peterson Institute for International Economics

Global demand for a variety of critical minerals is growing (see Table 1). Without policy intervention, the issue of supply chain concentration will not be addressed, and Australia will also risk having a smaller share of global supply.

The problem is further illustrated by the level of geographic concentration of critical mineral and downstream processing. As an example of China's dominance in supply chains, nearly 80% of global lithium-ion batteries^[90], a battery chemistry that is forecast to dominate the battery market, are produced in China.^[91] As extraction and processing of critical minerals are 'highly concentrated geographically' (see Table 2), this could create a 'bottleneck' which runs a significant risk of delaying the production of clean energy assets.

Notes:

Announced Pledges Scenario (APS), Stated Policies Scenario (STEPS), Net Zero Emissions by 2050 (NZE) Scenario

Source: World Energy Outlook 2022, International Energy Agency

Table 1.1: Global supply and demand for selected refined critical minerals

Notes: Australian share of global supply is indicative only, as Australian production figures are for the financial year and global supply use a different data source.

Source: DISR, private sector forecasts

Table 1.2: IEA estimate of the share of top 3 producers of selected refine critical minerals in 2023, thousand tonnes

Source: International Energy Agency (2024)

This supply-chain concentration, coupled with other jurisdictions not meeting expected targets^[92], is further reflected by China's share of around 80% of the rare earth (refer to Figure 1.4) minerals processed worldwide, 90% of the lithium, 70% of the gallium, and 70% of germanium.^[93] Evidence from a production forecast study suggests that the EU will fall short of meeting its 2030 targets in the rare earth sector. According to this study, EU will achieve only 22% of expected demand of 45% for producing magnets from metals.^[94] Another study demonstrates that US firms producing critical minerals sought to meet short term goals that ran contrary to national and strategic objectives focused on the long term.^[95] These figures highlight the exposure and reliance of Australia on concentrated, vulnerable supply chains for critical minerals. Without development of domestic supply chains, Australia will remain exposed to these supply chain risks and be vulnerable to external instabilities. ^[96]

Figure 1.4. Summary overview of the global rare earth elements supply-chain

ANU Rare Earth Elements (REE) Conference 2023: REECON 23 - Rare Earth Element (REE) Supply Chain Perspective

Another key example of market volatility in critical minerals supply chains is nickel. A substantial increase in nickel supply from Indonesia, following significant Government invention^[97] influenced a fall in price from a high of US$50,000/t in 2022 to just US$16,400/t in February 2024. Consequently, BHP, Australia's only and largest nickel producer, wrote down the value of its West Australian nickel division Nickel West to zero and has since placed the entire division into a "period of care and maintenance".

Cost gap

Critical minerals refining is technically complex and involves significant capital outlays. Australia's high labour and environmental standards, and higher cost of capital mean that the processing of critical minerals is more expensive relative to other markets^[98].

In addition, over the past decade, there has been a surge in global industry policy interventions that has exacerbated cost differentials between Australia and these other jurisdictions. From 2010 to 2022, the volume of such interventions has expanded exponentially, showing a 46-fold increase. This upswing has been strongest among OECD countries, including the United States. Specifically, the US Inflation Reduction Act (IRA) provides US$394 billion of industry support, including US$31 billion to reduce the operating costs for producing critical minerals^[99].

Figure 1.1. Evolution of industrial policy by major economies from 2010-2022

Source: Reka Juhasz, Nathan Lane and Dani Rodrik (2023) The new economics of industrial policy; MIT Technology Review (2023); European Commission (2019).

Using proprietary industry data from ten firms in Australia's critical minerals industry, Mandala modelling determined that Australia's production is on average 10 per cent more expensive than in the US when it comes to refining critical minerals and producing battery active materials^[100]. This is partly attributable to the US IRA Advanced Manufacturing Production Tax Credit (AMPTC) which provides a 10 per cent production subsidy for both critical minerals and active battery materials.

Similar to the US IRA, the Canadian CTM Clean Technology Manufacturing Investment Tax Credit (CTM ITC) and Critical Mineral Exploration Tax Credit (CMETC) both also exacerbate the cost gap in Australia. The CM ITC reduces the cost of capital for clean energy technology manufacturing, processing and extraction of 6 critical minerals in Canada by 30%, through a refundable tax credit. The CMETC also provides a 30% tax credit for specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. These tax incentives improve prospective critical minerals processors anticipated returns and make Canada a more attractive investment destination for critical minerals processors.

A study for Thorium Energy Alliance has expressed concern over China's dominance of rare-earth elements production and nominal cost differentials of up to 30% compared with US firms.^[101] Neodymium market prices have fluctuated greatly in the past decade, ranging from around US$50,000/tonne ($50/kg) to nearly US$140,000/tonne ($140/kg).^[102] With US policies already in place, the nominal cost differentials of China compared with Australian firms is even larger.

How the problem impacts people, businesses and community organisations

Insufficient processing of critical minerals in Australia at scale is a problem as without the critical minerals on Australia's list, and the technologies they enable, manufacturing sectors and defence industries will not have access to key inputs, putting them in a vulnerable position and posing a national security risk.

Furthermore, critical minerals processing will assist Australia in meeting its renewable energy ambitions and net zero goals. Achieving net zero will internalise the negative externalities from emissions, drive efficient decarbonisation, spur long-term investment in clean, emissions-lowering technologies and industries, and seize the economic opportunities this transformation presents. ^[103]

These impacts are further noted to include the following people, businesses and communities:

•

Processors undertaking critical minerals processing and refining activities, and clean energy manufacturers further downstream, would be significantly more exposed to supply chain disruptions, and economies of scale may not be achieved or realised by firms.

•

New firms and investors may be less inclined to invest in Australia's critical minerals sector rather than other jurisdictions with Government support.

•

The Australian community may lose out to the extent that the onshore downstream critical minerals related jobs are lost because of offshore processing.

•

The Australian community will not benefit from the rewards of an established clean energy production industry in Australia which will help Australia meets its net zero targets.

Current Government measures that address the problem - Why are the measures not sufficient?

Australia's Critical Minerals Strategy 2023-2030 ^[104] sets out a vision for investment in critical minerals processing facilities and the sustainable development of Australia's critical minerals industry. The Government has announced a range of measures consistent with the Strategy to promote investment (as set out in Appendix C). However, these measures are primarily aimed at providing capital support and do not directly address the subsequent production cost gap compared with other jurisdictions. This means there is insufficient incentive for critical minerals processing in Australia.

If these barriers to investment in the critical minerals supply chain are not addressed, Australia will not process critical minerals at scale. This will leave Australia vulnerable to external shocks and lead to upwards prices for processed critical minerals, downward prices for Australian ores, and a lack of consistent access to a supply of processed critical minerals.

Case for government action/objective of reform

Government objectives

The Government's objective is to create sovereign capability in critical minerals processing to strengthen domestic resilience against supply chain shocks in line with the economic resilience and security stream of the National Interest Framework^[105].

Achieving this objective will see Australia moving down the critical minerals value chain and increase Australia's footprint in downstream processing. It will also allow Australia's critical minerals sector to make higher-value products that will assist in building new industries and strengthen domestic resilience to supply chain shocks.

Specific measurable targets include:

•

production volumes of processed critical minerals increasing to manage supply shocks on the Australian economy;

•

increase in the volume of onshore downstream processing in Australia relative to the status quo;

•

processing facilities established increasing by 30 per cent by 2035 in Australia to perform downstream activities;

•

Australia's market share in the critical minerals and energy transition minerals increasing from the 5.66 per cent base case scenario^[106]; and

•

the number of long-term offtake agreements by 2035 in place for the refined minerals alongside a growing domestic market for critical minerals.

The success targets were selected on the basis that they are measurable and reflect the Government's objective. The targets assume that Australia will invest in the downstream processing of critical minerals for the primary objective of economic resilience and security given that some level of domestic capability is necessary to protect against global supply chain shocks.

Given the Government's objective, these targets are important in ensuring that Australia can build enough domestic capability in the downstream processing and refining of critical minerals in order to withstand global supply shocks.

Why is Government intervention required?

Critical minerals processors are not entering into Australia's critical minerals sector at a rate which will effectively develop the sovereign capability in critical minerals to protect against global supply chain shocks. Because of this, Australia is also not capturing the full value of Australia's opportunity that the energy transition presents to allow the industry to be able to achieve economies of scale. This lack of international investment is largely driven by the global cost differentials and supply chain vulnerabilities that have been outlined in the Policy Problem Section.

Given the lack of new entrants at the desired rate, well-designed Government support can help de-risk critical minerals investments and crowd-in private sector funding to build the required domestic resilience. Specifically, tailored public financing arrangements can assist projects manage price risks over longer periods and unlock further private financing opportunities that would otherwise have been unavailable due to lower rates of return.^[107] This intervention can improve the attractiveness of Australia as an investment location for prospective processors, especially coupled with the comparative advantage that Australia has in relation to the abundance of raw critical mineral ores and mining and extraction capabilities.

Private sector customers are not always well placed to manage the risk of supply chain disruption and may not be able to account for the broader public costs of this risk. For this reason, strategic products such as critical minerals, that are highly exposed to supply chain disruption and lack of diversification, can require Government support to account for the public value of prudent management of geostrategic risk and broader access to these materials for the Australian economy^[108], as outlined in the Policy Problem section.

Australia cannot rely on the existing natural rate of investment determined by normal investment cycles given the expected significant demand pressures arising from global net-zero transformation efforts to develop sovereign capability in the sector. As identified in the 2024-25 Budget National Interest Framework Supporting Paper, some level of domestic capability may be both necessary and efficient for critical minerals processing, but the private sector cannot adequately invest in this capability without public investment.^[109] This is because of issues that create undue uncertainty for investors as described above, particularly around price instability makes investment uncertain.

As an example of the potential benefits of Government intervention, the US administration reported that twelve months since the introduction of the US Inflation Reduction Act of 2022, which was complemented by the Bipartisan Infrastructure Law and CHIPS and Science Act, the private sector had announced more than $110 billion in new clean energy manufacturing investments and more than 170,000 clean energy jobs created.^[110] Given the nascency of other policies, such as the Canadian CM ETC and CMITC, data on the effect of the Government intervention is not available, however various industry stakeholders have noted the importance of these measures to the global critical minerals industry.

Furthermore, Australia's trade and investment partners are increasingly looking to Australia to provide critical minerals, including rare earth elements, that will feed diversified global supply chains in the energy transition. The Government can work with industry and communities to enable this. The Government has already taken steps to work with international partners to help projects link to emerging markets in countries like the United States, the United Kingdom, Japan, Korea, India, the UK, the European Union and its member states.^[111]

Constraints to achieving objectives

The key constraint to Australia achieving its critical minerals objectives is that the Government has limited funds to address the cost gap in Australia and the expenditure may not be enough to overcome the barrier to encourage the required investment levels. To manage this constraint, Government expenditure on critical minerals will need to be targeted to the areas required most by the industry to build sovereign capability. The Government can manage this risk by engaging in stakeholder consultation with the industry to best understand where the cost gap lies.

Another constraint is the nascent nature of the critical minerals industry. Although early movement is necessary to meet the Government's objective, there is a risk that technology may rapidly change, requiring greater than expected capital expenditure from firms. The Government should remain engaged with stakeholders and be agile with the method of intervention to manage this risk.

The final constraint is that the critical minerals sector may remain vulnerable to global supply chain disruptions even with Government intervention. This constraint is most apparent in relation to China's current monopolisation of the Lithium and Rare Earth minerals market as explained in the Policy Problem section. To best mitigate this risk, Government should develop sovereign capability in critical minerals processing, and secondarily maintain strong trade relations with key countries in the critical minerals sectors, such as the US, Canada and China, to ensure there are multiple sources of processed critical minerals inputs.

Alternative to government action and why is this a problem?

An option is to leave the market to manage the challenges faced in the sector and rely on existing Government support. This is a problem for Australia as there are long lead-time for projects in the critical minerals industry and will require time to build sovereign capability to protect against supply shocks. Further, the renewable energy transition is occurring now, which could lead to Australia being left behind and not capturing the full value of the opportunity that the energy transition presents.

Policy options

Option 1 -Base Case (Status Quo)

Under the base case, Australia maintains the current status quo. It is assumed that Australia would continue to benefit from domestic and international economies decarbonising, with no additional efforts from the Government or industry.

The base case reflects some impacts resulting from the decarbonisation of the Australian and global economy, however, remains agnostic as to whether this decarbonisation is in line with the Paris Agreement or Australian Government emissions reduction targets.

As such, Australia would not take on any further downstream processing activities and would remain an exporter of raw minerals where it is already doing so.

This option demonstrates the national security risks of a lack of government intervention in the sector, and resulting foregone economic opportunities.

Access to critical minerals will therefore rely heavily on trading partners building their capacity and honouring Free Trade Agreements with Australia.

Options 2 and 3 - Production Tax Incentive

The Critical Minerals Production Tax Incentive (CMPTI) will be available for up to 10 years per facility, for production between 2027-28 and 2039-40. The CMPTI will provide a time-limited and uncapped 10 per cent refundable tax offset, delivered through the tax system for constitutional corporations subject to tax in Australia:

•

The offset will be calculated on the costs of processing and refining any of the critical minerals published on the Australian Government's Critical Minerals List^[112] as at 14 May 2024.

•

Where the value of the taxpayer's incentive claim exceeds their tax liability, the offset may result in a cash refund.

•

There is no proposed cap on the quantum of funds claimable for each facility and no proposed restriction on the end use of the critical mineral.

The addition of further minerals to the Critical Minerals List (see Appendix B for full list) would not automatically flow through to the incentive and would instead require a decision of Government to amend the legislation. If a mineral is removed from the critical mineral list, this would not flow through to the incentive, without Ministerial direction, to retain certainty for firms which have proceeded with investments on the basis that they would receive the CMPTI.

Eligible processing costs will be those incurred for the processing and refining of the critical minerals. Depreciation and financing costs, and costs of feedstock will be excluded. Taxpayers will be required to apportion costs where they use the same inputs for eligible and non-eligible purposes.

Integrity measures will limit risk associated with related party transactions.

The CMPTI is only available to constitutional corporations that are income tax residents of Australia, or which carry on their processing activities through a permanent establishment (except entities that are fully exempt from paying corporate income taxes). Foreign investment will continue to be subject to Australia's foreign investment settings.

Eligible processing will usually be defined based on the processing activities undertaken, such as chemical or thermal techniques, as opposed to eligibility based on the purity of the output. Legislation will include a regulation making power to allow for the inclusion or exclusion of activities for which the general definition does not appropriately cater.

Taxpayers will be able to elect when to start claiming the CMPTI, so that they can commence the 10-year period at the most opportune time for them.

The CMPTI will help achieve Government's policy objectives as it will assist in building sovereign capability and economic resilience in critical minerals by narrowing the ongoing operational expenditure cost gap for firms with eligible processing activities by providing the 10 per cent tax credit for operational expenditure costs. This cash flow support will also increase companies' creditworthiness and indirectly supports initial capital finding from financial institutions. By narrowing this cost gap, a greater volume of firms may decide to invest in processing which will assist in meeting the objective to protect and diversify supply chains for both Australia and our strategic partners.

Option 2 - CMPTI as announced in the 2024-25 Budget

Option 2 would require applicants of the CMPTI to take a Final Investment Decision (FID), or commencement of production, prior to 30 June 2030. Applicants would need to provide supporting evidence that they had taken a FID or started processing by this date.

The inclusion of the requirement to take a FID by 30 June 2030 was intended to support the Government's objective of building sovereign capability by providing an incentive to bring forward investment decisions.

Option 3 - CMPTI as amended following stakeholder consultations

This option would remove the requirement for applicants to take a FID, or commence production, prior to 30 June 2030.

In consultation, stakeholders noted that given the long lead times for critical mineral investments new investors were unlikely to be able to take a FID by 30 June 2030. The intended effect of removing the FID requirement was to not exclude any new investment into critical minerals processing given the long lead times for projects. The removal would lead to the CMPTI not favouring existing producers or those well advanced towards FID. As a result, Option 3 will also support the Government in achieving its objective to build sovereign capability by providing as many processors as possible with access to the CMPTI.

Options out of scope for this Impact Analysis

Various stakeholders have raised that other initial capital supports could also help the nascent industry stakeholders to develop the infrastructure required for developing downstream critical minerals processing and refining. The Government had made a separate announcement in the 2024-25 Budget that the Critical Minerals Facility would financially support projects that are aligned with the national interest.

Additionally, there are other priority industries and areas which require further investigation within the Government's Future Made in Australia package with similar objectives, such as green hydrogen, green metals and low carbon liquid fuels. These measures are also not in scope of this regulatory impact analysis.

Cost benefit analysis

The cost-benefit analysis incorporates external scenario modelling commissioned by the Department of Industry, Science and Resources in 2023 to estimate the possible whole of economy benefits of an expansion in the critical minerals sector and potential downstream value adding.

Appendix D outlines the modelling approach, assumptions, and limitations of the external scenario modelling.

4.1 Option 1 - Base Case (Status Quo)

Under the status quo, Australia would not be well positioned to establish downstream critical minerals processing and manufacturing capabilities, and as such meet the Government objective. This option would favour the existing 'dig and ship' model and not build sovereign capability in the sector, leaving Australia vulnerable to supply chain shocks. It will also not assist with the investment growth in any additional critical minerals refining capabilities increasingly constrained by Australia's cost gap and vulnerability to supply chain disruptions.

Treasury estimates suggest that under the base case, Australia will produce more than 7.5 million tonnes of refined critical mineral output by 2039-40, however the level that the minerals are refined to are estimated to be small improvements to the raw mineral. This estimation is based on analysis of Wood Mackenzie data, DISR prepared and provided data on unit production costs, and production forecasts of existing facilities only.

Australia's current market share in the critical minerals and energy transition sector is 5.66 per cent overall based on Australia's 2023 market value when compared to the global equivalent^[113], heavily derived from the mining and extraction sectors.

The base case does not achieve the Government's objective: to develop a sovereign capability for Australia to perform the downstream processing and refining of critical minerals. As a result, Australia will remain highly exposed to global supply chain disruptions given the lack of development in the critical minerals processing sector.

Furthermore, under the base case, Australia will not realise the potential value of the renewable energy transition and economies of scale will not be realised by the sector. Because of this, firms with marginal rates of return may be forced to close both temporarily and permanently during periods of disruption or economic difficulty. This will leave Australia more vulnerable to the global supply shocks as domestic processing and sovereign capability both decline.

Similarly, because the problems remain for existing firms the Australian community will not benefit should a well-developed critical minerals processing sector be developed in Australia. As a result, the community may lose out to the extent that an established clean energy production industry would help Australia meet its net zero targets and inputs into defence technologies and manufacturing. This would reduce the community's access to emission-lowering technologies and industries, and worsen Australia's national security, especially when supply chain disruptions occur.

The Australian community may also lose out to the extent the opportunity to gain higher value and productive onshore downstream critical minerals related jobs are foregone because of offshore processing.

This option is not expected to have any regulatory impact.

4.2 Option 2 and 3 - Critical Minerals Production Tax Incentive Key Features

The refundable CMPTI Options 2 and 3 provide financial support to critical minerals processors for ongoing operating expenditures. This cash flow support also increases companies' creditworthiness and thus indirectly supports initial capital funding from financial institutions. Because of this incentive, the CMPTI aims to help establish downstream refining and processing capability, and in turn build sovereign capability and economic resilience for the sector.

Treasury estimates suggest that Australia will produce an additional amount of more than 2.5 million tonnes of refined critical mineral output over the life of the policy. By 2039-40, the CMPTI will have supported estimated production of around 10 million tonnes of refined critical minerals.

This estimation was calculated using the theory of price-induced demand and an elasticity for refined minerals sourced from the Global Trade and Analysis Project database. Treasury also consulted with DISR on expected lead times for new projects to become operational.

Like all forecasts, there is uncertainty as to future outcomes, with both upside and downside risks. In addition, and not uncommonly, there were limitations to the data, including that DISR was unable to source production data for all 31 critical minerals due to their nascency.

An increased production of more than 2.5 million tonnes of higher processed, critical mineral output reflects the effectiveness of the Government's objective to build a sovereign capability. The CMPTI is expected to benefit critical minerals processors and manufacturers further downstream as they will be able to access an increased supply of domestic minerals because of the development of the industry, due to the narrowing of the operational expenditure cost gap achieved by the CMPTI. Developing the critical minerals industry will reduce Australia's reliance on imported processed critical minerals and accordingly support the Government's objective of achieving national security benefits by building sovereign capacity.

The Australian community is expected to benefit to the extent that the CMPTI encourages greater production of clean energy assets and defence technology inputs which will assist with Australia's net zero objectives and national security considerations. Achieving net zero will internalise the negative externalities from emissions, drive efficient decarbonisation, spur long-term investment in clean, emissions-lowering technologies and industries, and seize the economic opportunities this transformation presents. ^[114]

Additionally, the CMPTI will be aligned with the Community Benefit Principles outlined in the Future Made in Australia Bill^[115] which seeks to ensure public investment and the private investment it attracts flows to local communities in ways that benefit local workers and businesses.

It should however be noted that the full potential of the Australia's sovereign capability in the critical minerals sector may not be realised without targeted support for downstream activities, including manufacturing (i.e. creating demand for the CMPTI outputs). Options 2 and 3 only aim to address the operational expenditure cost gap for processors. Targeted Government support for capital expenditure, such as the Critical Minerals Facility, will still be relied upon by the sector to assist Australia in meeting its objectives.

In addition to the national security rationale of the CMPTI, the external modelling commissioned by DISR also provides an estimates of the economic benefit that the CMPTI could provide. In scenario 2 of the external modelling, it is estimated that a $6.94 billion in total investment from Government and Industry is applied to the Australia economy from 2022 until 2035. Given the CMPTI is estimated to cost approximately $7 billion dollars from 2023-24 to 2033-34, Treasury has for the purposes of this Impact Assessment, assumed that Scenario 2 is at least equivalent to the proposed CMPTI outcomes.

As the external modelling assumes that the $6.94 billion comes from both industry and Government, compared to the CMPTI which only comes from Government expenditure, Treasury believe that it is reasonable to assume that the estimates in the external modelling constitute the lower bound of the possible economic benefits of the CMPTI.

The modelling commissioned externally by DISR estimates that a $6.94 billion total investment until 2035 into the critical minerals downstream processing sector will see a net increase in national GDP of $69.9 billion (2023-dollar value) until 2040, relative to the base case. The investment from the Government is expected to cause greater co-investment from industry compared to Option 1 given the reduced cost gap and vulnerability to supply chains.

Furthermore, the external modelling estimates that Government investment is expected to create up to 143,000 additional cumulative FTE jobs from 2022 to 2040^[116], compared to the base case. While the investment captured as part of this scenario is spread out from 2022 to 2035, employment levels post 2035 are maintained as the shocks adopted remain ongoing.

Option 2 and 3 are expected to result in a medium overall compliance cost impact, comprising a medium implementation impact and a low increase in ongoing compliance costs. The options are expected to cost $100,000 per claimant for implementation, and $12,000 per year for ongoing reporting requirements.

The regulatory impact cost assessment assumes that the compliance cost will vary between companies and that there will be some new reporting and verification activities that will need to be designed and dealt with.

Option 2 - Critical Minerals Production Tax Incentive at Budget

The FID requirement was intended to support the accelerated development of sovereign capability in critical minerals processing industry onshore. This is because it would incentivise firms to bring forward any existing, or potential, investment decisions to pre-June 30 2030 to be eligible for the CMPTI. A requirement for FID was also considered as it could limit the fiscal impacts over the life of the CMPTI by not limiting the cost associated with late entrants. Having a FID deadline with a requirement to register this decision with DISR would also provide processors with greater certainty and assurance for the industry participants that they could receive the CMPTI.

Option 2 was estimated to have a cost to the budget of $7.0 billion over 11 years from 2023-24 (and an average of $1.5 billion per year from 2034-35 to 2040-41).^[117]

This option was estimated, subject to data availability, by taking forecasts provided by DISR of eligible annual production volumes for each critical mineral. These volumes were then multiplied by eligible unit processing costs for each mineral to provide an estimate of total eligible processing costs for each listed critical mineral. Proxy processing costs were used where data limitations were present. The resulting eligible CMPTI costs were then multiplied by 10 per cent to obtain the value of the CMPTI accrued over a given year.

The regulatory impact for option 2 to include a requirement to register a FID is not estimated to require additional costs from firms, rather require the bring forward of these decisions that would occur as normal business practice.

Option 3 - CMPTI as amended following stakeholder consultations

Feedback from industry stakeholders indicated that critical minerals projects have long lead times due to financing, environmental and other approvals processes which will impede upon a new project's ability to accelerate towards FID by 2030. This meant that Option 2 would only benefit existing producers or those already well advanced towards a FID by 2030. Treasury has estimated that the FID requirement would disqualify production from some of the facilities which would commence operations in response to the CMPTI but begin producing much later (2035-36 onwards) than assumed under Option 2 at 2024-25 Budget. Treasury has estimated that retaining the FID eligibility requirement would result in a reduction in CMPTI support to this cohort of facilities.

Option 3 would better ensure that the CMPTI meets the policy objective of growing Australia's sovereign capability in the critical minerals processing industry, including by incentivising projects not already under active consideration. It would allow projects with longer lead times to come online later and remain eligible for the CMPTI towards the end of the life of the policy, largely offsetting the unintended consequence of the FID requirement.

The fiscal cost of Option 3 is similar to Option 2 as costed at 2024-25 Budget, with a small increase to the underlying cash balance (UCB) over the life of the policy (to 2040-41). The small UCB gain is due to a small amount of production from 'induced' projects falling outside of the eligibility period. This overall net UCB gain further reflects the net benefit that Option 3 provides. As a result, the fiscal cost of Option 3 is similar to Option 2 as costed at 2024-25 Budget.

The FID requirement was originally considered to incentivise firms to move quickly to bring projects online and to limit the budget cost. However, feedback from consultation indicated that the 10-year limit per project and 2040 end date were sufficient to incentivise firms to move as quickly as possible and limit the fiscal impact of the policy.

Stakeholder engagement confirmed that infrastructure demands constrain the delivery of critical minerals projects making it almost impossible to meet the FID deadline outlined in the consultation paper.

Removing the requirement for a project to take FID or start production by 2030 will make the CMPTI more effective in incentivising new investment and diversifying critical minerals supply chains which supports the Government's objective. It would also reduce the administrative complexity for companies, DISR and the ATO, and be consistent with strong feedback from stakeholders during consultation.

Option 3 is also expected to have a negligible regulatory cost. Firms will be required to register their intention to claim the CMPTI with DISR, however the information required to meet these registration requirements is estimated to be low.

Consultation conducted

Early confidential consultations before announcement

Before the 2024-25 Budget announcement, Treasury, with representatives from the Department of Industry, Science and Resources (DISR), the Department of Climate Change, Energy, the Environment and Water (DCCEEW) and the Net Zero Economy Agency (NZEA) undertook confidential consultations with participants and peak bodies in the critical minerals industry.

The purpose of these consultations was to:

•

test the key features of the CMPTI;

•

clarify the proposed interaction between the CMPTI and other Government critical minerals initiatives; and

•

engage with the States on the specific implications for their Government Business Enterprises (GBEs).

Consultees welcomed the proposal and indicated it would make a meaningful improvement to Australia's attractiveness as an investment destination for refining and processing critical minerals. Consultees also broadly agreed with the proposed project parameters, noting the similarities with the US production tax credit for critical minerals.

Treasury and DISR agreed that concerns raised in the confidential consultations could be explored further during public consultation before finalising the proposed design. The concerns were repeated in the public consultation process.

Public consultation on implementation details

Treasury conducted a public consultation on the design implementation details of CMPTI from 28 June 2024 to 12 July 2024, and 49 written submissions were provided with a range of stakeholders including, project developers, industry bodies, tax advisors, unions and state and territory governments. Treasury and DISR also held targeted discussions with 18 key stakeholders to explore the CMPTI in greater detail.

Public consultation supported the addition of a broad-based tax incentive to incentivise growth and scale in the critical minerals sector. Some of the key outcomes of the consultation are as follows:

•

At least 12 respondents supported the inclusion of mid-stream processing in the CMPTI policy framework. Other respondents did not explicitly note support or provide dissenting views.

•

9 stakeholders flagged that the 10 per cent credit would be insufficient to facilitate new investment in critical minerals processing and would need to be complemented by other forms of Government assistance to effectively shift the dial.

-

Treasury considered the appropriate level of incentive in the lead up to Budget based on industry feedback, comparisons with other support provided globally, and existing policies. Feedback from public consultation did not sufficiently question the basis for this decisions.

•

Eleven stakeholders communicated that depreciation is one of the highest costs for critical minerals processing in Australia and including it as an eligible cost would help attract more downstream processing investment.

-

Treasury and DISR understand that depreciation costs do not scale with production once a facility has been built, so extending eligibility to depreciation could result in some taxpayers receiving significant payments even if production is limited. This would be inconsistent with the policy objective of targeting processing activity and there are other forms of capital support that projects could seek access to, such as the Critical Minerals Facility.

Removal of FID requirement

During public consultation, 11 industry stakeholders of the 49 submissions supported the removal of the requirement to make a Final Investment Decision (FID), or commence first production, by 2030. Stakeholders outlined that this requirement would likely exclude new investment given the long lead times for critical mineral processing projects, meaning the CMPTI would only benefit existing producers or those well advanced towards FID, which was against the policy intent of the CMPTI.

Treasury and DISR agreed with stakeholders around the removal of the FID requirement, and this is reflected in the preferred option. It is understood that given the long lead time for critical minerals processing in Australia, a FID requirement is likely to exclude new investment, meaning the incentive will only benefit existing producers, which is against the policy intent. This thinking differs to the Hydrogen Production Tax Incentive, as the relevant projects have short lead times.

Eligible outputs

Sixteen stakeholders cautioned against the CMPTI defining eligible outputs by prescribing purity levels. It was noted that customer requirements are consistently evolving and incentivising companies to target certain purity levels may not match future market demand. This was because a plant built to certain specifications may be out of date by the time the build is complete.

Furthermore, stakeholders noted that achieving high purity levels is not currently economical for the Australian critical minerals industry. Even with a CMPTI the foreseeable opportunity is mid-stream processing activity, with further downstream capability being developed incrementally. Industry added that higher purity targets are more appropriate for the United States industry as they have a more developed manufacturing sector to sell processed minerals into.

Some stakeholders proposed an alternative approach to purity definitions which involved using a metric based on value-add or chemical transformation from the initial mined output.

Following consultation, Treasury and DISR's view is that outputs should be defined through a test that will be principally defined based on the processing activities undertaken, such as extractive metallurgical processing techniques, as opposed to eligibility based on the purity of the output. This is reflected in the preferred option.

Leverage existing processes to reduce administration burden for claimants

Six stakeholders requested that existing processes were leveraged as much as possible to reduce administrative burden. In particular, stakeholders noted that producers and customers do extensive testing to ensure output meets the specifications of the sale contract, with financial penalties or rejection where it does not. This testing is performed by an in-house or independent laboratory, and disputes are generally adjudicated by a third-party laboratory.

Products can be independently tested by National Association of Testing Authorities (NATA) accredited laboratories in Australia, which certify the products for commercial sales and are required for any sale of critical minerals globally. These laboratories are audited by the International Federation of Inspection Agencies.

Industry recommended that the CMPTI rely on certificates of assurance from these laboratories for compliance purposes rather than requiring separate testing by Geoscience Australia. Industry also noted Geoscience Australia did not currently have necessary testing capabilities for this function. Nevertheless, they were largely supportive of an audit of products where appropriate to ensure compliance.

Treasury and DISR support the use existing testing arrangements to evidence eligibility of outputs, specifically, the use of NATA accredited testing labs. From consultation, it is clear there are already incentives for producers to have sufficient testing mechanisms in place, given the financial consequences that will arise where it does not meet the specification in the commercial contract. This level of independence and certification is considered sufficient to support the integrity of the scheme and is reflected in the preferred option.

Confidential Consultation on draft legislation

In October 2024, Treasury, with representatives from DISR undertook confidential consultation with participants and peak bodies in the critical minerals industry. The purpose of this consultation was for consultees to provide feedback on draft legislation and explanatory materials.

Consultees welcomed the draft legislation and indicated that the amendments since the public consultation effectively incorporated stakeholder feedback and would assist with Australia's ambition to grow the downstream critical minerals processing sector.

Option selection

The table below provides a summary of the costs and benefits of each option.

The preferred option is Option 3 - introduction of the CMPTI without a requirement for a FID to be taken. This option provides the greatest net benefit as it most effectively address the Government's objective to incentivise critical minerals processing in Australia by narrowing the cost differential for production and, in doing so, build sovereign capability in critical minerals processing.

As discussed in the cost benefit analysis, Option 1 does not adequately address the Government's objectives as it favours the existing 'dig and ship' model. This option does not build sovereign capability in the sector, leaving Australia vulnerable to supply chain shocks. It will also not assist with the investment growth in any additional critical minerals refining capabilities increasingly constrained by Australia's cost gap and vulnerability to supply chain disruptions.

Furthermore, under the status quo, Australia will not realise the potential value of the renewable energy transition and economies of scale will not be realised by the sector. Because of this, firms with marginal rates of return may be forced to close both temporarily and permanently during periods of disruption or economic difficulty. This will leave Australia more vulnerable to the global supply shocks as domestic processing and sovereign capability both decline.

Similarly, because the problems remain for existing firms the Australian community will not benefit should a well-developed critical minerals processing sector be developed in Australia. As a result, the community may lose out to the extent that an established clean energy production industry would help Australia meet its net zero targets and inputs into defence technologies and manufacturing. This would reduce the community's access to emission-lowering technologies and industries, and worsen Australia's national security, especially when supply chain disruptions occur.

The Australian community may also lose out to the extent the opportunity to gain higher value and productive onshore downstream critical minerals related jobs are foregone because of offshore processing under option 1.

Options 2 and 3 aims to help establish downstream refining and processing capability, and in turn build sovereign capability and economic resilience for the sector. The CMPTI provides financial support to critical minerals processors for ongoing operating expenditures. This cash flow support also increases companies' creditworthiness and thus indirectly supports initial capital funding from financial institutions.

Furthermore, Treasury estimates suggest that Australia will produce an additional amount of more than 2.5 million tonnes of refined critical mineral output over the life of the policy. By 2039-40, the CMPTI will have supported estimated production of around 10 million tonnes of refined critical minerals. The increased production of more than 2.5 million tonnes of higher processed, critical mineral output, compared to the status quo, reflects the effectiveness of the Government's objective to build a sovereign capability.

Options 2 and 3 are also expected to benefit critical minerals processors and manufacturers further downstream as they will be able to access an increased supply of domestic minerals because of the development of the industry, due to the narrowing of the operational expenditure cost gap achieved by the CMPTI. Developing the critical minerals industry will reduce Australia's reliance on imported processed critical minerals and accordingly support the Government's objective of achieving national security benefits by building sovereign capacity.

The Australian community is expected to benefit from these options to the extent that the CMPTI encourages greater production of clean energy assets and defence technology inputs which will assist with Australia's net zero objectives and national security considerations. Achieving net zero will internalise the negative externalities from emissions, drive efficient decarbonisation, spur long-term investment in clean, emissions-lowering technologies and industries, and seize the economic opportunities this transformation presents.^[118]

Additionally, these options will be aligned with the Community Benefit Principles outlined in the Future Made in Australia Bill^[119] which seeks to ensure public investment and the private investment it attracts flows to local communities in ways that benefit local workers and businesses.

It should however be noted that the full potential of the Australia's sovereign capability in the critical minerals sector may not be realised without targeted support for downstream activities, including manufacturing (i.e. creating demand for the CMPTI outputs). Options 2 and 3 only aim to address the operational expenditure cost gap for processors.

Under the modelling commissioned externally by DISR, it is also estimated that options 2 and 3, in contrast to the status quo would see a net increase in national GDP of $69.9 billion (2023-dollar value), until 2040. Further, the modelling estimated that these options are expected to create up to 143,000 additional cumulative FTE jobs from 2022 to 2040^[120], compared to the base case.

Furthermore, the external modelling estimates that Government investment is expected to create up to 143,000 additional cumulative FTE jobs from 2022 to 2040^[121], compared to the base case. While the investment captured as part of this scenario is spread out from 2022 to 2035, employment levels post 2035 are maintained as the shocks adopted remain ongoing. These options and their net benefits outweigh the status quo in their ability to meet the Government's objectives.

The key constraint of these options is that the critical minerals sector may remain vulnerable to global supply chain disruptions even with Government intervention. This constraint is most apparent in relation to China's current monopolisation of the Lithium and Rare Earth minerals market as explained in the Policy Problem section. To best mitigate this risk, Government should maintain strong trade relations with key countries in the critical minerals sectors, such as the US, Canada and China, to ensure there are multiple sources of processed critical minerals inputs.

Option 2 would address the Government's objectives to a more limited degree, as the FID requirement would lock out investment that comes online after the FID deadline. The Option was estimated to have a cost to the budget of $7.0 billion over 11 years from 2023-24 (and an average of $1.5 billion per year from 2034-35 to 2040-41).^[122]

Option 3 considers stakeholder feedback and removes the requirement for firms to take a FID by 2030 or commence first production. Option 3 would better ensure that the CMPTI meets the policy objective of growing Australia's sovereign capability in the critical minerals processing industry, including by incentivising projects not already under active consideration. It would allow projects with longer lead times to come online later and remain eligible for the CMPTI towards the end of the life of the policy, largely offsetting the unintended consequence of the FID requirement.

This option takes stakeholder feedback into consideration and has sought to manage compliance and administration costs. It reflects close collaboration between the Treasury, DISR, and regulators. Given the nascency of the industry there are limitations associated with calibrating support, however this option is underpinned by robust assumptions and received broad support from stakeholders.

The fiscal cost of Option 3 is similar to Option 2 as costed at 2024-25 Budget, with a small increase to the UCB over the life of the policy (to 2040-41). The small UCB gain is due to a small amount of production from 'induced' projects falling outside of the eligibility period. This overall net UCB gain further reflects the net benefit that Option 3 provides.

Implementation considerations

To implement the CMPTI, legislative design will be worked through, including appropriate consultation of the legislation. Once implemented, Treasury will continue working with DISR and the ATO to monitor the effectiveness of the CMPTI.

Implementation risks in relation to the introduction of the CMPTI include that there may be a rapid influx of applications to DISR to register for the incentive when available and taxpayers seeking certainty prior to investment decision in the sector. This risk can be mitigated by clear guidance from DISR and the ATO regarding registration requirements and providing a timeframe in which responses to applications are expected to be sent.

There are further integrity risks associated with offering a significant refundable tax offset, which can be addressed to an extent by integrity rules in legislation, which the ATO will manage.

Evaluation/Review

The effectiveness of the preferred option can be monitored and evaluated again the Government's objectives as outlined in the table below.

The cost of the production tax credits will be publicly reported via the Tax Expenditures and Insights Statement each year.

The policy will be annually through observing the typical administration of the tax system and increase in private new capital expenditure and investment intentions.

The policy will also be evaluated over time through regular community outreach and engagement Treasury has with the industry and other interested stakeholders.

Careful design of the application forms will enable economic data including baseline data to be collected for future evaluation.

Potential for Future Made in Australia Community Benefits Principles^[123] to inform data collection

Outcomes from the Community Benefit Principles under the Future Made in Australia Bill may be measured, with the data to inform future evaluations. The principles as introduced are:

1.

Promote safe and secure jobs that are well paid and have good conditions;

2

Develop more skilled and inclusive workforces, including by investing in training and skills development and broadening opportunities for workforce participation;

3.

Engage collaboratively with and achieve positive outcomes for local communities, such as First Nations communities and communities directly affected by the transition to net zero;

a.

Supply Nation's members include a number of mining companies with interests in critical minerals, for example: BHP Ltd; Fortescue Metals Group; Iluka Resources Ltd; Mineral Resources Ltd, Newmont Australia Ltd., Rio Tinto, Wesfarmers.^[124]

b.

Such information can be useful for assessing progress against the National Agreement on Closing the Gap, socioeconomic target outcome 8 - Strong participation and development of Aboriginal and Torres Strait Islander people communities^[125]

3a. Supporting First Nations communities and Traditional Owners to participate in, and share in the benefits of, the transition to net zero;

4.

Strengthen domestic industrial capabilities including through stronger local supply chains; and

5.

Demonstrate transparency and compliance in relation to the management of tax affairs, including benefits received under Future Made in Australia supports.

Appendix A: Status of the IA at each major decision point

Appendix B: Australia's Critical Minerals List

*Critical Minerals List as at 14 May 2024

High-purity Alumina

Antimony

Arsenic

Beryllium

Bismuth

Chromium

Cobalt

Fluorine

Gallium

Germanium

Graphite

Hafnium

Indium

Lithium

Magnesium

Manganese

Molybdenum

Nickel

Niobium

Platinum-group elements^[126]

Rare-earth elements^[127]

Rhenium

Scandium

Selenium

Silicon

Tantalum

Tellurium

Titanium

Tungsten

Vanadium

Zirconium

Appendix C: Existing Support for Australian Critical Minerals Production

The table below provide examples of support for Australian Mining and Resources industry:

Future Made in Australia measures in the 2024-25 Budget to support critical minerals^[134]

Appendix D: Modelling Assumptions and Limitations for Cost Benefit Section

The cost benefit analysis section draws on external scenario modelling that was commissioned by DISR in 2023 to estimate the possible whole-of-economy benefits of an expansion in the critical minerals sector and potential downstream value-adding. The scenarios were modelled as a change in the status quo (i.e. shocks) and illustrated the potential impact of an expansion in downstream critical minerals processing activity through investment.

The observations reflected comparative static analyses of 4 scenarios out to 2040 against a 'base case' scenario, which assumed some growth in the critical minerals sector with mine expansions based on current trends, together with impacts resulting from the current decarbonisation paths of the Australian and global economies.

Base Case:

Under the base case scenario, the status quo is maintained. This means that Australia would continue to benefit from domestic and international economies decarbonising, with no additional efforts from the Government or industry. The base case reflects some impacts resulting from the decarbonisation of the Australian and global economy, however, remains agnostic as to whether this decarbonisation is in line with the Paris Agreement or Australian Government emissions reduction targets.

The Base Case also assumes there would be no green price premium, no faster adoption of clean technologies and no further adoption of energy transition related policies in Australia.

The base case is informed by a view of the Australian economy, based on Australian Bureau of Statistics (ABS) data, as well as known and anticipated mine expansions based on current trends. It is assumed under the base case, that no further investment stimulates the economy (in addition to what has already been catered for in the model), nor the use of any other policy mechanism or levers within each of these subsequent scenarios. This also means no green price premium, no faster adoption of clean technologies and no further adoption of energy transition related policies are captured under the base case.

Scenario 2

Scenario 2 reflects the scale of change required to transform global economies to net zero, generating unprecedented levels of demand from private and public sectors for clean technology products. These clean technology products are critical to global decarbonisation, with all pathways to net zero requiring a significant increase in capital expenditure and investment in material efficiency, circular economy solutions, and renewable energy technologies.

Scenario 2 captures the opportunity for Australia to become more than a primary producer and capture the potential of developing Australia's sovereign manufacturing capability to value add to these raw materials.

The additional investment adopted under Scenario 2, which equates to Options 2 and 3 in this Impact Assessment, is not directly associated with specific Government policy mechanisms or industry players, as it remains unclear what key drivers will lead to the additional investment adopted. Key inputs from DISR have been provided to establish a total co-investment value that could be attributed to building out downstream capabilities. Given the time horizon of the modelling, these inputs are necessarily illustrative, and should not be considered as indicating future government policies.

Representative ratios for Government to private sector investment provided by DISR have been used for scenario 2 and is based on historic performance of similar or related Government measures.

For scenario 2, the report employs economic 'shocks' to represent construction and operation phases, effectively making Australia's downstream capabilities more productive. Sectors that were shocked contained processing of mineral products, battery manufacture, electrical equipment manufacture, metal fabrication and transport equipment manufacturing.

The shocks employed include additional investment in:

•

Other metals sector, which includes for example professional, scientific, computer and electronic equipment manufacturing and electrical equipment manufacturing;

•

Other chemicals sector, which includes for example chemical manufacturing; and

•

Other manufacturing sector, which includes for example metal product manufacturing.

In adopting these economic shocks, it is assumed that greater productivity will be achieved within the above sectors, meaning less input will be required to deliver the same level of output.

Assumptions/modelling approach:

The modelling uses a customised version of the Victoria University Regional Model (VURM).^[135] A dynamic multi-regional computable general equilibrium (CGE) model which quantifies the economic impacts resulting from the various success in building downstream capability scenarios (and sensitivities).

The model uses detailed data from the Australian Bureau of Statistics and features price-driven behaviour and economy-wide constraints. The model involves an economy changing and growing over time in response to population, capital and debt accumulation, partial adjustment mechanisms in the labour market, as well as changes in technology and patterns of international trade and growth.

The 'base case' captures the baseline impact that is expected by Australia as it moves to low emissions technologies to support its decarbonisation journey.

While the base case captures the baseline impact that is expected by Australia as it moves to low emission technologies to support its decarbonisation journey, it is unclear whether or not the VURM assumes Australia achieves net zero by 2050, and whether it is on the trajectory to achieve that target over the analysis period. The report assumes this a reasonable position to adopt within the base case as it represents governments and industries actively taking steps to support the decarbonisation of the Australian economy.

All results presented are additional to the growth that is expected to occur under the model base case forecast of the Australian economy.

Jobs reported as 'additional' within the scenario results are the estimated net number of new jobs generated above the baseline, which move from non-productive industries to those which are stimulated by additional activity/investment.

Limitations:

The results have been quantified out to 2040, based on publicly available projections relating to foreseen demand of critical minerals. The modelling has been conducted using a forecast of critical mineral demand values, so would be subject to any change in those forecasts. Due to data limitations, the commodity prices adopted have been assumed to remain consistent across the analysis period.

The additional investment adopted under Scenario 2, which equates to Options 2 and 3 in this Impact Assessment, is not directly associated with specific Government policy mechanisms or industry players, as it remains unclear what key drivers will lead to the additional investment adopted. Key inputs from DISR have been provided to establish a total co-investment value that could be attributed to building out downstream capabilities. Given the time horizon of the modelling, these inputs are necessarily illustrative, and should not be considered as indicating future government policies.

It remains unclear what green price premium could be unlocked in Australia, where it plays an active role in shaping international standards in the future.

CGE is a simplification of real-world interactions and will not definitely address all uncertainties. One of these uncertainties includes whether Australia achieves net-zero by 2050, in the absence of any targeted additional 'shocks'.

The modelled scenarios do not capture the impacts of recent shifts in international renewable energy and industry policies, such as the US Inflation Reduction Act of 2022, nor are the shocks attributed to any particular additional government policy levers. As such, the scenario outcomes are interpreted as illustrative of the potential impacts from building downstream capabilities.