Edited version of private advice

Authorisation Number: 1052056725429

Date of advice: 20 January 2023

Ruling

Subject: Carbon credits

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Carbon offsetting services:

The Company provides a commercial service in carbon offsetting. The Company provides advice and carbon offsetting sourcing services related to decarbonisation. The Company acquires non registered emissions units, cancels/retires them immediately and provides a confirmation to the client that this has been effected and the business has offset their carbon footprint through the Company.

The carbon credit cancellation process occurs as a voluntary action at the carbon registry account by the account holder and is when the carbon credit practically and legally becomes a carbon offset. The carbon credit is then no longer tradable.

Depending on the verification standard under which the carbon credit was verified there are different options to confirm the carbon offset to their clients.

Clients pay a service fee to the Company in consideration for the carbon offsetting optimisation services provided.

In addition to the carbon offsetting service, the Company provides an educational platform to help clients work towards becoming carbon neutral.

The Company does not have an Australian Financial Services License to conduct a financial service business. The Company does not have a registry account within the meaning of the Australian National Registry of Emissions Units Act 2011 yet.

Voluntary carbon offsetting by the Company:

The Company also acquires and retires carbon credits that are defined as non registered emissions units and registered emissions units to offset their carbon footprint generated by the Company itself.

Question 1

Can we deduct the cost of Non Registered Emissions Units that we purchase for the purpose of providing carbon offsetting services to our clients?

Answer

Yes.

Reasons for decision

Registered emissions units are defined under section 420-10 of the ITAA 1997 as:

A registered emissions unit is:

(b)         a Kyoto unit; or

(d)         an Australian carbon credit unit;

for which there is an entry in a Registry account (within the meaning of the Australian National Registry of Emissions units Act 2011).

Division 420 of the ITAA 1997 deals with amounts you can deduct and amounts included in your assessable income if you acquire, hold or dispose of registered emissions units. This division only deals with specific provisions for registered emissions units and does not apply to emissions units that are not registered emissions unit as defined under section 420-10 (referred to as non registered emissions unit in this private ruling).

There is no definition or legislative provisions for 'non registered' emissions units, therefore the general deductions will be considered under section 8-1 of ITAA 1997.

Section 8-1(1) of ITAA 1997 states you can deduct from your assessable income any loss or outgoing to the extent that:

(a)  it is incurred in gaining or producing your assessable income; or

(b)  it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income

Section 8-1(2) states that however, you cannot deduct a loss or outgoing under this section to the extent that:

(a)  it is a loss or outgoing of capital, or of a capital nature; or

(b)  it is a loss or outgoing of a private or domestic nature; or

(c)   it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

(d)  a provision of this Act prevents you from deducting it

8-1(3) states that a loss or outgoing that you can deduct under this section is called a general deduction.

Application to your circumstances

Your income producing activities include purchasing non registered emissions units, cancelling those units and providing confirmation to your client that this has been effected and their business has offset their carbon footprint through the Company. The Company produces assessable income through a service fee that clients pay as a result of purchasing and retiring the non registered emissions units.

In Ronpibon Tin NL v FCT (1949) 78 CLR 47, the High Court considered that for expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income, it must be incidental and relevant to that end.

The main objectives and business goal of the Company is to acquire carbon offsets and help their customers become carbon neutral. The purchase cost of the non registered emissions units is incidental and relevant to the Company in gaining or producing assessable income for their business. The purchase of non registered emissions units were necessary in carrying out the Company's business activities in cancelling those emission units and allowing their clients to offset their carbon footprint. There is a rational link between the expenditure and their income producing benefits.

The expenses are not a capital expense or private or domestic in nature.

The cost of non registered emissions units the Company purchases to provide carbon offsetting services is an allowable deduction under section 8-1 of the ITAA 1997.

Question 2

Can we deduct the cost of Non Registered Emissions Units that we purchase for our own carbon offsetting purposes?

Answer

Yes

Reasons for decision

Division 420 of the ITAA 1997 deals with amounts you can deduct and amounts included in your assessable income if you acquire, hold or dispose of registered emissions units.

Since the carbon credits that are purchased are not registered emissions units as defined under section 420-10 of the ITAA 1997, Division 420 is not relevant.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Application to your circumstances

In addition to acquiring emissions units, which are not defined as registered emissions units, for providing carbon offsetting services to your clients, you also acquire and retire these emissions units for your own carbon offsetting purposes generated by the Company. The purpose is to offset the carbon footprint generated by the Company in the ordinary course of the business operations.

The purchase of the non-registered emissions units will be deductible if it will help you generate income or run a profitable business. There must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin v FC of T (1949) 78 CLR 47).

Where the expense is voluntary, the controlling factor is whether the expense can objectively be seen to be appropriate to the business activity (Magna Alloys & Research v. FC of T 80 ATC 4542; (1980 11 ATR 276). Purchasing the carbon credits is voluntary and not a direct expense to generate assessable income, however, achieving your own carbon neutral status while operating a carbon offsetting service is appropriate to gaining or producing income or carrying on a profitmaking business. Voluntary outgoings can meet the positive limbs even if the income earning/business advantages are indirect and remote (Magna Alloys & Research v. FC of T 80 ATC 4542; (1980 11 ATR 276)).

The word 'necessarily' incurred does not mean that the outgoing must be unavoidable or logically necessary. What it means is that the outgoing must be "clearly appropriate or adapted for" the ends of the business. The expenditure to offset the Company's own carbon footprint is appropriate as the Company provides carbon offsetting services to its clients. It incurs the expense for the purpose of becoming carbon neutral to align with its business goals.

The Company states that business partners and stakeholders have expectations on businesses who have a decarbonisation plan. The Company states that government institutions invite tenders to businesses and an important criterion for tenders is that the business has a green profile and decarbonisation plan. Further, the clients of the Company will more likely deal with them if they also offset their own carbon footprint to become carbon neutral. They state they need to lead by example.

These reasons for offsetting their own carbon footprint are clearly appropriate to the ends of the business in order to generate income or have a profit-making business.

The cost of acquiring and retiring carbon credits which are not defined as registered emissions units is deductible under section 8-1 of the ITAA 1997 as it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

Question 3

Can we deduct the cost of Registered Emissions Units that we purchase for our own carbon offsetting purposes?

Answer

Yes

Reasons for decision

Registered emissions units are defined under section 420-10 of the ITAA 1997 as:

A registered emissions unit is:

(b)         a Kyoto unit; or

(d)         an Australian carbon credit unit;

for which there is an entry in a Registry account (within the meaning of the Australian National Registry of Emissions units Act 2011).

Division 420 of the ITAA 1997 deals with amounts you can deduct and amounts included in your assessable income if you acquire, hold or dispose of a registered emissions units.

Under section 420-15 of ITAA 1997, expenditure incurred in becoming the holder of a registered emissions unit is deductible to the holder provided that proceeds of disposal of that unit would be the holder's assessable income. Subsection 420-15(5) links the deduction to section 420-25 stating that you cannot deduct under this section expenditure you incur in becoming the holder of a registered emissions unit if the proceeds of the sale of the unit would not have been included in your assessable income under section 420-25 of the ITAA 1997.

Therefore section 420-15 does not apply to expenditure incurred for holding registered emissions units if the proceeds of disposing of units would not be assessable under section 420-25.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Application to your circumstances

You acquire and retire carbon credits that are defined as registered emissions units for your own carbon offsetting purposes generated by the Company.

The purpose of the carbon offsetting activities is to offset the carbon footprint generated by your Company in the ordinary course of the business operations. The purchase of the carbon credits will be deductible if it will help you generate income or run a profitable business. There must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin v FC of T (1949) 78 CLR 47).

Where the expense is voluntary, the controlling factor is whether the expense can objectively be seen to be appropriate to the business activity (Magna Alloys & Research v. FC of T 80 ATC 4542; (1980 11 ATR 276). Purchasing the carbon credits is voluntary and not a direct expense to generate assessable income, however, achieving your own carbon neutral status while operating a carbon offsetting service is appropriate to gaining or producing income or carrying on a profitmaking business. Voluntary outgoings can meet the positive limbs even if the income earning/business advantages are indirect and remote (Magna Alloys & Research v. FC of T 80 ATC 4542; (1980 11 ATR 276)).

The word 'necessarily' incurred does not mean that the outgoing must be unavoidable or logically necessary. What it means is that the outgoing must be "clearly appropriate or adapted for" the ends of the business. The expenditure to offset the Company's own carbon footprint is appropriate considering the Company's business is providing carbon offsetting services to its clients. It incurs the expense for the purpose of becoming carbon neutral to align with its business goals.

The Company states that business partners and stakeholders have expectations on businesses who have a decarbonisation plan. The Company states that government institutions invite tenders to businesses and an important criterion for tenders is that the business has a green profile and decarbonisation plan. Further, the clients of the Company will more likely deal with them if they also offset their own carbon footprint to become carbon neutral. They state they need to lead by example.

These reasons for offsetting their own carbon footprint are clearly appropriate to the ends of the business to generate income or have a profit-making business.

The cost of acquiring and retiring carbon credits defined as registered emissions units is deductible under section 8-1 of the ITAA 1997 as it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

Relevant legislative provisions

Section 8-1 of the Income Tax Assessment Act 1997

Section 420-10 of the Income Tax Assessment Act 1997

Section 420-12 of the Income Tax Assessment Act 1997

Section 420-15 of the Income Tax Assessment Act 1997

Section 420-25 of the Income Tax Assessment Act 1997

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