Edited version of private advice

Authorisation Number: 1012680177022

Ruling

Subject: GST and Partial Exemption Certificates

Question 1

Do you receive any non-monetary consideration for your supply of electricity to the customer?

Answer

Yes

Question 2

If so, are you the recipient of a taxable supply made by a customer when a Partial Exemption certificate (PEC) is issued in relation to you by the Clean Energy Regulator in accordance with the Renewable Energy (Electricity) Act 2000 (RE(E) Act)?

Answer

You are the recipient of a taxable supply made by a customer when the customer provides a PEC to you.

Relevant facts and circumstances

• You are registered for goods and services tax (GST).

• You are an electricity retailer. A retailer buys electricity from the wholesale market and on-sell the electricity directly to individual customer.

• You sell electricity to customers, who are registered for GST, under a Retail Electricity Agreement.

• Your activities are governed by the RE(E) Act.

• Electricity generators are able to create renewable energy certificates (RECs) either Large-Scale Generation Certificates (LGC) or Small-scale Technology Certificates (STC) for electricity produced using eligible energy sources. Once registered, RECs are traded and sold.

BACKGROUND

Liability under the RE(E) Act

• Wholesale purchasers and large users who make relevant acquisitions of electricity ('liable entities') are required to meet a share of annual legislated targets in proportion to their share of the national wholesale electricity market.

• The RET places a legal requirement on liable entities (typically electricity retailer) to purchase RECs equivalent to a prescribed proportion of liable wholesale electricity acquisitions set annually by the Regulator.

• RECs are traded and sold to liable entities, mainly electricity retailers, who may surrender them to the Renewable Energy Regulator (the Regulator) to demonstrate their compliance under the scheme and avoid paying the shortfall charge.

• Each year, you who made RET-liable acquisition of electricity (liable entity) during the previous calendar year are obliged to submit statements detailing its relevant acquisitions and to either surrender RECs equivalent to its obligation in MWh or pay a shortfall charge.

The Partial Exemption Certificate (PEC)

o Liable entities passed the cost associated with sourcing these certificates onto electricity user through higher retail prices.

• In recognition that the RET scheme will increase costs to firms that carry on Emissions-Intensive Trade-Exposed (EITE) activities, the RET legislation includes provisions to provide partial exemptions from RET liability in respect of acquisitions of electricity used in carrying on EITE activities. The broad intention of the partial exemptions is that part of the electricity supplied for use in carrying on an EITE activity can be exempted from liability under the RET.

• By exempting an amount of electricity from the named entity's RET-liable electricity, it reduces the number of RECs the liable entity must purchase during the year for surrender to the Regulator. Only the entity named on the PEC may claim the partial exemption.

• A partial exemption certificate (PEC) has a financial value to the RET-liable entity named on the PEC. In return for the PEC, the retailer offers a reduction in the price of electricity to the EITE customer.

• To claim this exemption, the liable entity must provide a copy of the PEC to the Regulator by 14 February the following year as part of the entity's energy acquisition statement for the previous year T

• The PEC is theoretically worth the cost of acquiring the exempt RECs for the liable entity.

The operation of the partial exemption

• An entity involved in carrying on an EITE activity may apply to the Regulator for a PEC in relation to RET-liable electricity used in carrying on that activity at a particular site for a particular year.

• The Regulator will issue a PEC to the applicant setting out the amount in MWh of the electricity to be exempted for the year and including the name of the liable entity in relation to the electricity (usually the retail supplier). Regardless of when during the year an applicant is issued with a PEC, the value of the partial exemption will be based on the full year's production of relevant product.

• It is envisaged that the entity to whom a PEC has been issued will voluntarily provide a copy of the PEC to the liable entity (their electricity retailer) which will remove the RET liability for that supply of electricity.

• As part of the RET compliance process in February each year, the liable entity can claim exemption from RET liability for the amount of electricity set out on the PEC by providing a copy to demonstrate its entitlement to the partial exemption.

Application form for PEC - CER-RET 006

The purpose of this form

Subject to agreement from the prescribed person a PEC may be traded to the liable entity, and provides the liable entity with exemption from liability for a certain amount of megawatt-hours of electricity in the given compliance year. The level of exemption is based on financial year quantity of relevant product and other relevant variables as detailed in Division 5 of Part 3A of the Regulations. The liable entity must provide a copy of the PEC(s) with their annual energy acquisition statement for the given compliance year to reduce their liability by the designated amount of electricity. [emphasis added].

• An application for a PEC must be made by a prescribed person who will receive the PEC (this is generally the entity carrying on the EITE activity).

• If the liable entity (usually the electricity retailer) changes during the year, the prescribed person may apply to have the original PEC amended and another PEC issued in relation to the new liable entity.

Publication of Information

• Sub-regulation 22E(2) requires that the Regulator publish on its website within 14 days after a PEC is issued under section 46B (1) of the Act for each year, the name of the person to whom the PEC is issued, and the relevant EITE activity; and

• EITE customer that receives a PEC can only negotiate its value with the retailer that supplies their electricity. The value of the PEC is negotiated as a part of the electricity contract. In your circumstances, the negotiation on the reduction in price of electricity is included in a Schedule of the Electric Retail Agreement

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 9-75

Section 9-15

Section 9-10

Renewable Energy (Electricity) Amendment Regulations 2010 (No 1).

Reasons for decision

It is not disputed that you make a taxable supply of electricity to your customers (including EITE customers) and receive consideration in return for the taxable supply.

The consideration is the price that you receive in return for the electricity supplied to your customers.

The amount of GST on a taxable supply is 10% of the value of the taxable supply. Under subsection 9-75(1), the value of a taxable supply is the price x 10/11, where the price is the sum of:

(a) so far as the consideration for the supply is consideration expressed as an amount of money - the amount (without any discount for the amount of GST (if any) payable on the supply); and

(b) so far as the consideration is not consideration expressed as an amount of money - the GST inclusive market value of that consideration.

Under section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 'consideration, for a supply or acquisition, means any consideration, within the meaning given by sections 9-15 and 9-17 of the GST Act, in connection with the supply or acquisition.' Subsection

9-15(1) provides that consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

A 'payment' is not limited to a payment of money. It includes a payment in a non-monetary or in an 'in kind' form.

Goods and Services Tax Ruling GSTR 2001/6 explains how the GST Act applies if part or all of the consideration for a supply is not expressed as an amount of money (that is, if it is non-monetary consideration). The Ruling explains the meaning of monetary consideration for the purposes of subsection 9-75(1) and provides principles for identifying non-monetary consideration for a supply.

In identifying a non-monetary consideration, paragraphs 47 and 48 of GSTR 2001/6 provide that:

47. The definition of a taxable supply requires, among other things, that you make a supply for consideration. There needs to be a supply, a payment and the necessary relationship between the supply and the payment. Where one party makes a monetary payment to another, something of economic value is provided. The question is whether there is a sufficient nexus between the supply and the payment as consideration.

48. The same analysis applies in determining whether a good, service or thing is non-monetary consideration for a supply.

Paragraphs 81 and 82 of GSTR 2001/6 add further:

81. For a thing to be treated as a payment for a supply, it must have economic value and independent identity provided as compensation for the making of the supply. That is, it must be capable of being valued and be a thing that an acquirer would usually or commercially pay money to acquire. Whether this requirement is satisfied will usually be demonstrated by the parties to an arrangement assigning a specific or separate value to the thing. However, the assigning of a value by the parties is not necessary for a thing to have economic value.

82. Whether a payment is consideration for a supply depends on the true character of the transaction. Consideration for a supply is something the supplier receives for making the supply. Although a non-monetary payment (and acts or forbearances) can form consideration, the character of the transaction will determine whether it forms part of the consideration received by the supplier for making the supply.

Therefore, there are two elements to the definition of consideration:

• The first is the payment by one entity to the other. The payment must have economic value and independent identity.

• The second element is the nexus that must be established between the payment and the supply.

For a non-EITE customer, you only receive monetary consideration to settle the account. The price is the amount of money paid to you for the supply.

For EITE customers, what is the consideration you have received from the supply?

The following are a brief description of the operation of the Partial Exemption Scheme as envisaged in the Explanatory Statement Select Legislative Instrument 2010 No 46 Renewable Energy (Electricity) Amendment Regulations 2010 (No 1). The Regulations amend the Renewable Energy (Electricity) Regulations 2001 to support the provisions of the Act that deal with the provision of partial exemptions from liability in respect of the electricity acquired for use in carrying on activities that are defined as emissions-intensive trade-exposed (EITE) for the purposes of the Act.

• The EITE is the applicant for the PEC.

• The Regulator will issue a PEC to the applicant setting out the amount in MWh of the electricity to be exempted for the year and including the name of the liable entity in relation to the electricity (usually the retail supplier). .

• The EITE customer to whom a PEC has been issued will voluntarily provide a copy of the PEC to the liable entity (their electricity retailer) which will remove the RET liability for that supply of electricity.

• The liable entity can claim exemption from RET liability for the amount of electricity set out on the PEC by providing a copy to demonstrate its entitlement to the partial exemption.

• A partial exemption certificate (PEC) has a financial value to the RET-liable entity named on the PEC. In return for the PEC, the retailer offers a reduction in the price of electricity to the EITE customer.

The RET places a legal requirement on liable entities (typically electricity retailer) to purchase RECs (LGCs and STCs) equivalent to a prescribed proportion of liable wholesale electricity acquisitions set annually by the Regulator. It should be noted that the RET liability to the Regulator by you do not change regardless of whether the customer is EITE or non-EITE. The liability is calculated by reference to the wholesale electricity acquisitions. The liability must be met either:

• the retailer purchases the relevant certificates by using their own fund, and/or

• the retailer surrenders the PEC which was granted to the EITE customer.

Under the current arrangement, the exemption can only be claimed by the liable entity that supplies electricity to EITE customer, although being issued to the EITE customer. Theoretically, the PEC reduces the amount of electricity subject to a RET liability and therefore reduces the number of certificates the liable entity must purchase during the year to surrender to the Regulator. In return for the PEC, the retailer offers a reduction in the price of electricity to the EITE customer as agreed in the retail contract.

EITE customer that receives a PEC can only negotiate its value with the retailer that supplies their electricity. The value of the PEC is negotiated as a part of the electricity contract, in your circumstances. The negotiation on the reduction in price of electricity is included in a Schedule of the Electric Retail Agreement.

This indicates that the PEC has an economic value and is accepted by the retailer as a payment in addition to the monetary payment for the supply of electricity by the retailer. As the PEC is not considered money, the PEC in the circumstances is a non-monetary consideration for the supply by the retailer.

The value of the taxable supply of electricity is provided by you to EITE customers consists of two components:

• the monetary component, and

• the non-monetary component, representing the value of the PEC.

The EITE customer pays a combination of monetary and non-monetary consideration. The two components adds up to the price of the supply which is the same for both EITE and non-EITE customers.

The GST payable on the supply of electricity is 1/11 of the price of the supply.

Question 2

Summary

You receive a taxable supply from an EITE customer in relation to the PEC. Your GST liability and input tax credit entitlement are subject to the normal rules in section 9-75 and Division 29 of the GST Act.

Detailed reasoning

Paragraph 16 of GSTR 2001/6 provides that:

By providing non-monetary consideration for a supply, you are in turn making a supply. Where this happens, you need to determine the GST consequences of the supply you make. If it is a taxable supply, you need to determine the GST inclusive market value of the consideration you receive for this supply to account for the GST payable. You may also be entitled to claim input tax credits for the supply made to you.

Paragraph 3 of GSTR 2001/6 provides that:

Something that is non-monetary consideration can itself be a taxable supply. The Ruling describes when this can happen and gives guidelines for identifying what the consideration is for such a supply.

Is the supply made by the EITE customer a taxable supply?

A supply is a taxable supply where all of the requirements under section 9-5 of the GST Act are met.

• The supply of the PEC is made for consideration: the reduction in the price of electricity to the EITE customer.

• The supply is made in the course or furtherance of an enterprise that the EITE customer carries on. Paragraph 3.10 of the Explanatory Memorandum to the GST Act provides that:

In the course or furtherance of an enterprise is not defined, but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise or achieving its goal, is a furtherance of an enterprise although it may not always be in the course of that enterprise.

• The supply is made in Australia.

• The EITE customer is registered for GST.

• The supply is not input taxed or GST-free under any provision of the GST Act or other Acts

Therefore, the supply of the PEC to you is a taxable supply made by the EITE customer.

Under the arrangement above:

• You make a taxable supply of electricity to the EITE customer. you receive part of the consideration in monetary form and part of the consideration in non-monetary form.

• You are liable for the GST on the supply of electricity to the EITE customer. The GST liability is calculated on the price of electricity as discussed above, not the reduced price.

• You are the recipient of a taxable supply made by EITE customer of the PEC. The consideration for the supply to you is the reduction in the price of the supply you made to the EITE customer.

• As you are making a creditable acquisition under section 11-5 of the GST Act, you are entitled to an input taxed credit. Under section 11-25 of the GST Act, the amount of the input tax credit is an amount equal to the GST payable on the supply of the thing acquired (GST payable on the acquisition of the PEC).

The value of the PEC as non-monetary consideration

Paragraph 138 of GSTR 2001/6 provides that:

…Where the consideration for a supply is non-monetary, the GST inclusive market value of that consideration is used to work out the price and value of the supply. In most circumstances where parties are dealing at arm's length, we are of the view that the goods, services or other things exchanged are of equal GST inclusive market value.

It is considered that the non-monetary consideration (PEC) received by you from the customer for the supply of electricity is of equal GST -inclusive market value to the taxable supply made by the customer to you, which is equal to the reduction in the price for the electricity.

Your GST liability

• You account for GST on a non-cash basis, the GST liability arising on your supply of the electricity arises at the earlier of the issuing of an invoice or the receiving of consideration.

• The price may include only monetary consideration or the combination of both monetary and non-monetary consideration. As the two components add up to the price of the supply, the GST liability will be the same because GST is 1/11 of the price of the supply.

Your input tax credit (ITC) entitlement in relation to the PEC

• As the acquisition of the PEC is a creditable acquisition, you are entitled to an input tax credit for the acquisition.

• Under section 29-10 of the GST Act you attribute the ITC in the tax period in which you provide any of the consideration for the acquisition or if, before you provide any of the consideration an invoice is issued relating to the acquisition - the tax period in which the invoice is issued.

• When you issues a tax invoice to an EITE customer (for a periodic supply), you also provides consideration for a part of the PEC- equivalent to the reduction in the price for that tax invoice (contra supply). you can claim the relevant ITC in that tax period.