Edited version of your written advice

Authorisation Number: 1012723857661

Ruling

Subject: GST and clean energy - Large - scale generation certificate trading

Questions

1. Are you eligible to claim input tax credits (ITCs) on the creation of Large-scale generation certificates (LGCs) through the Clean Energy Regulator (Regulator)?

2. Is your supply/transfer of LGCs for consideration to any buyer via the renewable energy certificates (RECs) registry a taxable supply?

Answers

1. No, you are not eligible to claim ITCs on the creation of large-scale generation certificates (LGCs) through the Regulator because there is nothing supplied from the Regulator to create the LGCs. You create the LGCs on the REC Registry. The Regulator merely registers/records the LGCs you created.

2. Your supply/transfer of LGCs for consideration to an Australian resident recipient via the RECs registry is a taxable supply. Your supply/transfer of LGCs for consideration to a non-resident recipient via the RECs registry is a taxable supply, unless it meets the requirement of Item 4(b) in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Relevant facts and circumstances

You are registered for GST. You are an accredited renewable energy power station, which means you are a registered participant under the Clean Energy Regulator's registry a market based online system, which allows Renewable Energy Target (RET) participants to create, transfer and surrender renewable energy certificates (RECs). The scheme is administered under the Renewable Energy (Electricity) Act 2000 (the Act).

LGC creation and registration:

In order to be eligible to create LGCs, you must first be accredited to do so. The main criterion for eligibility is that the generation system in question produces power via a renewable technology (for example, wind, hydro, or solar) and does not produce power using fossil fuels or waste products from fossil fuels.

Under the Large Renewable Energy Target (LRET), accredited RET power stations may be entitled to create LGCs. One LGC is equivalent to one megawatt hour of eligible renewable electricity generated above the renewable or eligible energy power station's renewable energy baseline.

Prior to creating LGCs , you measure your LGC eligibility according to Regulation 14 of the Renewable Energy (Electricity) Regulations 2001 (the Regulations) which specifies the eligible generation formula; and you ensure that LGCs are only created for renewable electricity generated above the power station's 1997 renewable energy power baseline, as determined by the Regulator when the power station is accredited. When you create the LGCs, you attach evidence to demonstrate the amount of electricity attributable to each eligible fuel source.

Properly created LGCs are validated by the Regulator and after payment of fees, become registered LGCs. These LGCs can then be sold and transferred to liable entities (usually electricity retailers) or any buyer for a negotiated price, using the REC Registry. Payment is arranged outside the REC Registry. The REC Registry tracks the ownership and status of LGCs.

All LGCs must be created in the REC Registry before they can be bought, sold, traded or surrendered. An account must be applied for and approved before certificates can be created, viewed or transferred.

LGCs are usually sold to liable entities. The liable entities are required by law to surrender a set number of LGCs to the Regulator in each calendar year to meet large-scale renewable energy target.

Clauses 27-29 of the Act in relation to the transfer, surrender and retirement of the certificates provide that:

Clause 27 - Certificates may be transferred

This clause allows for the ownership of registered certificates to be transferred from the owner of the certificate to any other person.

Clause 28 - Regulator to be notified

This clause requires that the Regulator must be informed, electronically, of every transfer in ownership of every certificate. The certificates register maintained by the Regulator must be altered to reflect the current ownership.

28A Registered owner may surrender certificate

The registered owner of a certificate may surrender the certificate to the Regulator under this section.

Clause 29 - Retirement of certificates

This clause specifies that certificates which have been surrendered in order to discharge a liability will no longer be valid. When a certificate is surrendered to the Regulator, the register of certificates will be altered to show that the certificate is no longer valid.

LGCs are not eligible emissions unit under the Clean Energy Act 2011.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

A New Tax System (Goods and Services Tax) Act 1999 Section 9-25

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-190(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-190(2).

Reasons for decision

Question 1:

Entitlement to input tax credits

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that you are entitled to an input tax credit if you make a creditable acquisition.

Section 11-5 of the GST Act states that:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

* denotes a term defined in section 195-1.

A supply will be a taxable supply where the requirements of section 9-5 of the GST Act are satisfied. Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply *is connected with Australia; and

(d) you are *registered or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed

Consideration - paragraph 9-5(a) of the GST Act:

Paragraphs 64 to 72 of Goods and Services Tax Ruling (GSTR) 2001/6 provide that there are three questions relevant to determining whether there exists a supply for consideration. These are:

• is there a supply,

• is there consideration; and

• does the necessary relationship exist between the supply and the consideration?

Section 9-10 of the GST Act gives the meaning of supply. Paragraph 33 of Goods and Services Tax Ruling (GSTR) 2006/9 states:

33. The words 'A supply is any form of supply whatsoever' in subsection 9-10(1) cover all supplies regardless of whether they concern goods or services…

Section 195-1 of the GST Act states that "consideration, for a supply of or acquisition, means any consideration, within the meaning given by sections 9-15 and 9-17, in connection with the supply or acquisition".

Paragraph 56 of Goods and Services Tax Ruling (GSTR) 2001/6 provides that it is not sufficient for there to be a supply and a payment there must be a sufficient nexus between the supply and the payment.

We do not consider that the Regulator supplies the LGCs to you. There is nothing supplied from the Regulator to create the LGCs. You create the LGCs on the REC Registry. The Regulator merely registers/records the LGCs you created. In addition, there is no consideration from you to the REC for your creation of the LGCs.

Since there is no supply of LGCs to you from the Regulator or from any entity, it follows that there is no taxable supply. Hence neither section 9-5 of the GST Act nor subsection 11-5(b) of the GST Act is satisfied, and you are not entitled to input tax credits under section 11-20 of the GST Act.

Question 2:

Is your supply/transfer of LGCs for consideration to any buyer via the renewable energy certificates (RECs) registry a taxable supply?

Characterisation of LGCs

We can use the reference to the relevant provisions of the Renewable Energy (Electricity) Act 2000 (the Act), under which the LGCs are created and surrendered.

Generally, the Act permits certain entities to create LGCs. The valid LGCs are created when registered by the Regulator. Once registered, the Regulator permits certificates to either be sold or purchased by any person (subject to registration of ownership); or surrendered by a registered owner to the Regulator to be cancelled to discharge a liability of registered owners under the Act. The Act also establishes reporting requirements to record and report, to the Regulator, liabilities incurred under the legislation by "liable entities" and the surrendering of LGCs to meet those liabilities.

The facts indicate that registration of change of ownership of LGCs is achieved electronically (online system). In this regard, a LGC does not, prima facie, satisfy the definition of 'goods' in section 195-1 of the GST Act. Paragraph 45 of Goods and Services Tax Ruling (GSTR) 2003/8 states:

45. Section 195-1 defines 'goods' as 'any form of tangible personal property'. 'Tangible' connotes a physical existence. Thus, a supply of goods is a supply of any form of personal property that has a physical existence, but does not include a supply of intangible personal property...

Subsection 9-10(2) of the GST Act provides that supply includes any one of these:

(e) a creation, grant, transfer, assignment or surrender of any right.

The description of a right is set out in Goods and Services Tax Ruling (GSTR) 2003/8 at paragraph 50:

What is a right?

50. The word 'right' is not defined for GST purposes and has a very broad meaning under the general law. A 'right' has been defined as 'Generally, a benefit or claim entitling a person to be treated in a certain way'

Furthermore, paragraph 64 of GSTR 2003/8 states:

64. The creation, grant, transfer, assignment or surrender of any right is a supply that is made in relation to rights for the purposes of item 4.

The nature of LGCs appears to provide permission for LGCs to either be sold or purchased by any person (subject to registration of ownership); or surrendered by a registered owner to the Regulator to be cancelled to discharge the owner's liability under the Act.

In both cases, the registered owner of a LGC has the right to have the LGC dealt with as set out in the Act. Under the Act a person not being the registered owner of the LGC cannot surrender the certificate. A liable party cannot surrender a certificate against their liability unless they are the registered owner of the LGC at the time that the liable party's energy acquisition statement is lodged with the Regulator.

Hence a LGC created under the Act prima facie takes the form of a right. That right is the right to hold or trade or surrender the LGCs to the Regulator in Australia pursuant to the Act and have the LGCs acquitted accordingly. The Act provides for owners of LGCs to be treated in a specified way being the ability to surrender the certificate under the Act to meet their Renewable Energy Target/ obligations under the Act.

We consider that your supply of LCGs is a supply of the right itself by way of the creation, grant, transfer or assignment of the right; or a supply by way of the surrender of a right.

Taxable supply

A supply will be a taxable supply where the requirements of section 9-5 of the GST Act are satisfied (see question 1). One particular requirement is that the supply is 'connected with Australia'. For rights, this is regulated by subsection 9-25(5) of the GST Act, which states:

(5) A supply of anything other than goods or real property is connected with Australia if:

(a) the thing is done in Australia; or

(b) the supplier makes the supply through an enterprise that the supplier carries on in Australia; or…

You satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act because:

a) you supply LGCs to the buyers for consideration;

b) the supply of LGCs is made in the course or furtherance of your enterprise;

c) your supply of LGCs is connected with Australia as it is made through an enterprise that you carry on in Australia; and

d) you are registered for GST.

The supply of LGCs is not input taxed under the GST Act. Therefore, it remains to be determined whether the supply of LGCs is GST-free.

Item 4 - GST-free

Of most relevance to this situation is Item 4 in the table in subsection 38-190(1) of the GST Act (Item 4).

Item 4 states:

4. Rights

a supply that is made in relation to rights if:

(a) the rights are for use outside Australia: or

(b) the supply is to an entity that is not an *Australian resident and is outside Australia when the thing supplied is done.

The supply of a LGC, being the supply of a right, can be considered under Item 4.

Item 4 (a): the rights are for use outside Australia

Goods and Services Tax Ruling GSTR 2003/8 paragraphs 108-118 provide guidance to determine whether the rights are 'for use' outside Australia. Paragraph 108A of GSTR 2003/8 states:

108A. A supply does not fall within item 4 simply on the basis that the essential characteristics of the rights demonstrate that they may be used outside Australia. It is the intended use of those rights that determines if the supply that is made in relation to the rights falls within item 4. The extent to which the supply is taxable or GST-free is not affected by the actual use of the rights, other than as potential evidence of the intended use.

As discussed above, we have identified that the LGCs give the registered owner the right to trade it or to meet its targets/obligations under the Act. The creation/granting of the certificate (the right itself) is for use to meet Renewable Energy Target in Australia. We do not view that you are supplying a right to 'trade' this right. Hence, the intended use of the LGCs will depend on whether the LGC is for use to meet the Renewable Energy Target under the Act in Australia, rather than the intended use of trade.

Under the Act, a LGC can only be surrendered to the Regulator in Australia to meet the Renewable Energy Target under the Act in Australia. Hence, it is not valid for use outside Australia and Item 4(a) is not satisfied.

Therefore, where you supply the LGC to an entity to meet the Renewable Energy Target in Australia (i.e. the rights are for use in Australia), the supply will be taxable unless Item 4(b) applies to a supply to a non-resident entity.

Item 4 (b): the supply must be to an entity that is not an Australian resident and is outside Australia when the thing supplied is done

Alternatively, for the supply to be GST-free under Item 4(b), the supply must be to an entity that is not an Australian resident and is outside Australia when the thing supplied is done.

Hence, in the circumstances/scenarios outlined in this case, the supply of the LGCs to a 'non-resident' entity (that is, company) which is not in Australia is only GST-free under Item 4 (b) where:

i. the non-resident's PE/branch/subsidiary/agent (if one exists) has no involvement or is limited to administrative tasks, in relation to the supply of the LGCs; and

ii. rights are not partly or solely used for the purposes of any Australian presence.

(please refer to Goods and Services Tax Ruling GSTR 2004/7, paragraphs 347-353).

Otherwise, if Item 4(a) or (b) does not apply, the supply of the LGCs will be taxable under section 9-5 of the GST Act.

Subsection 38-190(2)

We also take into consideration subsection 38-190(2) of the GST Act. This subsection is only considered if Item 4 is satisfied above.

Subsection 38-190(2) of the GST Act provides that a supply covered by any of items 1 to 5 in the table in subsection (1) is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free.

In relation to the supply of a right to 'acquire something', there is an issue of whether the LGCs entitles the registered owner to 'another supply that would be connected with Australia'. It would not appear that, on exercise of the right (surrender of the certificates), the certificate entitles the registered owner to acquire another thing (that is, not a good or service, for example), but to meet its Renewable Energy Target/ obligations under the Act in Australia. Alternatively, it is considered a surrender of a right.

GSTR 2003/8 states at paragraph 11B that:

…with respect to the surrender of a right or option to acquire another thing it is the Commissioner's view that the surrender of the right or option is not connected with Australia merely because the right or option being surrendered concerned the supply of some other thing that would have been connected with Australia.

Furthermore, paragraph 42 GSTR 2003/8 states that 'subsection 38-190(2) does not extend to a surrender of a right or option to acquire something'.

From the information given, the LGC (the right) entitles the registered owner to meet its Renewable Energy Targets/obligations in Australia under the Act. The LGCs are either used/redeemed or surrendered (that is, the LGCs are surrendered by the liable entities to the Regulator in Australia). Hence, it would appear that subsection 38-190(2) of the GST Act does not apply here.