Emissions Trading Scheme for Non-Forestry Sectors
By Annamaria Maclean and Andrea Scatchard
Inland Revenue has published its final interpretation statement, titled "Income tax and GST – industries other than forestry registered in Emissions Trading Scheme" (IS 25/24). The document applies to non-forestry participants in the Emissions Trading Scheme (ETS), including emissions-intensive and trade-exposed sectors, activities involving removals, and certain horticultural operations. Forestry remains under separate tax treatment.
This interpretation statement navigates the ETS rules as they apply to non-forestry industries and should be examined carefully by anyone affected.
Key takeaways
- Businesses may deduct emissions liabilities incurred, based on the number of New Zealand emission units (NZUs) required to be surrendered relative to production levels, using accrual accounting.
- NZUs can be purchased on the open market or, in some cases, received as free NZUs through annual government subsidies. NZUs are treated as revenue account property, with specific valuation rules at acquisition and at balance date.
- If a business receives free NZUs, the market value of those units at balance date can generate income that offsets the emissions liability deduction, rather than simply reducing the deduction.
- Issues can arise if there is a shortfall or excess of free NZUs, or if a business’s balance date does not align with the emissions year’s calendar period.
- The statement emphasizes the ongoing challenge of accurately monitoring and documenting all held NZUs—purchased and free alike—including their valuation and how they are disposed of (sold or surrendered) for tax purposes. These tax positions may differ from records in the NZU register. Robust tax governance is essential for affected taxpayers to monitor compliance and reassess their positions each year in line with the guidance.
Industry feedback and potential reforms
Many stakeholders who commented on the exposure draft highlighted the ETS regime’s substantial complexity for non-forestry sectors. There is a strong push for legislative reforms to simplify how the regime operates and to reduce administrative burdens on affected taxpayers.
Proposed reforms being discussed include:
- Removing tax treatment of stockpiled free NZUs that have not yet been surrendered or sold to offset an emissions liability within a given income year.
- Allowing taxpayers to calculate emissions liabilities and allocate NZUs based on the emissions year that ends within their income year (analogous to how income from limited partnerships and certain controlled foreign corporations is treated), which would streamline tracking and reconciliation of NZUs and related tax obligations.
Next steps and guidance
These submissions have been forwarded to Inland Revenue’s Tax Policy team for consideration. We will continue to monitor developments and share updates on any changes arising from the review.
If you have questions about the ETS regime, contact your Deloitte advisor for tailored guidance and support.
