Submission to the Department of Climate Change - Carbon Pollution Reduction Scheme

10 September 2008

Green Paper Submissions
Department of Climate Change
GPO Box 854
Canberra ACT 2601

Dear Sir/Madam

Carbon Pollution Reduction Scheme

The Group of 100 (G100) is an organization of chief financial officers from Australia’s largest business enterprises with a purpose of advancing Australia’s financial competitiveness. The G100 is pleased to provide comments on the Green Paper.

The G100 supports actions to address issues relating to climate change, proposals to implement the framework for a broadly-based Carbon Pollution Reduction Scheme (CPRS) and providing assistance for entities engaged in trade exposed activities. However, the G100 is concerned about the impact and timing of the proposed CPRS on Australia’s financial competitiveness in the event that the scheme is implemented in isolation from the responses in other jurisdictions. These concerns are amplified by the exposure of emissions-intensive-trade-exposed industries and the potential for the entities adversely affected to redirect resources to economies that have not implemented a scheme or that have implemented schemes which provide relief/support for those activities which are the most adversely affected. In addition lack of clarity in identifying the categories in which entities will be classified for assistance purposes and the potential financial implications of the classification is a significant uncertainty confronting entities.

The G100 is also concerned that there are significant uncertainties about key features of the CPRS, in particular, uncertainties relating to the:

taxation implications;
accounting and financial reporting of the effects of the scheme; and
audit and assurance requirements and how they relate to the financial reporting.

If not addressed prior to the inception of the CPRS the uncertainties relating to these issues and the way in which companies address them has the potential to seriously impact its operation and negatively impact Australia’s financial competitiveness.

Taxation

While the Green Paper (Chapter 11) discusses tax issues the G100 considers that the proposed scheme presents an opportunity to consider how achieving the objectives of the CPRS can be enhanced through appropriately targeted taxation initiatives to support the significant capital investment required to provide infrastructure and the encouragement of innovation and research and development activities. Taxation concessions will provide incentives for research and development will stimulate investment and encourage companies to undertake activities to seek innovative solutions to addressing the issues.

Questions that need to be resolved before implementation of the scheme include:

Taxation of free permits: It is important to the company’s affected that the potential adverse cash flow effects of including free permits in assessable income in the year they are granted is addressed as there may be a substantial time lag before they are required to be surrendered. Failure to do so is likely to add significantly to the cost burden of financing tax payments because of the timing difference.

The G100 believes that there should be symmetry between the taxation treatment of the permits granted and their relinquishment.

Status under GST Legislation and State Tax Regimes: In order to maintain equity and efficiency in the tax system the G100 believes that permits should not be subject to State Taxes such as stamp duties. It is important that as a national scheme the scheme be subject to a single taxation regime. Allowing aspects of the scheme to be subject to different State regimes would be inconsistent with the Government’s deregulation agenda.

The G100 also believes that on the grounds of tax equity and fairness, trading in permits should not be subject to adverse GST consequences.

The G100 looks forward to further clarification on the treatment of permits for taxation purposes as more information on the details of the CPRS are provided and is keen to engage in further discussion of these issues.

Accounting

The Green Paper acknowledges that the International Accounting Standards Board (IASB) is working on a project on accounting for emission rights. However, it is unlikely that the IASB project will be completed before the planned implementation date of the CPRS. Experience in Europe shows, that in the absence of an Accounting Standard dealing specifically with the issues, a diverse range of practices, all asserting consistency with IASB Standards, has arisen. This diversity which adversely impacts the comparability of financial statements and the usefulness of the reported information to shareholders and other users also impacts on the credibility of the European scheme.

Consistent and credible accounting and disclosure by companies subject to the CPRS should be regarded as an integral part of the scheme which is essential to its efficient and effective implementation and acceptance by the community and capital markets.

While there are a number of accounting issues to be resolved in relation to emissions schemes the absence of an IASB Standard could lead to the development of an Australian Standard in the interim. If the Australian Accounting Standards Board were to develop an accounting standard applicable to the CPRS it could only do so within the context of the existing suite of IASB Standards and still maintain compliance with International Financial Reporting Standards (IFRSs). This outcome carries the risks that the Standard will not be regarded as compliant with IFRSs and that Australian companies would be required to change their accounting and to restate their past results and financial statements when the IASB project is completed. This would be an unacceptable outcome. In this regard we note that the IASB withdrew an Interpretation which, while IFRS-compliant, included significant accounting mismatches which resulted in unacceptable accounting outcomes.

Although liaison with the IASB is occurring the G100 believes that the Government should, as a matter of urgency, engage directly with the IASB to emphasise the crucial importance of ‘fast-tracking’ its current project on emissions schemes. The complexity of the CPRS in Australia highlights the urgency of an agreed accounting treatment to ensure consistency, comparability and reliability of reported results.

Audit and Assurance

The G100 is concerned about the significant uncertainties relating to the audit and assurance process and compliance testing. We believe that it is highly desirable for issues relating to:

the nature and scope of the audit or review activity and its frequency;
who can perform audits and the qualifications required;
who determines the scope of the audit/review activity; and
the boundaries and scope for reporting;

to be resolved before the implementation of the CPRS.

The recognition and measurement of permits will result in items being included in the financial statements which, subject to materiality, will be within the scope of the normal financial statement audit and audit opinion. This will be the case for all companies including those that emit below the ‘volume thresholds’ proposed for mandatory assurance over their annual emissions. The costs associated with compliance, audit and reporting will be minimised if assurance reporting requirements are part of a single assurance framework.

The G100 considers that it is highly desirable that the audit and assurance requirements and framework be consistent with international practices. However, we understand that agreement internationally is unlikely to occur before the Australian CPRS is implemented.

In the absence of an internationally agreed framework the G100 considers that the assurance requirements should be developed in conjunction with the Australian Audit and Assurance Standards Board in order to avoid inconsistencies between the assurance requirements for financial and non-financial information.

The G100 believes that it is essential to the orderly implementation and operation of the CPRS that uncertainties relating to the taxation, accounting and financial reporting and the audit and assurance process are resolved before its implementation. Failure to resolve these uncertainties has the potential to significantly erode the credibility and acceptability of the scheme and its impacts and negatively impact Australia’s financial competitiveness.

Yours sincerely

Tony Reeves
National President