Through recent discussions with MinterEllison, the ATO has affirmed its new position on the GST implications of Bundled Power Purchase Agreements (PPAs), as initially detailed in a Private Binding Ruling (PBR) issued to a State Government entity in 2022.
Whilst this PBR was initially obtained in the context of a wider government scheme, it has a direct impact on both Generators and Off-takers that are party to existing commercial PPAs, or are negotiating new commercial PPAs.
Which PPAs does this apply to?
This PBR applies to Bundled PPAs, which involve:
(a) the parties agreeing to make contract payments to each other, based on the difference between an agreed fixed price and the floating market price for renewable energy (effectively a contract for difference, or CfD),
(b) the Generator supplying LGCs (or other green products) associated with that renewable energy, and
(c) no separate payment being made for the LGCs.
Existing industry position
The supply of LGCs is generally subject to GST. Different industry participants have taken different approaches to accounting for GST on the supply of these LGCs under the PPAs. The most common approach has been to allocate a portion of monthly contract payment to the LGCs, and account for GST (and issue a tax invoice) on that monthly basis.
New ATO position
The ATO's new view is that that the transfer of the LGCs is a taxable supply made in return for the Off-taker agreeing to enter into the CfD. Because that CfD is entered into when the PPA is executed (or is no longer subject to conditions precedent), the attribution of the GST on the LGCs is brought forward. Practically, this means that the GST on LGCs must be accounted for upfront when the arrangement is entered into, rather than on a monthly basis over the life of the arrangement.
Practical implication for new PPAs
For parties negotiating new PPAs, it's important that:
(a) The GST provisions in the PPA allow for the GST to be accounted for upfront, in line with the ATO's new position,
(b) The parties agree how the supply of the LGCs will be valued (e.g. an agreed figure, or a methodology based on the anticipated net present value), and
(c) The parties agree to issue a single tax invoice for the GST on the LGCs upfront, and not include a GST component in monthly invoices for contract payments.
This new ATO position significantly simplifies the administration of GST over the life of the PPA (as monthly invoices for contract payments won't be subject to GST).
However, the new ATO position can result in a cashflow burden for the Off-taker, as there may be a gap between the Off-taker paying the upfront GST gross-up amount on the supply of the LGCs to the Generator, and getting the benefit of an input tax credit for that GST amount on their next BAS. This burden can usually be managed with appropriate drafting of the GST provisions in the PPA.
Practical implication for existing PPAs
For existing PPAs that are already in place, the parties should be aware of the following risks:
(a) The Generator is likely to have remitted too little GST, too late, and
(b) The Off-taker may not be entitled to claim back the GST component of any monthly invoices for LGCs after a period (because of the operation of the four year rule).
We recommend that entities that are parties to existing PPAs carefully review their arrangements, and consider ways of mitigating these risks.
The ATO is considering public guidance to confirm its new position. In the meantime, please contact us if you have any questions regarding how this new ATO position might impact your PPAs.