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Long term Power Purchase Agreements (PPA) are essential to the financing and bankability of renewable energy projects.
In addition to the fixed or floating price hedge, embedded within the PPA, the Purchaser will often acquire the green products granted to the Generator under various Government schemes.
No GST is payable on the price swap, but the disposal of the green products does give rise to a GST liability for the Generator. The offsetting input tax credit (ITC) for the Purchaser means that there should not be a net GST cost.
The long-held industry position recognises that GST is payable periodically as the green products are transferred, based on their market value as a proportion of the floating payment due under the price swap.
However, based on recent ATO discussions about a PPA with a State Government, the ATO may now consider that for some PPAs, all of that GST should be recognised in full and up front, calculated on the net present value of all of the green products expected to be transferred under the PPA. The Purchaser would receive a corresponding up-front ITC.
If applied broadly, this will give rise to material cash-flow and funding difficulties for either the Generator or the Purchaser, as the GST amount would need to be funded for payment to the ATO (by the Generator) and receipt of the corresponding ITC (by the Purchaser). Potential mismatches between this GST position and the accounting and income tax recognition of revenue on the transfer of the green products will need to be considered carefully.
Additionally, there is a risk that the ATO will seek to apply this position to existing projects, notwithstanding that the Generator has been reporting and paying GST periodically in accordance with industry practice. Significant discussion between the Generator, Purchaser and the ATO will be needed to mitigate the issues this would cause (for no net GST collection given the offsetting ITC). Appropriately, the ATO has shown some willingness to discuss some offsetting arrangements and waiver of penalties and interest for Generators in this position.
While the ATO is still firming up its position and potential consultation looms, now is the ideal time for your business to explore how to best strategically navigate the GST landscape. Our experts are ready to support your new projects to limit the GST impact, including carefully drafting the PPA to distinguish payment for the green products, or seeking a private ruling from the ATO, as well as approaching the ATO around your obligations for existing projects.
If your renewable energy project or investment is facing these issues, or you are looking to better understand your position and risk exposure, please get in touch.
