The Carbon ‘Tax’ – its impact on you and your business.

The Government has released its comprehensive plan for tackling climate change and for securing a clean energy future with the release of a carbon tax. 

The Key points:

- Carbon price to start on July 1, 2012, starting at $23 a tonne rising at 2.5 per cent a year.

- It will be paid by about 500 biggest polluters.

- It will be replaced by an emissions trading scheme from July 1, 2015.

- Price ceiling and floor to apply when trading starts.

- There will be two rounds of tax cuts and increases in allowances, payments and benefits.

- The tax free threshold will almost triple to $18,200 from July 1, 2012, and then increase to $19,400 from July 1, 2015.

- Every taxpayer with income below $80,000 to get tax cut from July 1, 2012.

- Costs for the average household will rise by $9.90 a week.

- Average household assistance, under the "clean energy supplement", will be $10.10 a week.

- $9.2 billion will be allocated over the first three years for industry assistance.

- Most exposed industries such as steel, aluminium, zinc, pulp and paper makers will get free permits representing 94.5 per cent of industry average carbon costs.

- $300 million has set aside help the steel industry move to a clean energy future.

- $1.3 billion has been set aside for a Coal Sector Jobs Package, targeted at mines that are most affected by the carbon price.

- A $10 billion Clean Energy Finance Corporation will be established to invest in new technology.

- $3.2 billion has been allocated to the Australian Renewable Energy Agency.

- Closure of 2000 megawatts of dirtiest power generators by 2020.

- Agriculture is not subject to carbon price, farmers to benefit from carbon farming.

- Small grants will be made for community-based energy efficiency programs.

- Transport fuel excluded, but heavy transport to start paying carbon tax in 2014.

- Climate Change Authority to advise on pollution caps and meeting emissions targets.

- Businesses with under $2 million in turnover will get a $6,500 instant tax write-off for assets purchased after July 1 2012, up from $5,000. (Remember that, with other changes related to the MRRT and other budget changes, the company tax rate drops to 28% over the next 3 years for these businesses as well)

“It looks like a tax, it smells like a tax, it must be a tax…”

But is it?

As explained here, while the government has been effectively railroaded into calling this a carbon tax, it is anything but that. It IS a carbon pricing mechanism, and the first stage in the implementation of an emissions trading scheme. But a ‘tax’ on carbon? Well, sort of, but really, it isn’t. After all, with a tax, the government is usually banking on an INCREASE in activity creating an increase in tax revenue. By its very design, the aim of this package is to reduce emissions, and as a result, reduce the amount of ‘tax’ that is paid. We all know that won’t happen, or certainly not for a long time…

The carbon tax will be payable by around 500 of the biggest polluters in Australia. To assist households with price impacts there will be tax cuts and increases in pensions, allowances and benefits.

With the changes in the tax rates, it is estimated that over 1 million individuals will not need to pay tax on their net taxable incomes. (This has been reported as ‘not having to lodge a tax return, but let’s be real with this – if you received any sort of welfare payments, hold a small number of shares, or have a bank account with interest income, it is likely that you will still need to prepare and lodge a tax return on incomes of around $20,000 p.a.

The Federal Budget announcement in May was the first time in 8 years we had not seen any tax cuts, but it seems the Government was keeping these in reserve to help smooth over the introduction of the Carbon Tax. The changes also go a long way towards implementing many of the changes recommended in the Henry Tax Review. So, those who were complaining about the ‘lack’ of action when the Review was released simply need to consider that not everything has to happen within the timeframe of a 30 second soundbite…

Assuming that, as the system moves from a fixed price to a market based scheme – with a progressive reduction in permits available – the price per tonne continues to rise, either one of two things should occur. A) Revenue from this tax / fee / price (however you wish to define it) will increase, and the government will have scope to increase personal and corporate tax cuts, increase pensions and welfare benefits, or b) Pollution reduction and energy efficiency is improved, with resulting reductions in costs, and the market will realise an overall reduction in effective costs, prices and hence, cost of living, meaning that further welfare or compensation will not be required.

I believe we will see more of the former initially, with a progressive change to a more energy efficient economy over an extended period of time.

Already we have seen the papers full of the ‘massive price rises’ doom and gloom reports… very much like we had in the years before the GST was introduced. Did we have ‘massive price rises’ then? No, not really… sure a few people and businesses tried to price gouge – and got promptly whacked – either by authorities or by market prices – but overall prices did not rise JUST BECAUSE of the GST. And neither should prices rise significantly under a carbon tax – JUST because of the carbon tax.

With the steel, aluminium paper and other industries getting most of their initial permits for free, they should be shielded initially from the increased costs resulting from this change – and they should have the time AND THE INCENTIVE to change their energy consumption practices to reduce their costs. Certainly over the next 5 – 10 years this is possible.

As for the REAL impact on personal tax rates... well the next update will get behind the spin that has been in every discussion around tax rates since the low income tax offset and the family tax benefit scheme was introduced, and  look at what the 'real' tax rates are as they currently apply - and what they will be after July 1, 2012.