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Renewable Energy Projects: Tax considerations

Renewable Energy Projects: Tax considerations

Gary Calford

In our previous article, we recommended that landowners seek advice before signing any documentation, even if the initial figures seem low. There are complex taxation issues for different types of agreements which can be managed by having quality legal and taxation advisers on board in the initial stages. 

A tax effective structure for your primary production business may not be tax effective for a renewables project.  We explore some of these issues and considerations in this article.

Structure – What has worked may no longer work
Most primary production businesses have intentionally been structured as owned by either individuals, partnerships or trusts, in order to access tax concessions applicable to primary producers including:
  • Income averaging concessions to “smooth” tax liabilities between good and bad primary production seasons.
  • Farm management deposits which allow primary producers to make tax deductible deposits during years of good cash flow and withdraw them during bad years, to assist in smoothing out tax liabilities.
  • Capital gains tax (CGT) discounts.
Income received by landholders from renewable energy projects is currently not defined as “primary production income”.  As a result, these concessions do not currently extend to the generation of income from renewable energy projects.

With this in mind, consideration should be given to whether primary producers should own their land on which renewable energy projects operate in a company.  This will depend on a number of factors, including the likely income forecast from the renewable energy project, whether primary production is still likely to occur on the relevant title, the possibility of later selling the land and other factors. The appropriate structure should be considered in advance of entering into a renewables project and tax advice should be sought.

Take care in entering early phase agreements

Most renewable energy development companies are currently in the feasibility phase.  This phase necessitates them determining the feasibility of projects in select areas.  Part of the feasibility requires them to lock up sufficient land to develop an appropriately scaled project.

With this in mind, renewable energy companies are currently entering into various agreements with landholders to get exclusive access to their land.  A prime example is an option agreement, giving the renewables company an option to purchase the relevant land, lease the land or a combination of both.

While such agreements and the payments that come with them, seems like a good passive income stream, the tax implications of the agreements needs to be considered.  Granting an option over land (whether lease or sale) is subject to Capital Gains Tax (CGT)and these implications need to be considered.

A number of agreements we have reviewed recently potentially expose the landholders to upfront CGT in respect of annual option fees to be received over a number of years.  Being subject to tax on cash yet to be received is not a tax-effective outcome.  This issue can be managed by seeking tax advice upfront, before signing off on the agreement put forward by the renewable energy company.

The ultimate tax-effective structure (as discussed above) should also be considered at this stage.  There may be tax advantages in structuring the project at an early stage rather than waiting for the time when a deal is entered into. But this is a case-by-case analysis and bespoke advice should be sought.

Other Considerations

Other tax issues that should be considered as part of renewable energy projects include:

  • Significant tax depreciation shelters exist for owners of renewable energy projects.  It’s simple for primary producers to give up possession of their land to project companies for a passive income stream but consideration should be given to whether they are better to negotiate to be an equity participant in the project and have direct access to those tax depreciation shelters rather than just take an income stream subject to tax from the outset.

  • Goods and Services Tax (GST) implications of whichever structure is ultimately agreed to and whether there is firstly, an obligation for the primary producer to remit GST and, secondly, whether there is an ability to gross-up the consideration payable by the renewable energy project company to cover the GST.

  • State based stamp duty issues can arise for the transfer, or in some cases, lease of land.  Stamp duty should always be considered prior to entering into agreements that deal with rights in relation to land.

Our advisors can help identify the tax options for a renewable project before you sign any agreements, even initial feasibility options may have an impact on your business.