The Australian Energy Regulator (AER) today released its final report on its approach to estimating tax allowances for regulated energy networks.
AER board member Jim Cox said the AER’s review identified areas where the regulator’s current incentive based tax approach could be improved, but also explained differences between network tax allowances and actual tax payments.
“The AER was asked to review what appeared to be a material difference between networks’ tax allowances we set and the actual taxes paid by energy networks.
“Following an examination the differences were explained, and are largely due to the complex structure and nature of regulated energy networks,” he said.
Mr Cox said a key focus of the review was to understand and address the drivers of the differences that had been identified.
“We consulted extensively with stakeholders, including consumers and businesses.
“Based on the information we received we do not see a reason to make fundamental changes to how we estimate tax allowances for regulated networks. Our current approach is in the long term interests of consumers.
“However we have identified some areas where our current tax approach can be improved.
“These improvements will see a reduction in regulated tax allowances, and we will be implementing them in the New Year in time for our April 2019 decisions.”
Key improvements the AER will address to reduce regulated tax allowances include adjusting the regulatory tax approach to:
- address depreciation mismatches around immediate expensing of refurbishment capital expenditure and diminishing value depreciation; and
- reflect applications of a 20 year tax life cap for certain new gas assets.
Background
In June 2018, then Federal Minister for the Environment and Energy, The Hon. Josh Frydenberg MP, asked the AER to review its approach to estimating tax for regulated energy networks following preliminary advice from the Australian Tax Office (ATO) that there appeared to be a difference between networks’ tax allowances set by the AER and actual tax paid to the ATO.
The amount of tax a network business is expected to pay each year is considered by the AER, along with expected capital, operating and financing costs, when it sets revenue allowances for regulated electricity and gas networks.
The AER determines the expected cost of corporate tax in accordance with the relevant legislation.