Proposed $6.7 billion Hydrogen Production Tax Incentive for renewable hydrogen

Australia is pushing ahead with renewable hydrogen incentives. The federal government recently announced a Hydrogen Production Tax Incentive (HPTI), which will become available from 1 July 2027. It intends to provide an uncapped refundable tax offset worth an estimated $6.7 billion over ten years.

The Future Made in Australia (Production Tax Credits and Other Measures) Bill 2024 (‘the bill’) was recently introduced into Parliament (and previously announced in the 2024-25 budget). Schedule 1 to the bill seeks to establish a new tax offset in respect of eligible hydrogen production.

By moving to provide certainty now, Australia is seeking to leverage its resources industry expertise, accelerate the development of renewable energy solutions, and attract further investment in the move to net zero and towards the government’s self-announced push to become a ‘renewable energy superpower’.

The development of a renewable hydrogen industry is considered to be a significant economic opportunity for Australia for both export and domestic use. This is through value-added manufacturing of green ammonia and fertilisers, iron and alumina.

General overview of the HPTI

The HPTI is intended to provide an incentive for corporations (but not trusts or partnerships) to commence medium to large scale production of renewable hydrogen in Australia. The HPTI is a refundable tax offset worth $2 for each kilogram of renewable hydrogen produced by eligible projects that reached a final investment decision before 1 July 2030.

The HPTI will apply to hydrogen produced from income years starting on or after 1 July 2027 and ending before 1 July 2040, and be available for up to 10 years per project. Taxpayers will need to choose the commencement date for their offset period by providing notice to the ATO in the approved form.

The HPTI will be jointly administered by the ATO and the Clean Energy Regulator (CER). The CER will certify projects with the ATO administering the HPTI offset. The CER and ATO will be able to share information to facilitate this joint administration.

Eligibility requirements

Broadly, to be eligible for the HPTI offset a taxpayer must:

• Be a constitutional corporation (a trading, financial or foreign corporation, or otherwise a body corporate incorporated in a Territory - trusts and partnerships will not be eligible).
  
  
• Hold a production profile under which eligible hydrogen was produced, which allows it to create a product guarantee of origin (PGO) certificate in respect of the hydrogen. Broadly, this requires that the hydrogen is:
  
  
  • certified by the CER;
    
    
  • produced in Australia;
    
    
  • produced within a 10 year period and in an income year commencing on or after 1 July 2027 and before 1 July 2040;
    
    
  • produced at a medium to large scale facility (equivalent of at least an electrolyser with 10MW nameplate capacity);
    
    
  • not produced through an excluded process (this is intended to exclude hydrogen produced from fossil fuels);^[1]
    
    
  • produced under a project where the final investment decision was made before 1 July 2030 (where unqualified board approval to proceed was provided before this date); and
    
    
  • produced with a carbon dioxide emissions intensity not exceeding 0.6 kilograms of carbon dioxide per kilogram of hydrogen.
    
    
• Be subject to tax in Australia in relation to income from activities in which the PGO certificate was created. (The taxpayer cannot be an exempt entity and there must be a connection between the hydrogen production and Australian assessable income derived by the taxpayer. However, the corporation need not be in an overall taxable position for the year).

In addition, the corporation must have complied with the community benefit principles for the HPTI made by the Treasurer.

An entity may become ineligible, or their entitlements to the HPTI may be reduced, where they do not comply with the community benefit principles for the HPTI.

The community benefit principles for the HPTI have not yet been determined. Whilst not specific to the HPTI offset, broader community benefit principles are contained in the Future Made in Australia Act 2024. In making the community benefit principles for the HPTI, the Treasurer must have regard to these broader principles. They are:^[2]

• promoting safe and secure jobs that are well paid and have good conditions;
  
  
• developing more skilled and inclusive workforces;
  
  
• engaging collaboratively with and achieving positive outcomes for local communities (including First Nations communities);
  
  
• supporting First Nations communities and traditional owners;
  
  
• strengthening domestic industrial capabilities, including through stronger local supply chains; and
  
  
• demonstrating transparency and compliance in relation to the management of tax affairs.

The government envisages that the community benefit principles for the HPTI may also require entities to arrange for their activities to be certified by expert bodies, with the ATO confirming that certification has in fact occurred.

Finally, a correction notice must not be in force for the PGO certificate (i.e. if the CER is reviewing key matters related to the hydrogen’s eligibility, then the HPTI cannot be claimed).

Key considerations ahead of the HPTI’s introduction

• There are specific requirements around the legal form of the entity used to claim the HPTI. The relevant entity needs to be a constitutional corporation to be eligible. Trusts and partnerships will not be eligible. This requirement could be satisfied where, for example, the relevant corporation both produces and sells the hydrogen (to be a trading corporation).
  
  
• There is currently no cap on the amount that a corporation could receive under the HPTI.
  
  
• The HPTI will complement the Hydrogen Headstart program (which is a $4 billion revenue support program for large-scale renewable hydrogen projects). However, taxpayers who receive government support under both the HPTI and the Hydrogen Headstart program will have their payments under the Headstart program proportionally reduced.
  
  
• The ATO will need to confirm certification with taxpayers, the CER and potentially further expert bodies. We anticipate there may be similar issues to tax audits under the jointly administered ATO/AusIndustry R&D tax offset rules, where the ATO may seek to question eligibility which has been provided by a separate body.
  
  
• The CER may retrospectively revoke a production profile (including from the original start date) and must notify the ATO if it revokes a production profile. Where certification for a production profile has been revoked by the CER, or if a correction notice is issued or revoked by the CER, then the ATO will have four years from the date of that revocation or correction to amend the taxpayer’s assessments (where this would otherwise be outside of the taxpayer’s period of review).
  
  
• The head entity of an income tax consolidated group will be able to claim the HPTI in respect of a subsidiary’s entitlement. That subsidiary must still be a constitutional corporation and satisfy the other requirements for the HPTI.
  
  
• The HPTI will be a tax benefit to which Part IVA (Australia’s tax general anti avoidance rule) can apply.
  
  
• A decision by the CER will be a reviewable decision by the Administrative Review Tribunal, as well as through judicial review.
  
  
• Alongside introducing the HPTI, the bill will tighten the technical application of the shortfall interest charge (SIC) so that SIC will apply in respect of receiving a greater net refund from overclaiming refundable tax offsets. Currently, SIC applies where offsets are used to decrease tax payable (without obtaining a net refund) but does not apply where a taxpayer overclaims refundable tax offsets to receive a greater net refund. This change will also apply to situations beyond the HPTI rules, such as where a taxpayer obtains a net refund from overclaiming refundable R&D tax offsets or franking credit tax offsets.
  
  
• The bill was referred to the Senate Economics Legislation Committee, which is due to provide a report by 30 January 2025.

While the introduction of the HPTI is a step in the right direction for the development of a hydrogen industry, there are a number of aspects of the scheme that require further detailed consideration. We expect corporations will need to work closely with the ATO and CER to get comfort that they can access the tax offset over the life of a project.

^{[1]  The currently excluded processes are steam reformation of natural gas and coal gasification. Additional processes may be prescribed in the future.}

^{[2]  Future Made in Australia Act 2024 s 10(3).}