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Ruling

Subject: Income - other - solar power

Are payments you receive for the generation of electricity from a photovoltaic solar system assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011.

Year ending 30 June 2012.

Year ending 30 June 2013.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

You carry on a primary production business as a partnership and are registered for goods and services tax (GST).

On the land where the business is being carried on there is also a house where one of you resides. The other partner resides primarily in a home elsewhere, however at times also stays at the house.

The primary production business is carried on the land and the house is not considered a part of that business.

Electricity consumed as part of the primary production business is separately metered and billed.

You are considering purchasing a photovoltaic solar panel system for the house under a State government's solar power scheme (scheme).

Under the scheme, your energy provider will be required to buy all electricity that the system generates at a gross feed in tariff rate of 3X cents per kilowatt hour. This will be recorded as a credit against any charges to you for electricity you use. You will then buy back electricity for your personal use at the rate of approximately X cents per kilowatt hour. Under the scheme, you also expect to receive a payment for any amounts in excess of electricity used. The frequency of the payment will depend on your arrangement with your energy provider, but it is expected you will probably be paid quarterly. The scheme will operate for a number of years.

You intend to purchase largest system allowable under the scheme. You will receive $Y, in government solar credits as a discount from assigning the renewable energy certificates, leaving a net price.

You state that the primary purpose of investing in the solar panels is to reduce your overall carbon foot print and to reduce your electricity bills.

You estimate that the house consumes about Z kilowatt hours of electricity per year and you expect to generate around 1.6Z, kilowatt hours of electricity through the system. Accordingly, the value of electricity that you will produce will be greater than the value of the electricity that you will consume. This will result in a credit on your electricity bill and/or a payment from your electricity provider each quarter.

You expect to receive around $A per year from your energy provider through the feed-in tariff rate.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision

Summary

The amounts you would receive for the generation of electricity from the photovoltaic solar system is ordinary assessable income under section 6-5 of the ITAA 1997.

Detailed reasoning

Under section 6-5 of the ITAA 1997 assessable income is made up of ordinary income and statutory income. There are no specific legislative provisions relating to money or credits received from electricity suppliers, therefore it is not statutory income.

Under subsection 6-5(1) of the ITAA 1997 ordinary income means income 'according to ordinary concepts'.

Under subsection 6-5(2) of the ITAA 1997 the assessable income of an Australian resident includes the ordinary income you derived directly or indirectly from all sources during the income year.

Under subsection 6-5(4) of the ITAA 1997 in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

The tax legislation does not provide specific guidance on the meaning of income according to ordinary concepts. However, a substantial body of case law exists which identifies likely characteristics.

In determining whether an amount is ordinary income, the courts have established the following principles:

· what receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as a statute dictates otherwise

· whether the payment received is income depends upon a close examination of all relevant circumstances, and

· whether the payment received is income is an objective test.

Relevant factors in determining whether an amount is ordinary income include:

· whether the payment is the product of any employment, services rendered, or any business

· the quality or character of the payment in the hands of the recipient

· the form of the receipt, that is, whether it is received as a lump sum or periodically, and

· the motive of the person making the payment, but noting that this latter factor is rarely decisive, as a mix of motives may exist.

In GP International Pipecoaters Proprietary Limited v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1, the Full High Court stated:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. The whole of the circumstances must be considered.

Amounts that are periodical, regular or recurrent, relied upon by the recipient for their regular expenditure and paid to them for that purpose are likely to be ordinary income. In addition, receipts that indicate a commercial activity, or an intention to make a profit from the activity, are also likely to be ordinary income.

In this instance, it needs to be determined whether the payments or credits received in return for transfer of electricity to the grid are income because they represent a financial return from the investment in the solar panel. The factual circumstances, and in particular, whether the arrangement is economic/commercial, or conversely non-economic/non-commercial in nature, needs to be considered in determining whether or not the receipts are income. Taxation Ruling IT 2167, which deals with rental properties, and in particular, circumstances when amounts received in connection with letting of property are income and when they are not provides some guidance on this issue.

Application to your situation

Under the gross metering tariff scheme and as described in your ruling application, the electricity company credits or pays a premium feed-in tariff to the householder for all electricity generated and contributed to the electricity grid. The householder then buys back electricity from the company according to their consumption. Payment for the electricity generated is separate and not related to the amount of electricity consumed. The rate paid by the householder for electricity consumed is the same as that available to any other householder.

In your case, you will receive a payment and/or credit provided under an arrangement between yourself and the relevant electricity company. The payment and/or credit will be made under a gross metering tariff scheme. The value of electricity that you will produce will be greater than the value of the electricity that you will consume. You expect to receive payments or credits regularly, generally quarterly.

It is considered that your solar panel installation involves a commercial arrangement because:

· The amount of electricity you seek to generate is significantly more than you require for domestic purposes.

· The electricity company will pay you a premium feed in tariff per kilowatt hour for all the electricity you generate.

· There is a realistic opportunity to profit from the arrangement.

Accordingly, the payments or credits you receive from the electricity company will represent a return on your investment in the solar panel because your arrangement is commercial in nature.

In addition, by receiving these payments or credits quarterly, they are able to be relied on, including to meet regular household electricity expenditure.

Consequently, the payments received or credited for your electricity generated and sold to the electricity grid are ordinary income.

This ruling does not consider the issues relating to deductions and depreciation in respect of the arrangement or any potential capital gains tax or goods and services tax consequences.

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