Edited version of private ruling

Authorisation Number: 1011777640777

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Ruling

Subject: Income - gross solar feed in tariff scheme

Question 1

Would payments received from your electricity retailer for the generation of electricity from a photovoltaic solar system be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Are the costs associated with the solar system, such as interest and depreciation deductible under section 8-1 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

1 July 2009 - 30 June 2010
1 July 2010 - 30 June 2011
1 July 2011 - 30 June 2012
1 July 2012 - 30 June 2013
1 July 2013 - 30 June 2014
1 July 2014 - 30 June 2015
1 July 2015 - 30 June 2016
1 July 2016 - 30 June 2017
1 July 2017 - 31 December 2017

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You acquired and installed a photovoltaic system (solar system), on the roof of your private residence.

You state you will enter into a gross solar feed-in tariff scheme. Under the scheme, your electricity retailer will be required to buy all electricity that the system generates at a gross feed in tariff rate per kilowatt hour. You will be paid per kilowatt hour for electricity generated by the network provider through your electricity retailer. Your retailer will pay you an additional tariff per kilowatt hour for electricity generated.

You will receive this as a separate payment, a direct payment either by cheque or direct deposit into a bank account from your energy retailer.

The frequency of the payment will depend on your arrangement with your electricity retailer, but it is expected that you will be paid quarterly.

You provided an estimate of the amount you expect to receive from your electricity retailer through the feed-in tariff rate. You also provided an estimate of your total household consumption per year.

The solar system you intend to purchase is an eligible small generation unit (SGU) for the purposes of the Renewable Energy (Electricity) Act 2000 (REE Act).

The REE Act supports the Federal Government's Renewable Energy Target (RET) scheme which was established to encourage additional electricity generation from renewable energy sources.

Upon ownership and installation of a SGU a statutory right arises under the REE Act entitling you to create Renewable Energy Certificates (RECs).

As provided for under the RET scheme, you entered into an agreement with the installer of the solar system, who is an agent for the purposes of the REE Act, and assigned your right to create RECs to the installer in return for a financial benefit. The financial benefit is effectively the reduction in the amount you will pay for the purchase and installation of the solar system. The reduction reflects the value of the right to create RECs that you assigned to the installer.

You provided a breakdown of the cost of the system after assigning your rights to create RECs to the installer.

You have not provided any contractual documents in relation to the scheme.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Subsection 6-5(1)
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Subsection 6-5(4)
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 25-25

Reasons for decision

Summary

Based on the size of the system you will install, the arrangement with your energy supplier/retailer and your estimated feed-in tariff payments, the arrangement is private or domestic in nature. That being so;

· the payments you would receive for the generation of electricity from the solar system is not assessable income under section 6-5 of the ITAA 1997, and as a result,

· the costs you would incur in relation to the generation of electricity from the solar system such as decline in value, borrowing and interest expenses are not deductible under section 8-1 of the ITAA 1997 as they are not incurred in gaining or producing assessable income and they relate to expenses that are private or domestic in nature.

Detailed reasoning

Assessable income

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 Pty Ltd 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. However, receipts that indicate the arrangement is private or domestic in nature are not 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 of the nature and the circumstances of the receipt. In determining whether the receipts are income, the factual circumstances, and in particular whether the receipts indicate an activity that is more than private or domestic in nature, need to be considered. Some guidance in the context of rental properties is contained in Taxation Ruling IT 2167, which outlines the circumstances when amounts received will be considered income and when they will be considered to be in the nature of family or domestic arrangements.

A solar system is considered to be property and receipts received in connection with it are potentially assessable income. In determining whether or not the payments are assessable income the following are important:

· the size of the solar system and its generation capability

· the terms of the arrangement with the electricity retailer and in particular whether the solar system:

o is configured into the electricity system of the home - the solar system first supplies electricity to the home to satisfy household electricity consumption before exporting excess electricity to the grid (referred to as a 'net' scheme), or

o exports all electricity to the grid (referred to as a 'gross' scheme).

· the feed-in tariff payments and whether they are considered to represent a return on your investment in the solar system

· whether there is a realistic opportunity for you to profit from the arrangement, and

· the regularity of payments / credits received from the feed-in tariffs such that they can be relied upon.

Deductions

The general provision that determines the deductibility of expenses is section 8-1 of the ITAA 1997. Under section 8-1 of the ITAA 1997 you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. However you cannot deduct a loss or outgoing that is capital, private or domestic in nature.

Other provisions in the ITAA 1997 contain specific deductions which section 8-5 allows you to deduct. Examples of specific deductions include borrowing expenses under section 25-25 and deductions for depreciating assets under section 40-25.

Interest

Under section 8-1 of the ITAA 1997 you can deduct interest expenses you incurred in financing the acquisition and installation of the solar system on your private residence if you incur the expense in deriving assessable income from the system.

You cannot deduct interest expenses relating to your private residence (such as in relation to a home loan) on which the system is fixed. Expenses associated with your home are usually of a private or domestic nature and do not qualify as deductions for taxation purposes.

Decline in value

For assets that are capital in nature, you cannot claim deductions under section 8-1 of the ITAA 1997. Instead, under the capital allowances system you may be able to claim a deduction for the decline in value of the cost of a capital asset if it is used in gaining your assessable income.

Application to your situation

Under the gross feed-in tariff scheme and as described in your ruling application, the electricity company credits or pays a premium feed-in tariff to you for all electricity generated and contributed to the electricity grid. You then separately buy electricity from the company according to your consumption.

Payment for the electricity generated is distinct from and unrelated to the amount of electricity consumed. The rate paid by you for electricity consumed is the same as that applied to any other householder. The payment for the electricity generated can be received by way of credit on your account, cheque or direct deposit into a bank account.

You have stated that you will receive this as a separate payment either by cheque or direct deposit into a bank account from your energy retailer.

The scheme is connected with the electricity needs of your household as:

· The size of the solar system you have installed is essentially designed principally for ordinary domestic needs and will generate an amount of electricity suitable for household needs

· The electricity retailer is required to buy all electricity that is generated from the system under the gross feed in tariff scheme. The arrangement is under a standard agreement available to any customer to encourage the use of renewable energy.

· The purpose of installing the system is to offset your average household consumption

· Your family circumstances indicate that there is no realistic opportunity for you to profit from the arrangement over the life of the arrangement.

Based on your factual circumstances, it is considered that the credits you receive on your electricity account (or payment for credits) are not ordinary income because:

· The scheme is of a private or domestic nature. The size and scale of the system installed and the arrangement with the electricity retailer indicate there is connection of the scheme with the electricity needs of your household (as outlined above).

· There is no realistic opportunity for you to profit from the arrangement.

Accordingly, the payments you receive from the electricity retailer are part of an arrangement that is private or domestic in nature.

Consequently, all of the payments received for your electricity generated and sold to the electricity grid are not considered assessable income.

As a result any expenditure incurred in producing the receipts from the sale of the electricity generated to the electricity grid is not deductible. You would not be able to claim deductions for decline in value, interest or borrowing expenses.

However, if there were an increase in the size or scale of the activity in which you are engaged, or an increase in the payments / credits received or the regularity of the payments, this might indicate the payments were ordinary income and therefore assessable.

This ruling does not consider the issues relating to any potential capital gains tax or goods and services tax consequences.

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