Edited version of private ruling

Authorisation Number: 1011814535977

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Ruling

Subject: Income - other - solar

Question 1

Would the generation of electricity from a solar system on your private residence amount to the carrying on of a business?

Answer: No

Question 2

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

Answer: No

Question 3

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

Answer: No

Question 4

Are there any capital gains tax (CGT) consequences under Part 3-1 of the ITAA 1997 for the prospective owner of a solar system, if instead of assigning their right to Renewable Energy Certificates (RECs) to the installer in the acquisition of the asset, they register and dispose of the RECs separately?

Answer: Yes

Question 5

What is the cost base of a REC?

Answer: Nil or incidental costs under section 110-35 of the ITAA 1997.

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

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You and your spouse installed a photovoltaic solar system on the roof of your private residence.

You entered into a net solar feed-in tariff scheme. Under the scheme, owners of eligible renewable energy systems are paid per kilowatt hour for energy exported to the grid that is in excess of the household consumption at the time of generation as recorded by the meter.

The tariff is applied on net electricity exported to the grid. Your retailer will pay you an additional rate per kilowatt hour for electricity exported to the grid.

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

You provided data on your usage and consumption of electricity in the quarter following the system installation.

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

The electricity account is held in your spouse's name. The solar system was purchased in your spouse's name.

You sourced the solar system overseas, imported it and subcontracted out to have the system installed.

The solar system 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 created and then sold the RECs to a company that trades in them.

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 8-5

Income Tax Assessment Act 1997 Section 25-25

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Subsection 104-10(2)

Income Tax Assessment Act 1997 Section 110-35

Reasons for decision

Summary

Based on the configuration 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:

· you would not be considered to be carrying on a business by receiving payments for the export of excess electricity generated from the solar system

· 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.

As a result of the creation and subsequent disposal of the RECs:

· CGT event A1 occurred when the RECs were disposed of. The timing of CGT event A1 is the time the contract for the disposal is entered into, and

· Any capital gain arising from the disposal of the RECs would be assessable to the owner of the solar system.

Reasons for decision

Detailed reasoning

Question 1

Carrying on a business

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators to determine the matter, these indicators are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production. These indicators are applicable to business activity generally, relevant indicators include:

· the size, scale and permanency of the activity.

· whether there is repetition and regularity of the activity, and

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business.

Size, scale and permanency of the activity

The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However the size or scale of the activity is not a determinative test and a person may carry on a business though in a small way.

In your case the activity involves the installation and operation of the system. Once the system is installed no more work other than maintenance is required to operate it. The size and scale of the operation is very small.

A smaller scale of activity usually detracts from the commercial purpose or character of the activities, for example the activity may more properly be described as the management of a capital investment rather than the carrying on of a business.

This factor alone is not conclusive. The smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business.

Whether there is repetition and regularity of the activity

It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. TR 97/11 refers to Hope v. The Council of the City of Bathurst (1980) 144 CLR 1, 80 ATC 4386, (1980) 12 ATR 231 where 'the transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business'.

In your case the measurement of and payments for the electricity generation are the responsibility of the energy retailer. There is little repetition and regularity in terms of action required for the activity. This factor must be considered together with the other relevant indicators.

Whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

The activities of a taxpayer are more likely to be a business when carried on in a manner similar to that in which other participants in the same industry carry on their activities.

The factors below, set out at paragraph 64 of TR 97/11, are used to compare the characteristics of others engaged in the same type of business:

· the volume of sales, if there is a small number of sales it is less likely that a business is being carried on

· the types of customers the taxpayer sells their product to - wholesalers, retailers, the public at large, or friends or relatives - and the manner in which this marketing takes place;

· the sort of expenses incurred by the taxpayer;

· the amount invested in capital items.

You expect to generate recurring receipts from the energy retailer. The major expense you will incur is the cost and installation of the system. There will be no significant operating costs.

You will have a single customer. There would be a contract agreement in place, however, you would not be required to meet or maintain a certain supply level, rather you would merely sell back the amount of electricity the system generates that is in excess of your domestic requirements. A business of electricity generation would usually be expected to produce and maintain certain amounts of electricity and meet certain levels of demand.

From a consideration of the factors above the activity would not amount to the carrying on of a business. The size and scale of the activity is small, there is little repetition and regularity in the activity and the activity when compared to an ordinary business of solar generation could not be said to be similar. As a result you would not be considered to be carrying on a business by receiving payments for the export of electricity generated from a small scale solar system.

Question 2 and 3

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

· 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

· 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 scheme you would receive credits whenever your electricity generation exceeds your household consumption at intervals during the day as recorded by your meter. The credit will be applied to your electricity account. You can make arrangements with the retailer to receive a payment of the credit.

The electricity provider will pay you a feed in tariff per kilowatt hour for the net electricity you generate through your electricity retailer and the electricity retailer will pay you an additional rate per kilowatt hour for net electricity exported.

You will receive the payments as credits against your electricity bill for net electricity exported. However, you can have the credits paid out to you if requested in writing.

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

· The solar system is configured into the electricity system of the home.

· The solar system primarily supplies electricity to the home and satisfies the electricity consumption of the householder before exporting excess electricity to the grid.

· The size of the solar system falls under the capped limit under the scheme administered, which is essentially designed principally for ordinary domestic needs.

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, this being demonstrated by the strong connection of the scheme with the electricity needs of your household (as outlined above). In particular:

· Electricity generated from the solar system is used for personal consumption in your private residence, and only the excess is transferred to the electricity grid.

· The credits you receive for excess electricity offset the cost of your electricity, effectively reducing your electricity account.

· 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.

Question 4

A CGT asset is defined under section 108-5 of the ITAA 1997 as any kind of property or a legal or equitable right that is not property.

A right to create a REC attaches to the purchase of eligible solar systems. The right to create the REC can be assigned to an agent, or the purchaser of the eligible solar system can create the REC independently. Where created independently, RECs can then be traded for financial return. The REC is a CGT asset as defined in subsection 108-5(1) of the ITAA 1997.

CGT event A1 happens if a change in ownership occurs from you to another entity, whether because of some act or event (subsection 104-10(2) of the ITAA 1997).

In your case, the RECs were created as provided for under the RET scheme and sold to another entity. The sale of the RECs caused CGT event A1 to happen. A capital gain arises if the proceeds from the disposal are more than the cost base of the asset.

Question 5

Subdivision 110-A of the ITAA 1997 provides the rules for the cost base of a CGT asset. The cost base of a CGT asset is made up of five elements:

1. money or property given for the asset

2. incidental costs of acquiring the CGT asset or that relate to the CGT event

3. costs of owning the asset

4. capital costs to increase or preserve the value of your asset or to install or move it

5. capital costs of preserving or defending your ownership of or rights to your asset.

In your case there is no first element cost base for the acquisition of the RECs because you did pay to acquire them. You may have incurred incidental costs that may form part of your cost base. Allowable incidental costs are set out under section 110-35 of the ITAA 1997. Examples include legal, borrowing and advertising expenses.

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