Edited version of private ruling

Authorisation Number: 1011825399307

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Ruling

Subject: PAYG Withholding

Question 1

Is Entity X required to withhold 46.5% from payments made to customers that are eligible to receive the feed-in tariff pursuant to section 12-190 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

No

Question 2

If Entity X is not legally required to withhold from payments made to customers, is Entity X required to obtain a written statement stating that the relevant transactions are not business transactions?

Answer

No

This ruling applies for the following period<s>:

Year ended 2008

Year ended 2009

Year ended 2010

Year ending 2011

Year ending 2012

Year ending 2013

Relevant facts and circumstances

Any reference in this ruling to an eligible customer is a reference to a small customer, a small retail customer or a qualifying customer, as described by the relevant state legislation listed in the table below. This ruling request is in respect of Entity X's individual resident customers only that own solar photovoltaic systems. The owners of solar photovoltaic systems installed for the main purpose of generating a profit are not subject of this ruling.

Entity X conducts retail business of supplying electricity to customers in various states (as per the table below). Some of those customers have set up electricity generation facilities, specifically, solar photovoltaic systems, on their premises that feed electricity back into the grid.

Distributors own the electricity meters that are located on the customers' premises and are responsible for undertaking the meter readings that measure each customer's consumption in a relevant period. The distributor also measures the extent to which the customer has fed electricity back into the gird or, in some circumstances, has generated its own electricity to offset its consumption from the grid. This information is then forwarded to the electricity retailer (in the present circumstances, Entity X) and the retailer issues the customer with an electricity bill.

Various state based regulatory schemes have been put in place that govern the arrangements. The activities and regulatory regimes in each relevant State and also Entity X's contribution in addition to the feed-in tariff prescribed by the legislation are set out below.

In NSW, Queensland and South Australia, criteria governing eligibility, length of time a feed-in tariff will be made available, the basis of measurement (gross or net) and the feed-in tariff level itself is governed by the main legislation and subordinate acts (regulations and rules).

In Victoria, Entity X is obliged under its licence to have a standard and premium feed-in tariff contract in place with eligible customers. The minimum terms and conditions are regulated, and the terms must be approved by the Victorian Minister of Energy and Resources, or referred to the state energy regulator (the Essential Services Commission of Victoria) for review.

Customers must consent to the terms and conditions in order to receive a feed-in tariff (either standard or premium).

The arrangements are entered into and take place as follows:

Scenario 1 - The customer is an existing Entity X electricity customer, when it installs the electricity generation facilities.

1. When the customer signs up with Entity X (previous to the feed-in tariff arrangements having been entered into), information is obtained in respect of that customer, including the name, address, contact details and an Australian Business Number (ABN), if applicable.

2. The customer purchases an eligible embedded electricity generator.

3. The customer, or the customer's electrician or installer, arranges a connection agreement between the customer and the electricity distributor (sometimes referred to as the Local Network Services Provider).

4. Entity X and the customer enter into a feed-in tariff agreement (Victoria only).

5. The customer, or the customer's electrician or installer, submits an additions/alterations service order to Entity X to exchange the meter (to ensure that the meter is capable of recording energy exported to the grid).

6. Payment of the tariff feed-in commences. The customers are paid a statutory amount for electricity that is fed into the grid. The retailer pays this amount by issuing a credit on the customer's quarterly electricity bill (that is, generally, not a cash payment).

7. The distributor reimburses the retailer for this cost. This is usually done by applying a credit to the amount otherwise payable by the retailer to the distributor for distribution services on a weekly basis. In this manner, the credit is funded by the distributor, as mandated by the regulatory schemes (see the note below).

8. The distributor recovers the cost of reimbursing the retailer by increasing the prices for all of its distribution services to all its customers (see the note below).

Scenario 2 - The customer is transferred to Entity X as an electricity customer with the generation facilities.

1. In the course of the transfer process, Entity X obtains information in respect of that customer, including name, address, contact details and an ABN, if applicable.

2. Entity X and the customer enter into a feed-in tariff agreement.

3. Payment of the tariff feed-in commences as per steps 6-8 above (see the note below).

Note:

· The process for crediting retailers in Victoria is consistent with the Use of System Agreement and is applied in the same way throughout the National Electricity Market. The distributor reduces the monthly network tariff bill to a retailer by the amount of net or gross feed-in tariff energy for which the retailer is the financially responsible Market Participant at the relevant feed-in tariff rate.

· Under the Victorian standard feed-in tariff scheme, the Queensland voluntary feed-in tariff scheme or the New South Wales voluntary feed-in tariff scheme, the distributor does not make a payment to the retailer for the cost of the feed-in tariff.

The metering of the electricity that is feed back into the grid can be carried out on a net or gross basis.

Net metering measures the flow of electricity to and from the grid. Electricity that is generated and consumed by the customer is not fed into the grid and is therefore, not measured by the meter. No feed-in tariff payments are made in respect of the energy generated and consumed by the customer. Net metering is used in Victoria, South Australia, Queensland and for some of NSW customers.

Gross metering measures the entirety of the output of the customer's generator and the customer is paid for all the electricity that is generated. The customer is then charged for all its electricity consumption. Gross metering is used in NSW.

The payment for energy supplied by the customer is only provided in cash (via cheque issued to the customer) if the customer's account is in credit and only then, if it is on demand by the customer. In most cases, credits are provided on customer bills, as only a minority of Entity X customers earn slightly more feed-in tariff revenue than the actual cost of their electricity bills.

Moreover, in Victoria, Entity X will only credit an account with a credit balance greater than a certain threshold amount. The threshold is yet to be implemented and approved by Entity X.

The legislation provides guidelines in regard to the capacity limit of the solar photovoltaic system. The average size of the photovoltaic systems used by Entity X's customers ranges between 1.4kW and 1.7kW.

The average household consumption of electricity varies by state. Customers who do not have electric storage hot water systems, generally, consume between 5 Megawatt hours (MWh) to 7MWh per annum. Customers who do have electric hot water heating consume on average 6MWh to 9MWh per annum.

The average payment amount made by Entity X to customers for the electricity generated varies by State and the relevant feed-in tariff scheme. Specific information was provided.

In addition to the credits received through the feed-in tariff scheme, eligible customers may be able to receive financial assistance in the form of rebates (where the application was received by June 2009), Renewable Energy Certificates (RECs)/, the Small-scale Technology Certificates (STCs), or Solar Credits.

Until 1 January 2011, Solar Credits were provided in the form of tradable RECs, under the Renewable Energy Target (RET) scheme. As of that date, STCs are replacing RECs for the Small Generation Units. These certificates can be sold and transferred to liable entities (usually electricity retailers) using a market based online system called REC Registry or, in the case of STCs, also via the STC Clearing House (at a fix price of $0.40/kWh, excluding GST). RECs are an electronic form of currency introduced through Renewable Energy (Electricity) Act 2000. One REC is equivalent to one megawatt hour of electricity generated by the photovoltaic system.

The Solar Credits scheme provides extra RECs for the first 1.5kW of system capacity. The level of subsidies provided under the scheme depends on a number of factors such as the location of the photovoltaic system, the size of the system and the price of the RECs at the time the system was installed.

Assumptions

· Generation of electricity occurs at the customer's principal place of residence. There is only one generator installed per each premises.

· The system capacity is no greater than 5kW. A 5kW system is complying with the relevant legislation of each of the states where Entity X operates a retail business. In order to benefit from the feed-in tariff scheme, the customer incurs certain expenses with the purchase, installation and maintenance of the 5kW system. When considering those expenses together with the feed-in tariff provided by the legislation and the additional amount provided by Entity X (as per the table above), it is reasonable to assume that no significant profit will be generated by the residential customers.

Relevant legislative provisions

A New Tax System (Australian Business Number) Act 1999 section 41.

A New Tax System (Goods and Services Tax) Act 1999 section 9-20.

Electricity Act 1996.

Electricity Act 1994.

Electricity Feed-in (Renewable Energy Premium) Act 2008.

Electricity Industry Act 2000.

Electricity Supply Act 1995 paragraph 15A(1)(a).

Electricity Supply (General) Regulations 2001.

Income Tax Assessment Act 1997 section 995-1.

Renewable Energy (Electricity) Act 2000.

Taxation Administration Act 1953 Schedule 1, section 12-190.

Taxation Administration Act 1953 Schedule 1, subsection 12-190(1).

Taxation Administration Act 1953 Schedule 1, subsection 12-190(6).

Reasons for decision

Question 1

Summary

As the eligible customer, that is, the residential customer, is not carrying on an enterprise, the provisions of section 12-190 of Schedule 1 to the TAA 1953 do not apply. Consequently, Entity X is not required to withhold tax from the payments made to eligible customer in the form of the feed-in tariff, for the energy supplied by them into the grid.

Detailed reasoning

Section 12-190 of Schedule 1 to the TAA 1953 provides that a payer must withhold from a payment made for a supply if the payer does not have an invoice or some other document relating to the supply which quotes the supplier's Australian Business Number (ABN) and none of the other exceptions to the requirement to withhold for in section 12-190 are satisfied.

Paragraph 6 of Taxation Ruling TR 2002/9, Income Tax: withholding from payments where recipient does not quote ABN, provides that section 12-190 of Schedule 1 to the TAA 1953 should only operate where the suppliers that are carrying on an enterprise fail to quote their ABN number to the payer. Consequently, the relevant question is whether the supplier, in this case, the eligible customer, is carrying on an enterprise.

The Australian Taxation Offices view on the concept of enterprise for the purposes of entitlement to an ABN is considered in Miscellaneous Taxation Ruling MT 2006/1, The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number.

'Enterprise' is defined in section 41 of A New Tax System (Australian Business Number) Act 1999 to have the meaning given by section 9-20 of the A New Tax System (Goods and Services) Act 1999 (GST Act). Section 9-20 of the GST Act provides that an enterprise can include an activity, or series of activities, done in the form of a 'business' or in the 'form of an adventure or concern in the nature of trade.'

Paragraph 180 of the MT 2006/1 provides that small scale activities can amount to an enterprise. However, it clarifies that where the activities are carried on in a small way, other indicators, such as 'commercial purpose or character' and the intention and prospect of producing a significant overall profit, become more important in determining whether they amount to an enterprise. Further clarification is provided in paragraph 186 of the MT 2006/1 which states: '[w]hile it is always a question of fact and degree in each particular case, it would be difficult to conclude that activities are an enterprise where they are of a very small size or scale, are carried on in an ad hoc manner, and there is little repetition or regularity.'

Small scale activities

In this case, the retail customer of Entity X is an individual (or individuals, where the account is in the name of associated persons), who is eligible to receive the feed-in tariff prescribed by the relevant state legislation and the additional amount funded by Entity X as a credit for the energy supplied to Entity X. The average size of the photovoltaic systems used by Entity X's customers ranges between 1.4kW and 1.7kW, well below the maximum capacity prescribed by various legislation.

The eligible customer installs the solar photovoltaic system principally to generate electricity for their own use, as a householder, and to reduce greenhouse emissions, as response to the government policy to tackle climate change.

While the quantity of electricity produced and fed back into the grid may vary from customer to customer, all available information points to the fact that the whole process is conducted on a very small scale, as compared to, for example, a commercial scale solar power station. The quantity of electricity produced and fed back into the grid may vary due to factors such as:

· the type and size of the photovoltaic system;

· the location of the residence where the system is installed;

· the period of the year when the system is used;

· the maintenance of the system; and

· the level of domestic consumption.

However, when considering those factors and the limitations imposed by the legislation in terms of capacity of the system, the feed-in tariff paid, and the number of systems installed - one per each premises (as prescribed by the legislation in Victoria and NSW), it can be concluded that those activities are conducted on a small scale.

Significant commercial purpose or character

Moreover, those activities do not have a significant commercial purpose or character. Similar to the Rendyl Properties Pty Ltd v FC of T (2009) ATC 10-082 case, the general impression is that the revenue-generating opportunities are 'thought of more as a means of defraying some of the costs' related to the purchase, installation and maintenance of the photovoltaic system and for domestic consumption rather than a profit -making business or for a commercial purpose. Although the eligible customer may produce at a certain time more than it is necessary for their own consumption, this contrasts with the facts in the Thomas v FC of T 72 ATC 4094 (Thomas case). In Thomas case, Walsh J concluded that the appellant was carrying on a business because:

…the appellant in planting the avocado pear trees and the macadamia nut trees set out to grow them on a scale that was much greater than was required to satisfy his own domestic needs and he expected upon reasonable grounds that their produce would have a ready market and would yield, if the trees became established, a financial return which would be of a significant amount, with a relatively small outlay of time and money, and that this return would continue for a very long time (ATC 4099) (emphasis added).

References to a significant return are also made in Crees v Federal Commissioner of Taxation 2001 ATC 2021; (2001) 46 ATR 1091 by Mr DW Muller, Senior Member, who noted at 2001 ATC 2024; ATR 1095:

It would be a most unusual business operator who would expend large amounts of money and labour, for more than ten years, on a business which was unlikely to ever cover the expenditure and even if it did, was not likely to give a reasonable return for effort. Under the circumstances I find that the orchid growing enterprise of Mr Crees does not have a significant commercial character and that, therefore, it does not amount to a business of primary production.

To establish whether the eligible customer has a bona fide intention to make a profit from activities related to supplying solar generating electricity, it is necessary to take into account all of the expected income and expenses. This will include any interest incurred and the decline in value of the photovoltaic system while used in generating solar electricity. In Thomas case, interest was clearly considered to be part of the relevant expenses. Further, in Daff v FC of T 98 ATC 2129; (1998) 39 ATR 1042, the major items of expenditure were noted to include interest and depreciation.

When taking into account all expected income and expenses incurred by the eligible customer, it could be concluded that the activity of generating solar electricity is not being operated for commercial reasons or significant overall profit. The limitations imposed by the legislation are reflected in the overall profit of the eligible customer. When comparing the income that the photovoltaic system may generate with all the costs related to the installation and maintenance of the photovoltaic system (that is, the initial price of the photovoltaic net of any financial assistance, other than the feed-in tariff amount, for instance, any rebate or RECs/STCs entitlements, the decline in value, the insurance and other possible costs), it is difficult to conclude that at any time, from the first to the last year of operation, the eligible customer will gain a significant profit.

The intention of the relevant legislation is to support the customers who want to generate renewable energy (see for instance, paragraph 15A(1)(a) of the Electricity Supply Act 1995 (NSW) and the Explanatory Memorandum to the Electricity Industry Amendment (Premium Solar Feed-in Tariff) Bill 2009 (VIC)), by helping them recover some of those costs. However, there is strong evidence that the financial assistance offered by the government to encourage the use of solar photovoltaic system is subject to continuous scrutiny. For instance, the NSW Solar bonus scheme was revised in 2010 and the Electricity Supply Act 1995 was amended to reflect a reduction in the feed-in tariff paid (from $0.60/kWh to $0.20/kWh) to new small retail customers who join the scheme. In May 2011, the Federal Government announced a reduction of the solar credits multiplier.

Further explanations regarding the commercial character are provided by Lord Clyde in I.R. Commrs v Livingstone (1926) 11 T.C. 538 at p 542:

the operation involved initially are of the same kind and carried on in the same way as those which are characteristic of ordinary trade in the line of business in which the venture was made.

This is not the case, the activities are not conducted in a business like manner as they lack the degree of organisation and system that would be found in the activities of people who normally would be regarded as carrying on a business of supplying electricity. The eligible customer is an individual that normally, does not have any expertise with regard to the production and supply of solar electricity. After the installation of the photovoltaic system, the eligible customer does not have to undertake any specific activities such as marketing, record keeping or billing.

Ad hoc nature of those activities and the repetition and regularity

Moreover, those activities are conducted in an ad hoc manner and there is little repetition or regularity. The eligible customer has a limited possibility to influence the way those activities are conducted. In regard to repetition and regularity, paragraph 56 of TR 97/11 Income Tax: am I carrying on a business of primary production? states '[t]he taxpayer should undertake at least the minimum activities necessary to maintain a commercial quantity and quality of product for sale.' In this case, the eligible customer has a limited control over the quantity of electricity produced. As explained above, the limitations imposed by the legislation (in terms of the prescribed rate of the feed-in tariff or the number of generators installed) and the other factors listed above restrict the quantity of electricity that could be exported back into the grid.

All of the above seem to indicate the eligible customers are not carrying on an enterprise. The activities are conducted on a small scale with little excess electricity being generated. The income that is received from exporting the excess electricity into the grid in a financial year is estimated to be minimal compared to the costs of the photovoltaic system. Taking into account the amount of equipment used to generate the electricity, the paying for that equipment and the current pricing structure, there is no realistic prospect of a significant profit from this activity. The activities have a more ad hoc character and the eligible customers are not able to undertake at least the minimum activities necessary to maintain a commercial quantity of electricity.

As the qualifying customer is not carrying on an enterprise, the provisions of section 12-190 of Schedule 1 to the TAA 1953 do not apply. Consequently, Entity X is not required to withhold tax from the payments made to eligible customer in the form of the feed-in tariff, for the energy supplied by them into the grid.

Question 2

Summary

As Entity X's customers referred to in this ruling are not supplying solar energy in the course of their enterprise, the provisions of section 12-190 of Schedule 1 to the TAA 1953 do not apply to the payment made by Entity X. Consequently, Entity X is not required to obtain from the payee any written statement stating that the transactions are not business transactions.

Detailed reasoning

Subsection 12-190(6) of Schedule 1 to the TAA 1953 provides the payer does not need to withhold an amount when the payee, an individual, has given the payer a written statement to the effect that the supply is made in the supplier's private capacity or as a hobby. Paragraph 1.58 of the Explanatory Memorandum to the A New Tax System (Pay As You Go) Act 1999 states '[section 12-190] withholding event provides a payer must withhold from the payment for a supply in the course of the recipient enterprise where an invoice or some other document relating to the supply does not quote the recipient ABN (emphasis added).' Consequently, the payer has a withholding requirement only where the supplier is making the supply in the course of their enterprise.

As Entity X's customers referred to in this ruling are not supplying solar energy in the course of their enterprise, the provisions of section 12-190 of Schedule 1 to the TAA 1953 do not apply to the payment made by Entity X. Consequently, Entity X is not required to obtain any written statement from the payee, the customer, stating that the relevant transactions are not business transactions.

However, Entity X is still required to obtain the required written statement if Entity X has a reasonable reason to believe that the payee is making the supply as result of carrying on an enterprise.

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