Edited version of private ruling

Authorisation Number: 1011831478988

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Ruling

Subject: Income- Solar feed-in tariff

Question 1

Would payments received as feed-in tariffs 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 there any consequences under Part 3-1 of the ITAA 1997, if you use your right to create a renewable energy certificate (REC) to acquire the solar system?

Answer: No

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You have installed a solar power system on the roof of your home. You paid jointly for the system and any credit is paid into a joint account.

You have a 3 Kilowatt system. You will be paid a rate for electricity generated which is on parity with the rate paid for electricity consumed.

The system is intended for domestic and private use only. You state that you are not seeking to get into the business of producing electricity for the purpose of making a profit. You do not envisage making profits from the arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 6-10,

Income Tax Assessment Act 1997 Section 8-1 and

Income Tax Assessment Act 1997 Section 104-10.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

Summary

Based on the size of the system you installed, 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,

· there are no consequences under Part 3-1 for assigning your rights to create RECs in return for a reduction in the amount you pay for the purchase and installation of the solar system.

Detailed reasoning

Assessable income

Assessable income is made up of ordinary income and statutory income. Section 6-10 provides that assessable income includes statutory income which constitutes amounts made assessable by specific statutory provisions. There are no specific legislative provisions relating to money or credits received from electricity suppliers therefore such amounts are not statutory income.

Subsection 6-5(1) defines ordinary income as income 'according to ordinary concepts'. Under subsection 6-5(2), the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources during the income year.

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:

· those receipts which 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. In addition, receipts from property or investments that are on commercial terms and/or that indicate an intention to make a profit from an activity are also 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 as a consequence 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 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 the property of its owner. Receipts received as a result of employing that asset, therefore, are potentially assessable income to the owner. Consequently, 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 system.

The factual circumstances, and in particular whether the receipts represent activity which is more than private or domestic in nature, need to be considered in determining whether or not the receipts are income. The following are important:

· the scale of the activity, in this case represented by the size of the 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

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

Renewable Energy Certificates (REC)

Subsection 104-10(2) states that CGT event A1 happens if a change in ownership of an asset occurs from you to another entity, whether because of some act or event or by operation of law. The right to create RECs is a CGT asset. The right arises under the Renewable Energy (Electricity) Act 2000.

Consequently, the transfer of the right, viewed separately from the acquisition of the generation unit, might be taken to cause CGT event A1 to happen. However in this case, where you assign your rights to the installer as part of the process of acquiring the small generation unit it is considered that the reality of the matter is that you are acquiring a generation unit and the assignment of the right to create a REC merely facilitates that acquisition.

Accordingly, where there is an assignment of the right to create a REC, and a reduction in the amount of money required to be paid for the unit (the underlying asset), the CGT provisions will not apply to the acquisition. As a result, there will be no CGT consequences under Part 3-1.

Application to your situation

Under the scheme operating in your jurisdiction you would receive credits whenever your electricity generation exceeds your household consumption as recorded by your meter. The credit will be applied to your electricity account.

The electricity provider will pay you a feed in tariff for the net electricity you generate through your electricity retailer. You will receive the payments as credits against your electricity bill for net electricity exported.

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 is essentially designed principally for ordinary domestic needs.

Based on your circumstances, it is considered that the credits you receive on your electricity account are not ordinary income because:

· The scheme is of a private or domestic nature which is demonstrated by the connection of the scheme with the electricity needs of your household (as outlined above). In particular:

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

o The credits you receive for excess electricity offset the cost of your electricity, effectively reducing your electricity account. You are unlikely to receive payments for excess credits on your electricity account because of your electricity usage.

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

Based on your circumstances, the payments you receive from the electricity retailer are part of an arrangement that is private or domestic in nature. Accordingly, 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, borrowing or other expenses.

You assigned your right to create RECs to the installer for a reduction in the purchase price of the solar system. It is considered that the assignment of the right merely facilitated the acquisition of the system. There are no consequences under Part 3-1 in those circumstances.

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