Edited version of private ruling

Authorisation Number: 1011840392711

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Ruling

Subject: Income and deductions - energy generation - solar power

Question 1:

Are payments/credits made to the company from the electricity provider/retailer for the generation of electricity from a solar system assessable to you, the individual?

Answer: No.

Question 2:

Are payments you receive from the company assessable income to you under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

Question 3:

Are the payments you receive from the company assessable income to you under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer: Yes.

Question 4:

Are the costs associated with the solar system, such as interest, depreciation and maintenance, deductible under any provision of the ITAA 1997?

Answer: No.

Question 5:

Are you eligible for the small business 50% tax break on the purchase of the solar system?

Answer: No.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010.

1 July 2010 to 30 June 2011.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

You are an individual.

You purchased a photovoltaic system in your name.

The total cost of the system was reduced when you assigned your rights to the Renewable Energy Certificates (RECs) to the installer.

Although an initial payment was made before 31 December 2009, the system was not installed until the 2010-11 financial year.

The solar panels are not located on your private residence.

The electricity account, and therefore credits from the solar system, is in the name of the company.

The credits from the solar panels appear on the electricity bill of the company. The most recent bill shows that the credits were used to reduce the amount owing on the electricity account.

The company transfers any and all credits to you via EFT internet banking at the time of receiving the electricity account (which is quarterly).

There is no written agreement or contract between you as an individual and the company for payments or arrangement for use of the solar system or payments between the parties.

The feed in tariff is based on total kilowatt hours produced by the solar panels. 100% of electricity produced by the solar panels is sold back to the electricity supplier.

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 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 44

Income Tax Assessment Act 1936 Subsection 44(1)

Income Tax Assessment Act 1936 Subsection 44(1A)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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

Summary

Based on the information provided, the arrangement between the company and the energy retailer/provider for the feed-in tariff payments, and the fact that there is no written contract or agreement between you and the company:

· the payments/credits received by the company for the generation of electricity from the solar system are not assessable income to you under section 6-5 of the ITAA 1997

· the payments received by you from the company are not assessable income to you under section 6-5 of the ITAA 1997

· the payments received by you from the company are assessable income to you under section 44 of the ITAA 1936

· the costs that are incurred in relation to the generation of electricity from the solar system are not deductible to you under any provision of the ITAA 1997 as you do not derive assessable income from the generation of electricity from the solar system, and

· you, as an individual, are not a small business entity and therefore you are not eligible to claim the small business tax break investment allowance.

Detailed reasoning

Question 1:

Assessable income is made up of ordinary income under section 6-5 of the ITAA 1997 and statutory income under section 6-10 of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that assessable income includes statutory income which constitutes amounts made assessable by specific statutory provisions.

Subsection 6-5(1) of the ITAA 1997 defines ordinary income as 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 derive 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 company has a contractual agreement with the electricity retailer/provider to be paid per kilowatt hour for electricity that is generated. The amount is calculated and dealt with as a credit on the electricity account of the company.

Copies of electricity statements for the company that you have provided show that the amounts charged for electricity exceed the amount of credits that are generated. The credit offsets some of the charges; and the company is billed for the outstanding amount.

You state however, that the company pays to you an amount equal to the amount of credit generated but there is no written agreement or contract that provides for any entitlement for you to receive this payment.

You are not paid any amount from the electricity retailer/provider for the generation of electricity.

Instead the credits that are generated by the solar system are offset against the electricity usage of the company. You do not derive the income as the credits are dealt with as the company directs.

The payments/credits made to the company from the electricity provider/retailer for the generation of electricity from a solar system are not assessable to you.

Question 2 and Question 3:

Assessable income is made up of ordinary income under section 6-5 of the ITAA 1997 and statutory income under section 6-10 of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that assessable income includes statutory income which constitutes amounts made assessable by specific statutory provisions including section 44 of the ITAA 1936.

The present definition of 'dividend' in subsection 6(1) of the ITAA 1936 provides that a dividend includes:

· any distribution made by a company to any of its shareholders, whether in money or other property, and

· any amount credited by a company to any of its shareholders as shareholders.

Subsection 44(1) of the ITAA 1936 states

The assessable income of a shareholder in a company………includes

(a) if the shareholder is a resident:

(i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and

(ii) all non-share dividends paid to the shareholder by the company

Subsection 44(1B) of the ITAA 1997, which applies from 28 June 2010, states that for the purposes of the Act, a dividend paid out of an amount other than profits is taken to be a dividend paid out of profits.

You state that the company will pay/credit you an amount equal to the value of electricity that the solar panels generate. You state that this will be done on the day that the company receives the account from the retailer/provider.

The payment made by the company to you is considered a distribution of money and will therefore be a dividend. It is not necessary that the payment be made from the profits from the company but can be paid out of an amount other than the profits, as stated above.

The payments to you from the company will be included in your assessable income as dividends under section 44 of the ITAA 1936.

Question 4:

As a general rule, an outgoing will not be deductible unless it is incurred in gaining or producing the assessable income of the taxpayer who incurs it (Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153). In that case, the expenses were not incurred by the taxpayer in earning his assessable income in his capacity as director but rather the income of the company. There is no nexus between the outgoing and the assessable income of the taxpayer in such a case as to characterise the outgoing as incidental and relevant to the gaining of assessable income of the taxpayer. The necessary link or nexus is sometimes referred to as a 'sufficient connection'.

There have been a number of cases in which it has been held that expenses incurred by an individual taxpayer on behalf of a company of which the taxpayer was a shareholder and/or director are not deductible.

In Case U134 87 ATC 780; AAT Case 92 (1987) 18 ATR 3646, the taxpayer was a shareholder and director of a family company who paid some of the company's expenses but was not reimbursed by the company for these expenses. The taxpayer did not receive any director's fees from the company in the relevant income year. The Administrative Appeals Tribunal held that the expenses were not deductible as the taxpayer incurred the expenses in his capacity as a director but did not derive any assessable income in that capacity.

The taxpayer incurred the expenses in order to produce the assessable income of the company rather than the taxpayer's own salary and wages. There was not a sufficient or direct connection between the expense and the taxpayer's assessable income for the income year.

Accordingly, if a taxpayer does not derive any assessable income from their position as a director of a company and they incur expenses in respect of their position as a director, they would not be entitled to a deduction under section 8-1 of the ITAA 1997 as the expenses are not incurred in gaining or producing assessable income in their capacity as a director.

In Case 26/94 94 ATC 258; (1994) 28 ATR 1133, the taxpayer was a shareholder and director of a family company. He borrowed money which he on-lent to the company. At that time the company had no capacity to borrow in its own name. Interest on the money would only be paid when the company was in a profit earning position. The taxpayer claimed the interest and other costs relating to the borrowings as a deduction under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936). He submitted that he had lent the money to the company to shore up its debts and ensure its future profitability which would enable him to derive assessable dividends in future.

The Administrative Appeals Tribunal held that the expenses were not deductible for the following reasons:

· The primary purpose of the taxpayer in borrowing the money was to temporarily assist the company to avoid liquidation by providing a short-term rescue package; and

· One of the taxpayer's objectives in lending the money to the company was to ensure its profitability so as to derive future dividends from the company. However, the connection between the lending and the future dividends was too remote.

In Case 48/97 97 ATC 500; (1997) 37 ATR 1208, the taxpayer was the majority shareholder in a private company. In 1989 he borrowed money to discharge the company's indebtedness to the Commonwealth Bank of Australia. In 1993 the company was deregistered by the Australian Securities Commission.

The taxpayer claimed the interest on the borrowings as a deduction. The Administrative Appeals Tribunal held that the interest was not deductible for the following reasons:

· the loan was secured by the taxpayer to repay the debts of a company which offered no foreseeable prospect of producing income for the taxpayer

· even if it could be said that the loan was incurred with the object of ensuring the derivation of future dividends from the company, the loan would be better characterised as being of a capital nature as the expenditure was concerned with the protection of the source of supply, rather than with the derivation of dividends, and


· there was an insufficient nexus between the outgoings and the derivation of assessable income.

These cases demonstrate that the Courts and Tribunals have consistently held that a deduction is not allowable to directors for company expenses as they have either not been incurred in gaining or producing assessable income in the taxpayer's capacity as a director, or there is not a sufficient connection between the expenses and any dividend income or director's fees received by the taxpayer.

In your case you have borrowed money to purchase a solar system. However, the solar system is not operated in your name and all monies generated by the system are paid/credited to the company.

You state that the company makes a payment to you equal to the amount of credit received each quarter however; there is no written contract or agreement between you and the company concerning the operation of the system.

The purchase of the solar system is a capital expense. Costs associated with the solar system such as interest, depreciation and repairs and maintenance are not expenses incurred in gaining or producing your assessable income as you do not derive income from the solar system.

The purchase of the solar system enabled the company to receive credits/payments on their account and reduce the amount payable on their electricity bills.

There is an insufficient nexus between the costs associated with the solar system and the derivation of your assessable income.

The expenses associated with the purchase of the solar system are not deductible to you under any provision of the ITAA 1997.

Question 5:

The Tax Laws Amendment (Small Business and General Business Tax Break) Act 2009 received Royal Assent on 22 May 2009. This has been inserted into the ITAA 1997 as Division 41.

Small business entities are able to claim a bonus tax deduction for 50% for eligible assets costing $1,000 or more (exclusive of GST) that they:

· commit to investing in between 13 December 2008 and 31 December 2009, and

· start to use or have installed ready for use by 31 December 2010.

To qualify for the 50% rate you need to meet the definition of a small business entity in section 328-110 of the ITAA 1997. This generally means that the taxpayer is carrying on a business and has an annual turnover of less than $2 million.

Businesses can commit to investing in an asset by:

· entering into a contract under which they will hold the asset, or

· starting to construct the asset.

In order to be eligible for the small business 50% tax break, you must be a small business entity, this generally means you need to have an annual turnover of under $2 million and be carrying on a business. You, as an individual, are not a small business entity. Therefore, you will not be eligible for the small business 50% tax break.

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