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Ruling

Subject: Solar Electricity Systems

Question 1

Are payments you receive from the electricity retailer for the generation of electricity from a solar system assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

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

Answer

Yes, to the extent they are not capital, private or domestic in nature.

Question 3

Is the statutory right to create small scale technology certificates (STC) considered an assessable recoupment under Subdivision 20-A of the ITAA 1997?

Answer

Yes.

Question 4

Should amounts relating to GST, which are included in GST inclusive payments from the electricity retailer, be included in assessable income?

Answer

No

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

The entity operates a business.

The entity constructed a shed.

The main purpose of the shed was for business purposes. You also use the roof of the shed to house an electricity solar system (solar system).

The solar system was connected to the electricity grid.

You have a gross metering arrangement.

You expect to receive an amount of money per year from the electricity retailer.

The solar system is an eligible small generation unit (SGH) for the purpose of the Renewable Energy (Electricity) Act 2000.

The solar system kit and installation were inclusive of GST.

You sold your right to a STC to the installer.

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 17-5

Income Tax Assessment Act 1997 subsection 20-20(2)

Income Tax Assessment Act 1997 subsection 20-25(1)

Income Tax Assessment Act 1997 section 20-30

Income Tax Assessment Act 1997 section 20-40

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 subsection 25-10(3)

Income Tax Assessment Act 1997 section 40-25

Reasons for decision

Unless otherwise stated, all legislative references in the following relate to the ITAA 1997.

Summary

Based on the configuration of the solar system you have installed, the arrangement with your energy supplier/retailer and your estimated feed-in tariff payments, the arrangement is not private or domestic in nature. As a consequence:

· the payments you receive for the generation of electricity from the solar system are ordinary assessable income under section 6-5

· the costs you incur in relation to the generation of electricity from the solar system are deductible under section 8-1 to the extent that they are not capital or private or domestic in nature

· you are able to claim deductions in respect of the decline in value of the capital cost of the system because the solar system is used to produce assessable income

· the value of the right granted to you to create STCs is an assessable recoupment and must also be included in your assessable income.

· The GST amounts you receive as part of the GST inclusive payments received from the electricity retailer are not assessable income.

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:

· 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

· 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

· 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 at 4420; (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.

A solar system is considered to be the property of its owner. Receipts received in connection with it, therefore, are potentially assessable income. Consequently, it needs to be determined, in light of the nature and the circumstances of the receipt; whether the payments or credits received in return for transfer of electricity to the grid are income.

In determining whether or not the payments are assessable 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. The following are important:

· the terms of the arrangement with the electricity retailer and in particular any requirement on the retailer to buy all electricity that is generated from the system (as occurs under a gross feed in tariff 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.

Amounts that you receive as a recoupment of a deductible expense (that is the financial benefit arising from the STC which offset the cost of the system) may potentially also be included in your assessable income. That issue will be discussed in greater detail below.

Deductions

The general provision that determines the deductibility of expenses is section 8-1. Under section 8-1 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 are made allowable by section 8-5. Examples of specific deductions include repairs under section 25-10 and deductions for the decline in value of depreciating assets under section 40-25.

Repairs and Maintenance

Under section 25-10 you can deduct expenditure you incur in respect of repairs and maintenance to the solar system. That is because the expense is incurred in deriving assessable income from the system.

Under subsection 25-10(3) expenditure incurred for repairs is not deductible if it is of a capital nature. For further information regarding the deductibility of repairs see Taxation Ruling TR 97/23 Income tax: deductions for repairs.

Decline in value

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

Under section 40-25, each income year you can deduct an amount equal to the decline in value of a depreciating asset that you hold. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time that it is used. Where it is used in producing assessable income a solar system would fall into that category.

You must reduce any applicable deduction by the part of the asset's decline in value that is attributable to your use of the asset for a purpose other than a taxable purpose. The purpose of producing assessable income is a taxable purpose but private usage is not.

A solar system comprises modules of photovoltaic cells, a roof mounting frame, various fixings, electrical wiring and conduits and inverters. The entire solar system is considered to be a single depreciating asset and would be depreciated accordingly.

Taxation Ruling TR 2012/2 Income tax: effective life of depreciating assets provides a table listing the effective life of depreciating assets. In accordance with TR 2012/2 the effective life of solar power generating system assets is twenty years.

Generally speaking, the costs of a solar system are those amounts which you are taken to have paid to hold the solar system, such as the purchase price and its associated installation and connection costs. It is worked out as at the time that you begin to hold the solar system; in other words, when it is installed and ready for use. The cost also generally includes amounts you pay over time to maintain its condition.

For more information on determining the decline in value of your solar system, you should refer to the Guide to depreciating assets 2011-12.

Assessable recoupments

Under Subdivision 20-A, your assessable income may include an amount which you receive by way of insurance, indemnity or other recoupment if it is for a deductible expense and it is not otherwise assessable income. This provision needs to be considered where your solar system produces assessable income and you incur a loss or outgoing (i.e. expense) in respect of installing and owning that system.

Under the Renewable Energy (Electricity) Act 2000 (REE Act), if you install an eligible solar system, you have a statutory right to create a STC after the system is installed. You can assign that right to another person, for example the installer of the system, or you may create the STC and sell it on the market.

Assigning the right to create a STC to another entity (such as the installer) is considered to result in a financial benefit to you. Effectively, the financial benefit is the reduction in the amount which you would otherwise pay for the purchase and installation of the solar system. In effect that reduction is the price discount which the installer offers you in return for surrendering the STC to them.

The STC is effectively a financial incentive given to you to purchase the system. The amounts received in respect of the STC are considered to be an indemnity (and therefore a recoupment) as they satisfy a statutory obligation under the REE Act to partially compensate you for the cost to install and own the solar system. Where you can deduct an amount for the decline in value of the solar system under Division 40 (as outlined above) the recouped amount in respect of the STC is an assessable recoupment.

Where the cost of the solar system is deductible under Division 40 over several income years, the total assessable recoupment included in a particular year is the amount of the deduction for the loss or outgoing in that year. Any part of the assessable recoupment that is not included in assessable income in the year it is received is assessable in later income years until it has been fully accounted for.

GST and assessable income

Division 17 of the ITAA 1997 discusses the effect of GST on assessable income.

Section 17-5, in part states an amount is not assessable income, and is not exempt income, to the extent that it includes an amount relating to GST payable on a taxable supply.

Application to your situation

Under the gross feed-in tariff scheme operating in your state 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 in your state.

In your case, you have stated that you will receive payments provided under an arrangement between yourself and the relevant electricity company. You expect to receive income from the electricity company. The value of electricity that you will produce and be paid for is not related to the amount of electricity you consume.

Based on your situation, it is considered that all of the payments received for your electricity generated and sold to the electricity company are assessable income because:

· The electricity retailer is required to buy all electricity that is generated from the system under the gross feed in tariff scheme.

· The feed-in tariff payments are considered to represent a return on your investment in the solar system.

· There is a realistic opportunity for you to profit from the arrangement.

· The payments from the feed-in tariffs are received regularly and can be relied upon, including to meet regular household electricity expenditure.

The arrangement is not of a private or domestic nature because the solar system does not provide electricity to your private residence. Instead, all electricity produced is exported back to the grid. You then buy back electricity to meet your own electricity needs.

As the payments received for the electricity generated to the electricity grid are assessable income, the expenditure incurred in producing the income from the sale of the electricity is deductible. You are entitled to deductions for the installation and operating expenses of the solar system, such as for:

· repairs and maintenance of the solar system

· decline in value of the solar system based on 20 year effective life.

In cases where the right to create STCs is assigned to a third party (i.e. the installer of the solar system), the grant of the right to create the certificates is an assessable recoupment. That is because it is considered to be a grant in respect of a loss or outgoing and you can deduct an amount for that loss or outgoing.

The amount you receive for that right is the value of the assessable recoupment. The assessable recoupment is applied to reverse the effect of a deduction for decline in value of the full cost of the solar system. The assessable recoupment will reduce such allowable deductions for a certain number of years, that period being determined by the original cost of the system and the annual amount of the deductions.

In relation to amounts received from the electricity retailer, the GST amount is not assessable income as outlined under subsection 17-5 of the ITAA 1997.

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