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Ruling

Subject: Solar Electricity Systems

Question 1

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

Answer

Yes

Question 2

Is the Government Electricity Rebate assessable income?

Answer

No

Question 3

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

Answer

Yes.

Question 4

Are the costs associated with the solar system, such as maintenance and depreciation, deductible under section 8-1 or 8-5 of the ITAA 1997?

Answer

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

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

The taxpayer runs a business.

The taxpayer acquired and installed a photovoltaic system (solar system) on the roof of a building.

The solar system is a net metering system. Of the electricity produced, a portion is used for private and business purposes and the remainder is exported to the grid. This proportion was calculated by the number of meters and the use of those meters.

The taxpayer sold their right to create STCs to the installer. The price paid for the right to create the STCs was deducted from the full purchase price.

The Government provides for a net feed-in tariff solar scheme (the scheme). Under the scheme, owners of eligible renewable energy systems are paid 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. The electricity retailer will pay per kilowatt hour for electricity exported to the grid.

This credit, and future credits for electricity generated, may be applied to offset your future electricity expenses. You are also able to receive a separate direct payment either by cheque or direct deposit into a bank account from your electricity retailer on an annual basis, or upon request, on a quarterly basis.

The Government provides a rebate up to a maximum amount on the cost of electricity supplied to the home of eligible concession card holders. The rebate is administered by electricity retailers and is accounted for as a credit on quarterly electricity bills.

You receive the rebate on your electricity bill in the form of a credit.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 4-15

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 25-10

Income Tax Assessment Act 1997 section 20-25

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

Income Tax Assessment Act 1997 paragraph 20-25(1)(b)

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

Income Tax Assessment Act 1997 section 20-40

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 electricity retailer and your estimated feed-in tariff payments, the arrangement is not totally 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 but the deduction must be reduced for non-taxable use

· 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 Government Electricity Rebate, which is calculated on a daily basis and you receive quarterly, is not assessable income.

Potential capital gains tax and goods and services tax consequences may also apply but have not been addressed in this ruling.

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 is 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.

Section 4-15 outlines that you work out your taxable income by taking your deductions away from your assessable income.

In application to your circumstances under the scheme operating in your State you receive credits on your quarterly accounts whenever your electricity generation exceeds your household or income producing consumption at intervals during the day as recorded by your meter. After a 12 month period, your electricity retailer will automatically send you a cheque for the amount of the credit on your electricity account. You are also able to request the refund of any credit on your account on a quarterly basis. These amounts are to be included in your assessable income when the bill has issued as you are able to access these amounts (upon request). The gross amount is assessable and then your eligible expenses are deducted from the gross amount. Your taxable income is worked out by taking your deductions away from all assessable income.

Amounts that you receive as a recoupment of a deductible expense (that is the financial benefit arising from the STCs 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.

Government Electricity Rebate

Subsection 6-5(2) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity

In your case, the Government provides a rebate on the cost of electricity supplied to the home of eligible concession card holders. The rebate is administered by electricity retailers and is accounted for as a credit on quarterly electricity bills. You are an eligible concession card holder and are therefore entitled to this rebate.

The credit you receive is not from rendering personal services, income from property or income from carrying on a business. Although the credit may be expected and relied upon, it is not earned; therefore the credit you receive is not assessable as ordinary income.

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 on your private residence, you have a statutory right to create STCs 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 STCs and sell them on the market.

Assigning the right to create STCs 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 STCs to them.

The STCs are effectively a financial incentive given to you to purchase the system. The amounts received in respect of the STCs 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 STCs 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.

By way of clarification, consider the following example:

On 1 July 2009, a taxpayer installed on the roof of his private residence a 10 kilowatt solar system costing $60,000. He received the right to create STCs to the value of $12,000. He assigned them to the installer, resulting in a reduction in the price paid for the solar system to $48,000.

The taxpayer claims the decline in value of his solar system using the prime cost method and an effective life of twenty years. He can claim a deduction for decline in value of the system of $3,000 for the 2009-10 financial year and each of the following 19 financial years (being $60,000 /20).

He received the right to STCs to the value of $12,000 and that is considered to be an assessable recoupment. As his deduction for decline in value of the system is $3,000 each year, he will include an assessable recoupment of $3,000 each year in his assessable income for the first four income years. The total value of the STCs will then be fully recouped. In subsequent years, the deduction can still be claimed but with no off-setting recoupment.

Taxation Determination TD 2006/31 deals with recoupments for rebates received for the purchase of a depreciating asset for use in a rental property. It provides further guidance on how the recoupment provisions operate in relation to depreciating assets. In addition ATO Interpretative Decision ATO ID 2010/218 discusses when the right to create STCs is an assessable recoupment, again in the context of rental properties.

In your case the amount you received for that right is the value of the assessable recoupment. That amount (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.

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 that are on residential property is twenty years.

Generally speaking, the cost of a solar system is 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 2012.

Apportionment of deductions for private and domestic usage

A net feed in tariff scheme 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. Where income received under a net feed in tariff scheme is assessable, any expenses incurred in generating the assessable income will need to be apportioned to take into account expenses incurred for electricity generated for private and domestic purposes. For example, one method to apportion will be to reduce the deduction by the percentage of electricity consumed by the household divided by total electricity generated by the system.

In your case you have determined that part of the solar system is used for business purposes and the rest is used for private purposes, therefore you are able to claim a proportion of the expenses incurred and the remaining proportion of the decline in value of the system.

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