Edited version of your private ruling

Authorisation Number: 1012491318171

Ruling

Subject: Income - photovoltaic solar system

Question 1

Are payments received from your electricity retailer for the generation of electricity from a photovoltaic solar system considered assessable income?

Answer

No.

Question 2

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

Answer

No.

Question 3

Are there any Capital Gains Tax CGT) consequences when assigning the Renewable Energy Certificates (RECs) back to the installer in return for a discount on the purchase price?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You have recently acquired and installed a 5 kilowatt photovoltaic system (solar system), on the roof of your private residence.

The agreement with your electricity retailer is in your name only.

The Government's Solar Bonus Scheme (scheme) provides for a net feed-in tariff. Under the scheme, electricity providers pay the electricity account holder an amount per kilowatt hour for energy exported to the grid that is in excess of the household consumption at the time of generation as recorded by the meter. You entered into a contract under which you will be paid at an amount per kilowatt hour for the net electricity generated by the network provider through your electricity retailer.

You will receive this as a credit on your electricity account or may receive a separate direct payment from your energy retailer. The frequency of the payment will depend on your arrangement with your electricity retailer, but it is expected that you will be paid quarterly.

You are billed for your electricity consumption in the same manner and at the same rate as any other retail electricity customer in your state.

For the last billing period the net amount exported to the grid, after household usage, resulted in a credit. You can receive this as a separate payment either by cheque or direct deposit into a bank account from your energy retailer.

Your intention with the solar system is to recoup your initial capital expense over time and any future energy consumption costs.

In the short term you estimate that the system will generate more income than the cost of electricity consumed. However this is uncertain in the longer term due to the rising costs of electricity, and declining performance of the solar panels over time.

You assigned the RECs back to the installer in return for a discount on the purchase price.

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

The REE Act supports the Federal Government's Renewable Energy Target (RET) scheme which was established to encourage additional electricity generation from renewable energy sources.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 8-1, and

Income Tax Assessment Act 1997 Subsection 104-10(2)

Reasons for decision

Assessable income

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (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 derived directly or indirectly from all sources during the income year.

In determining whether payments or credits received in return for solar generated electricity exported to the grid 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. 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.

Deductions

Section 8-1 of the ITAA 1997 states that 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.

For assets that are capital in nature, under the capital allowances system you may be able to claim a deduction for the decline in value of the cost of a capital asset, if it is used in gaining your assessable income.

Application to your situation

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

§ the scheme is of a private or domestic nature, this being demonstrated by the strong connection of the scheme with the electricity needs of your household. In particular:

o electricity generated from the solar system is used for personal consumption in your private residence, and only the 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 from your electricity retailer for excess credits on your electricity account because of your electricity usage

§ there is no realistic opportunity for you to profit from the arrangement.

Accordingly, the payments you receive from the electricity retailer are part of an arrangement that is private or domestic in nature, and 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. Further, expenses relating to repairs and maintenance are also not deductible.

Please note, if there were an increase in the size or scale of the activity in which you are engaged, or an increase in the payments / credits received or the regularity of the payments, this might indicate the payments were ordinary income and therefore assessable. Therefore you should evaluate your circumstances on a regular basis to determine whether your circumstances have changed. You can request a further ruling after the relevant financial year if you are still unsure about this issue.

CGT consequences

The right to create RECs is a CGT asset. The right arises under the Renewable Energy (Electricity) Act 2000.

Subsection 104-10(2) of the ITAA 1997 states that a CGT event A1 happens if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. ATO ID 2011/26 provides some guidance on the assignment of RECs.

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, where during the process of acquiring a small generation unit you assign your rights to the installer for a reduction in the purchase price, it is considered that the assignment of the right to create a REC merely facilitates the acquisition of the system.

Accordingly there are no CGT consequences for assigning your right to create RECs to the installer, in the process of acquiring the small generation solar system.

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