Edited version of private advice

Authorisation Number: 1012623205818

Ruling

Subject: Income from solar generation

Question 1

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

Answer

No.

Question 2

Is the discount received on the purchase price of the photovoltaic solar system for the assignment of the Renewable Energy Certificates (RECs) to the system installer considered assessable income?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You and your partner acquired and installed a 4kW photovoltaic system (solar system), on the roof of your private residence.

Your state provides for a net feed-in tariff solar scheme (the scheme). Under the scheme, owners of eligible renewable energy systems are paid 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 can receive this as a direct payment either by cheque or direct deposit into a bank account from your energy retailer.

The electricity account is held in only one of your names.

You are billed for your electricity consumption in the usual way at a cents per kilowatt hour amount.

You receive an amount per quarter from your electricity retailer for the net electricity exported to the grid.

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.

Upon ownership and installation of a SGU a statutory right arises under the REE Act entitling you to create RECs.

As provided for under the RET scheme, the right to create RECs were assigned to the installer in return for a discount on the purchase price of the solar system.

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

Reasons for decision

Question 1

Summary

Based on the configuration of the system you will install, the arrangement with your energy supplier/retailer and your feed-in tariff payments, the arrangement is private or domestic in nature and payments received for the generation of electricity from the solar system is not assessable income.

Detailed reasoning

Assessable income is made up of ordinary income and statutory income. Section 6-10 of the ITAA 1997 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) 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 derived 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 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:

n 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

n whether the payment received is income depends upon a close examination of all relevant circumstances, and

n whether the payment received is income is an objective test.

Relevant factors in determining whether an amount is ordinary income include:

n whether the payment is the product of any employment, services rendered, or any business

n the quality or character of the payment in the hands of the recipient

n the form of the receipt, that is, whether it is received as a lump sum or periodically, and

n 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. 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 because 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 in the context of rental properties 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 property and receipts received in connection with it are potentially assessable income. In determining whether or not the payments are assessable income the following are important:

• the size of the solar system

• the terms of the arrangement with the electricity retailer and in particular whether the solar system:

• 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

• 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, and

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

Application to your situation

Under the scheme operating in your state you receive credits whenever your electricity generation exceeds your household consumption at intervals during the day as recorded by your meter. The credit is applied to your electricity account and you can make arrangements with the retailer to receive a payment of the credit.

The electricity provider will pay you a premium feed in tariff for each kilowatt hour for the net electricity exported to the grid through your electricity retailer.

You will receive the payments as credits against your electricity bill for net electricity exported. However, you can have the credits paid out to you if requested in writing.

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, and

• the size of the solar system is essentially designed principally for ordinary domestic needs.

Based on your factual 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 (as outlined above). In particular:

• 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

• the credits you receive for excess electricity offset the cost of your electricity, effectively reducing your electricity account, and

• 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.

Consequently, all of 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.

However, 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.

This ruling does not consider the issues relating to any potential capital gains tax or goods and services tax consequences.

Question 2

Capital gains tax (CGT) event A1 happens if a change in ownership of a CGT asset from you to another entity occurs, whether because of some act or event or by operation of law (subsection 104-10(2) of the ITAA 1997). The right to create RECs is a CGT asset. Consequently, the transfer of that right, viewed separately from the acquisition of the generation unit, might be taken to cause CGT event A1 to happen.

That issue is considered in ATO ID 2011/26. It states that where as part of the process of acquiring the solar unit you assign your rights to the installer, 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 resultant reduction in the amount of money required to be paid for the solar generation unit, there are no CGT consequences for you to consider.

The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).