Edited version of private advice

Authorisation Number: 1012678811720

Ruling

Subject: Business deductions

Question 1

Are you entitled to a deduction for 100% of the expenses that relate to your solar power system?

Answer

No.

Question 2

Are you entitled to a deduction for the portion of the solar power system expenses that relate to your business activity?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

October 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You installed a X kilowatt, Y phase commercial system with a Zkw inverter.

The solar panels are installed on your main residence and shed roof.

You operate a farming business.

The panels were installed to reduce the electricity costs for both your home and the running of the farm machinery.

During the summer months, the excess that is generated by the system which you do not consume is delivered into the state electricity grid. You do not receive any compensation (rebate) for this.

During the winter months, you consume all the electricity that you generate and then you consume electricity from the state electricity grid.

In the past you have allocated the electricity on the basis of 50% business, 50% private.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 40-25.

Reasons for decision

The general provision that determines the deductibility of expenses is section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Under section 8-1 of the ITAA 1997 you can deduct 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.

Capital costs

For assets that are capital in nature, you cannot claim deductions under section 8-1 of the ITAA 1997. 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 or producing your assessable income. You can deduct the decline in value of the capital cost of your solar system where it is used in gaining or producing your assessable income.

Under section 40-25 of the ITAA 1997 you can deduct an amount equal to the decline in value for an income year 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.

You must reduce your 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.

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.

Taxation Ruling TR 2014/4 - Income tax: effective life of depreciating assets provides a table listing the effective life of depreciating assets. In accordance with TR 2014/4 the effective life of solar power generating system assets on residential property is 20 years.

You have installed a solar system to reduce the electricity costs for both your home and the running of the farm machinery. In your circumstances, the Commissioner provides that the effective life of the solar system is 20 years.

The cost of the solar system is, generally, amounts you are taken to have paid to hold the solar system, such as the purchase price including its installation and connection costs. It is worked out as at the time you begin to hold the solar system, that is, when it is installed and ready for use. It 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 publication Guide to depreciating assets 2013-14 which can be found on our website.

Electricity costs

In your case, you incur electricity expenses in the process of earning your income. Under section 8-1 of the ITAA 1997 you are able to claim a deduction for those expenses against your income.

For periods where the cost of your consumption of electricity exceeds the value of the power exported to the grid and you receive a bill for the difference, you would be able to claim a deduction for the business portion of that excess power usage. It is necessary to apportion the electricity expenses and claim deductions only in respect of the business percentage.

Note that deductions can only be claimed for costs actually incurred. Therefore, the deduction which can be claimed is for the business percentage of the amount charged for excess usage for a period - the cost actually incurred. It follows that, in those periods for which the credit for power returned to the grid is sufficient to reduce your bill to nil or produce a surplus, no power cost has been incurred by you and no deduction is available.

Apportionment of deductions for private and domestic usage

There are situations when a single outlay serves both an income-earning purpose and some other purpose indifferently. While there is no distinct separation of the portions of the expense, there must be a fair and reasonable division based on the facts of each case.

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 installed a solar system to reduce the electricity costs for both your home and the running of the farming machinery. Therefore you are entitled to claim a deduction for the decline in value of the solar system for the proportion of the costs that relate to the farm.

You do not receive a rebate from your energy provider for the electricity that your system feeds back into the grid. However, you are billed for the excess energy that you draw from the grid by your energy provider. The electricity is used for both your private residence and for running your farming machinery. You are entitled to claim a deduction for the portion of the costs that relate to the income producing purpose of running the farming equipment.

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