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Edited version of your written advice
Authorisation Number: 1013064097553
Date of advice: 2 August 2016
Ruling
Subject: Solar panels
Question and Answer:
Does your proposed methodology for calculating the effective life of the solar panels meet the requirements of section 40-105 of the Income Tax Assessment Act 1997?
No
This ruling applies for the following period:
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
You are the trustee for the trust (the Trust).
In the 2012 income year the Trust purchased solar systems to generate income from the state government solar feed-in tariff. The system is part of a government scheme that provides a feed-in tariff of x cents per kilowatt hour for eligible customers.
The feed-in scheme will end on date D in the 2016-17 income year.
The cost price of the system was $P.
Your intention was always to self-assess the effective life of the solar panels based on the end date of the feed in tariff scheme and the approximate second hand value of the system at the end of the scheme.
At the end of the feed-in tariff you estimate the written down value would be roughly equal to the value of a second hand solar system at this time.
You wish to calculate the depreciation claim to reflect the cost price of $P per system less a residual value of $R per system over a less than 10 year life to get to the $R residual value.
The manufacturer of the solar panels has given a manufacturer warranty of over 20 years.
The Commissioner’s determination of the effective life of a solar power generating system is 20 years.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 40
Income Tax Assessment Act 1997 Section 40-25
Income Tax Assessment Act 1997 Section 40-105
Income Tax Assessment Act 1997 Section 40-110
Reasons for decision
Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with deductions for the cost of depreciating assets. Section 40-25 of the ITAA 1997 allows a taxpayer to deduct an amount equal to the decline in value of a depreciating asset which is held for any time during an income year and used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income.
A taxpayer can use the Commissioner’s determination of effective life for a depreciating asset or self-assess the effective life.
How the Commissioner determines the effective life of a depreciating asset
Effective lives determined by the Commissioner provide what is referred to as a 'safe harbour' for taxpayers, as it provides certainty to taxpayers that these lives will be accepted by the Commissioner.
Taxation Ruling TR 2011/2 Income tax: effective life of depreciating assets (applicable from 1 July 2011) provides a table listing the effective life of depreciating assets. In accordance with TR 2011/2 the effective life of solar power generating system assets is 20 years. This Taxation Ruling has been updated each year. The effective life of 20 years has remained constant. The latest ruling is Taxation Ruling TR 2016/1 which confirms the Commissioner’s effective life for solar panels in still 20 years.
TR 2011/2 states that the Commissioner makes a determination of the effective life of a depreciating asset by estimating the period the asset can be used by any entity for a taxable purpose or for the purpose of producing exempt income or non-assessable non-exempt income:
a) assuming it will be subject to wear and tear at a rate that is reasonable for the Commissioner to assume,
b) assuming it will be maintained in reasonably good order and condition, and
c) having regard to the period within which it is likely to be scrapped, sold for no more than scrap or abandoned.
In determining an effective life, the Commissioner considers certain factors. Where appropriate, each factor is considered on the basis of historical information and future expectations. No one factor is necessarily conclusive and the relative importance of each will vary depending on the nature of the asset.
The factors the Commissioner considers include:
● physical life
● manufacturing specifications/engineering information
● use of the asset in a particular industry
● use of the asset in different industries
● industry standards
● repairs and maintenance
● retention period
● obsolescence
● scrapping or abandonment practices
● lease periods
● financial analysis, and
● market value.
Working out your own effective life
The Commissioner only takes account of normal industry practice when estimating effective life. Taxpayers who choose to self-assess, however, can take account of their own particular circumstances of use (see section 40-105 of the ITAA 1997).
Under section 40-105 of the ITAA 1997 a taxpayer’s self-assessment must be based on an estimate of the time the asset can be used from the taxpayer’s expected use, having regard to reasonable wear and tear and assuming it will be maintained in reasonably good order and condition.
Subsection 40-105(1A) of the ITAA 1997 stipulates that the effective life must be based on the period in years that the asset can be used by any entity. This means that the effective life is not only the period an entity uses the asset for its particular purpose.
A taxpayer can recalculate the effective life of a depreciating asset if the effective life being used is no longer relevant because of changed circumstances relating to the use of the asset (see section 40-110 of the ITAA 1997). An example would be an unpredicted obsolescence such as more or less rigorous use of the asset than anticipated.
Your circumstances
In the 2012 income year the Trust purchased solar systems to generate income from the state government solar feed-in tariff. The system is part of a government scheme that provides a feed-in tariff of x cents per kilowatt hour for eligible customers.
The feed-in scheme will end on date D in the 2016-17 income year.
You wish to calculate the depreciation claim to reflect the cost price of $P per system less a residual value of $R per system over a less than 10 year life to get to the $R residual value. The number of years you wish to use is based on the period of the feed-in tariff income scheme and not on the number of years the solar panels will be efficient. The manufacturer of the solar panels has given a manufacturer warranty of over 20 years.
The circumstances relating to your use of the systems over the period would be no different to usage of the same system by any other entity. Therefore it cannot be said that there would be more rigorous use of the system to allow a recalculation of the effective life of the systems.
Further a recalculated effective life must relate to the total estimated period the asset can be used by any entity for the purpose of producing income (assessable, exempt or non-assessable non-exempt). Therefore the effective life of the asset may include a period of time even if the taxpayer expects to dispose of the asset before its effective income-producing life is over.
As the system is able to be used by you or another entity to produce income after the beneficial feed-in tariff period ends, the effective life cannot be recalculated to less than the Commissioner’s determination of the system’s effective life of 20 years.
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