Edited version of private ruling

Authorisation Number: 1011640202654

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Carrying on a business

Question

Does the generation of electricity from a small scale photovoltaic solar system on common property of a body corporate amount to the carrying on of a business by the body corporate?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 January 2010

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.

The body corporate manages a number of townhouses and is proposing to install a grid feeding photovoltaic (PV) system on one of structures on common land.

The purpose of the PV system is for the owner's corporation to produce, by renewable means, about the same amount of power as you consume.

The renewable energy certificates (RECs) would be assigned to the installer of the PV system in exchange for a discount on the price of the system allowing a larger system to be purchased.

The PV system is likely to produce a similar amount of electricity to your annual consumption. Under the feed-in tariff you would receive a credit per kilowatt hour resulting in a credit on your electricity account.

The feed-in tariff provides a credit at a premium rate for all of the electricity generated by the PV system which is fed directly into the grid. Customers then purchase the electricity they require for consumption at the retail rate.

You consume electricity for lighting of various paths and parking areas on your site. The electricity is used entirely for lighting of the common land and your consumption occurs entirely between dusk and dawn, precisely when you would expect to have no production from the PV system.

You intend to purchase 100 percent accredited environmentally friendly power for your night-time consumption. You regard the grid as acting, in effect, like a battery into which you will feed the renewable energy you have made by day and from which you will withdraw an equivalent amount by night.

The credit received on your account for day-time production is expected to approximately match your costs for night consumption of power when considered over the period of the feed-in traffic considering both the supply and the consumption charges. In the earlier years you would expect to receive more credit than debit on the account but by the end of the period electricity costs may have risen to match or exceed the fixed credit.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Reasons for decision

The relevant legislation is the Income Tax Assessment Act 1997 (ITAA 1997). All references to legislation are to the ITAA 1997 unless otherwise stated.

Carrying on a business

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators to determine the matter, these indicators are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production (TR 97/11). These indicators are applicable to business activity generally, relevant indicators include:

· the size, scale and permanency of the activity.

· whether there is repetition and regularity of the activity, and

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business.

Size, scale and permanency of the activity

Paragraph 77 of TR 97/11 states that the larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However the size or scale of the activity is not a determinative test and a person may carry on a business though in a small way.

In your case the activity involves the operation of a small scale PV system. Once the PV system is installed no more work other than maintenance is required to operate it. The size and scale of the operation is very small.

A smaller scale of activity may detract from the commercial purpose or character of the activities, for example the activity may more properly be described as the management of a capital investment rather than a business.

However, this factor alone is not conclusive. Paragraph 82 of TR 97/11 states that the smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business.

Whether there is repetition and regularity of the activity

Paragraph 55 of TR 97/11 discusses the need for repetition and regularity. It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. TR 97/11 refers to Hope v. The Council of the City of Bathurst (1980) 144 CLR 1, 80 ATC 4386, (1980) 12 ATR 231 where 'the transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business'.

In your case the measurement of and payments for the electricity generation are the responsibility of the energy company. There is little to no repetition and regularity in terms of action required for the activity to continue, the PV system only requires installation to operate and generate revenue. However, this factor must be considered together with the other relevant indicators.

Whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

The activities of a taxpayer are more likely to be a business when carried on in a manner similar to that in which other participants in the same industry carry on their activities.

The factors below, set out at paragraph 64 of TR 97/11, are used to compare the characteristics of others engaged in the same type of business:

· the volume of sales, if there is a small number of sales it is less likely that a business is being carried on

· the types of customers the taxpayer sells their product to - wholesalers, retailers, the public at large, or friends or relatives - and the manner in which this marketing takes place;

· the sort of expenses incurred by the taxpayer;

· the amount invested in capital items;

You expect to generate recurring receipts from the energy company. The major expense you will incur is the cost and installation of the PV system. There will be no significant operating costs.

You will have a single customer. There would be a contract agreement in place, however, you would not be required to meet or maintain a certain supply level, rather you would merely sell back what the PV system generates.

A business of electricity generation would usually be expected to produce and maintain certain amounts of electricity and meet certain levels of demand. A business of electricity generation would also require a larger scale of production to ensure they were able to manage demand levels. It could not be said that your activity is alike to an ordinary business of solar electricity generation.

From a consideration of the factors above the activity would not amount to the carrying on of a business. The size and scale of the activity is small, there is little repetition and regularity in the activity and the activity when compared to an ordinary business of solar generation could not be said to be similar. As a result the body corporate would not be considered to be carrying on a business by receiving payments for the export of electricity generated from a small scale PV system.