Edited version of private ruling

Authorisation Number: 1011677090553

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Ruling

Subject: Solar energy - assessable income - allowable deductions

1. Are credits (or payments for credits) you receive from your electricity retailer for the generation of electricity from a solar system assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

2. Are you entitled to either an outright deduction or a decline in value deduction for the cost of the solar panels?

No.

3. Are you entitled to deductions in relation to funds borrowed in order to purchase the solar panels?

No.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011.

1 July 2011 to 30 June 2012.

1 July 2012 to 30 June 2013.

1 July 2013 to 30 June 2014.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

You have purchased a five kilowatt photovoltaic solar system (solar system) for your house in Western Australia, which is the largest permitted that qualifies for the relevant schemes. The system has not yet been installed.

The home is jointly owned by you and your spouse as owner occupiers and is not used for any income producing purpose.

The electricity account is in your name only and you also purchased the solar system in your name.

You will receive government solar credits as a discount from assigning the renewable energy certificates (RECs) which has been taken into account in working out your purchase price.

You paid for the system by extending the amount you owe under your current home loan/mortgage.

The Western Australian government offers a solar energy Residential Net Feed-in Tariff Scheme (FIT scheme). Under the FIT scheme, owners of eligible renewable energy systems are paid 40c per kilowatt hour for electricity exported to the grid that is in excess of the household consumption at the time of generation as recorded by the meter.

In addition to the FIT scheme, your electricity provider, has a Renewable Energy Buyback scheme (REB scheme). Under the REB scheme your electricity provider will make an additional payment for the purchase of the net electricity you export to the grid.

The net feed-in tariff rates under the FIT scheme and REB scheme will be provided as credits on your electricity account. If the account is in credit by more than $100, arrangements can be made to receive a payment of this credit.

You estimate that you would consume an 'above average' hours of electricity per year, based on recent power bills. The fixed rate for power is 21 cents per kilowatt but you are connected to a smart power tariff with rates varying from 11 cents per kilowatt to 40 cents per kilowatt depending on the time of day, weekday or weekend and month of the year.

You are unsure of the amounts of credits that you will receive under the FIT scheme and REB scheme. However, you state that as you are a heavy consumer of electricity, the five kilowatt solar system may not satisfy the electricity requirements of your home. The credits will offset the cost of your electricity, effectively reducing your electricity account. You are unlikely, however, to receive payments for excess credits on your electricity account because of your electricity usage.

You have not provided any contractual documents in relation to the FIT and REB schemes but you have provided a copy of the 'scheme design parameters' taken from a West Australian government website at the time of your private ruling application.

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 8-1

Income Tax Assessment Act 1997 section 8-5

Income Tax Assessment Act 1997 section 25-25

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 subsection 116-20(1)

Income Tax Assessment Act 1997 subsection 116-40(2)

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.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Based on your factual circumstances, and in particular, the fact that your solar system is configured to primarily supply electricity of your home, it is considered that the arrangement is private or domestic in nature. That being so;

· the credits (or payments for credits) you would receive for the generation of electricity from the solar system are not assessable income under section 6-5 of the ITAA 1997, and as a result

· the costs you would incur in relation to the generation of electricity from the solar system such as decline in value, borrowing and interest expenses are not deductible under section 8-1 of the ITAA 1997 as they are not incurred in gaining or producing assessable income. They are expenses that are private or domestic in nature.

We have not considered potential capital gains tax consequences.

Detailed reasoning

Assessable income

Under section 6-5 of the ITAA 1997 assessable income is made up of ordinary income and statutory income. There are no specific legislative provisions relating to money or credits received from electricity suppliers, therefore the payments/credits are not statutory income.

Under subsection 6-5(1) of the ITAA 1997, ordinary income means 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 you 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:

· 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

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

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

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

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

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

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

· 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; (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 terms of the arrangement with the electricity retailer and in particular whether the solar system:

o 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

o 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.

Deductions

The general provision that determines the deductibility of expenses is section 8-1 of the ITAA 1997. Under section 8-1 of the ITAA 1997 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.

Other provisions in the ITAA 1997 contain specific deductions which section 8-5 of the ITAA 1997 allows you to deduct. Examples of specific deductions include borrowing expenses under section 25-25 of the ITAA 1997 and deductions for depreciating assets under section 40-25 of the ITAA 1997.

Interest

Under section 8-1 of the ITAA 1997 you can deduct interest expenses you incurred in financing the acquisition and installation of the solar system on your private residence if you incur the expense in deriving assessable income from the system.

You cannot deduct interest expenses relating to your private residence (such as in relation to a home loan) on which the system is fixed. Expenses associated with your home are usually of a private or domestic nature and do not qualify as deductions for taxation purposes.

Decline in value

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 a deduction for the decline in value of the cost of a capital asset if it is used in gaining your assessable income. You can deduct the decline in value of the capital cost of your solar system where it is used in gaining your assessable income.

Application to your situation

Under the FIT and REB schemes operating in Western Australia and as described in your ruling application, you receive credits whenever your electricity generation exceeds your household consumption at intervals during the day as recorded by your meter. The credit will be applied to your electricity account. If the account is in credit by more than $100, you can make arrangements to receive a payment of this credit.

The FIT and REB schemes have a strong connection with the electricity needs of the householder 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.

· The size of the solar system is capped at five kilowatts under the schemes administered by the electricity provider, which 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. You are unlikely to receive payments for excess credits on your electricity account because of your electricity usage.

· There is no realistic opportunity for you to profit from the arrangement.

Consequently, any credits (and payment of credits) received for your electricity generated and sold to the electricity grid are not considered to be assessable income.

As a result any expenditure incurred in producing the credits (and payment of credits) from the sale of the electricity generated to the electricity grid is not deductible. You would not be able to claim deductions for decline in value, interest or borrowing expenses.

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.