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Ruling

Subject: PAYG Withholding

Issue 1

Question

Is the electricity retailer required to withhold an amount from feed-in tariff payments made to its residential customers where a customer has not provided an Australian Business Number (ABN), pursuant to section 12-190 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

No.

Issue 2

Question

If the electricity retailer is not required to withhold, is the electricity retailer relieved from obtaining any supporting documents and/or declarations from its residential customers in relation to this matter?

Answer

Yes.

Relevant facts and circumstances

This ruling request is in respect of the electricity retailer's individual residential customers only.

The electricity retailer is a licensed electricity retailer and has entered into agreements with retail customers for the supply of electricity.

The electricity retailer has entered into Default Use of System Agreements (DUOS Agreements) with various electricity distributors, whereby the electricity distributor supplies distribution services to the electricity retailer in respect of the electricity retailer's customers. In return for the distribution services, the electricity retailer pays the distributor a distribution service charge. The distribution services do not include the sale of electricity.

The DUOS Agreements also indicate that the electricity retailer may provide retail services to the distributor for a retail service charge. The retail services are defined in the DUOS Agreement and do not include charges imposed under statutory provisions.

Some of the electricity retailer's customers have installed renewable energy generating facilities, specifically, rooftop solar photovoltaic (PV) systems on their premises. These systems are set up such that all electricity generated is firstly consumed by the owner and any surplus electricity generated is transferred into the electricity network.

The Victorian Government has enacted amending legislation to the Victorian Electricity Industry Act 2000 that incentivises customers to generate renewable energy. The arrangements can broadly be described as follows:

a) Customers will be paid a statutory minimum amount (premium feed-in tariff payment or PFIT) of a minimum $0.60 per kilowatt hour(kWh) for electricity transferred into the electricity network

b) The PFIT is provided by the retailer and facilitated via a credit on the customers' electricity bill. The distributor reimburses the retailer for this additional cost on a 1 for 1 basis

c) The PFIT provided by the retailer is a 'net rebate'. That is, the PFIT is paid for the excess electricity generated by the renewable energy facility that the customer does not use for their own purposes, and which is fed back into the electricity network

d) The PFlT applies to residential, business and not for profit organisations

e) The maximum capacity of the renewable energy facility cannot exceed 5 kilowatts (kW), and

f) Customers' consumption must not exceed 100 megawatts (MW) per annum.

Reasons for decision

Summary

As the qualifying customer, that is, the residential customer, is not carrying on an enterprise, the provisions of section 12-190 of Schedule 1 to the TAA 1953 do not apply. Consequently, the electricity retailer is not required to withhold tax from the payments made to qualifying customer in the form of the PFIT, for the energy supplied by them into the grid.

Detailed reasoning

Section 12-190 of Schedule 1 to the TAA 1953 provides that a payer must withhold from a payment made for a supply if the payer does not have an invoice or some other document relating to the supply which quotes the supplier's Australian Business Number (ABN) and none of the other exceptions to the requirement to withhold for in section 12-190 are satisfied.

Paragraph 6 of Taxation Ruling TR 2002/9, Income Tax: withholding from payments where recipient does not quote ABN, provides that section 12-190 of Schedule 1 to the TAA 1953 should only operate where the suppliers that are carrying on an enterprise fail to quote their ABN number to the payer. Consequently, the relevant question is whether the supplier, in this case, the qualifying customer, is carrying on an enterprise.

The Australian Taxation Office's view on the concept of enterprise for the purposes of entitlement to an ABN is considered in Miscellaneous Taxation Ruling MT 2006/1, The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an ABN.

'Enterprise' is defined in section 41 of A New Tax System (Australian Business Number) Act 1999 to have the meaning given by section 9-20 of the A New Tax System (Goods and Services) Act 1999 (GST Act). Section 9-20 of the GST Act provides that an enterprise can include an activity, or series of activities, done in the form of a 'business' or in the 'form of an adventure or concern in the nature of trade.'

Paragraph 180 of MT 2006/1 provides that small scale activities can amount to an enterprise. However, it clarifies that where the activities are carried on in a small way, other indicators, such as 'commercial purpose or character' and the intention and prospect of producing a significant overall profit, become more important in determining whether they amount to an enterprise. Further clarification is provided in paragraph 186 of MT 2006/1 which states: '[w]hile it is always a question of fact and degree in each particular case, it would be difficult to conclude that activities are an enterprise where they are of a very small size or scale, are carried on in an ad hoc manner, and there is little repetition or regularity'.

Small scale activities

In this case, the retail customer of the electricity retailer is an individual (or individuals, where the account is in the name of associated persons), the qualifying customer, who is eligible to receive the $0.60 per kWh statutory PFIT. The energy is generated by 'one qualifying solar energy generating facility' (section 40F(1) of the Electricity Industry Act 2000, definition of 'qualifying customer) that is affixed to the customer's principal place of residence.

Section 40F(1) of the Electricity Industry Act 2000 defines the term 'qualifying solar energy generating facility' to mean:

a photovoltaic generating facility that-

(a) has an installed or name-plate generating capacity of 5 kilowatts or less; and

(b) is connected to a distribution system.

The 'qualifying customer' installs the PV system principally to generate electricity for their own use as a householder and to reduce greenhouse emissions. The Explanatory Memorandum to the Bill specifies that it was introduced to assist households in making a personal contribution to tackling climate changes by reducing the cost barriers to households installing small-scale PV systems with a name-plate generating capacity of no more than 5kW.

The Electricity Industry Act 2000 provides for a net PFIT which means the qualifying customer receives credits only for the power in excess of their own consumption, fed back into the grid [paragraph 40FA(2)(a) definition of 'premium solar feed-in credit' and subsection 40F(1) definition of, 'qualifying solar energy generation electricity']. However, most of the electricity produced by the PV system is consumed by the customers.

While the quantity of electricity produced and fed back into the grid may vary from customer to customer, all available information points to the fact that the whole process is conducted on a very small scale, as compared to, for example, a commercial scale solar power station. The quantity of electricity produced and fed back into the grid may vary due to factors such as; the type and size of the PV system, the location of the residence where the system is installed, the period of the year when the system is used, the maintenance of the system and the level of domestic consumption. However, when considering those factors and the limitations imposed by the legislation in terms of capacity of the system - no more than 5kW, the number of systems installed - one per each premises, the type of tariff - net in, it is safe to conclude that those activities are conducted on a small scale.

Significant commercial purpose or character

Moreover, those activities do not have a significant commercial purpose or character. Similar to the Rendyl Properties Pty Ltd v. FC of T (2009) ATC 10-082; (2009) 72 ATR 275 case, the general impression is that the revenue-generating opportunities are 'thought of more as a means of defraying some of the costs' related to the purchase, installation and maintenance of the PV system and for domestic consumption rather than a profit making business or for a commercial purpose. That seems to be also the intention of the amendments to the Electricity Industry Act 2000, as explained in the Explanatory Memorandum to the Bill. Although the qualifying customer may produce at a certain time more than it is necessary for their own consumption, this contrasts with the facts in the Thomas v. F.C. of T 72 ATC 4094; (1972) 3 ATR 165 (Thomas). In Thomas, Walsh J concluded that the appellant was carrying on a business because:

…the appellant in planting the avocado pear trees and the macadamia nut trees set out to grow them on a scale that was much greater than was required to satisfy his own domestic needs and he expected upon reasonable grounds that their produce would have a ready market and would yield, if the trees became established, a financial return which would be of a significant amount, with a relatively small outlay of time and money, and that this return would continue for a very long time (ATC 4099) (emphasis added).

References to a significant return are also made in Crees v. Federal Commissioner of Taxation 2001 ATC 2021; (2001) 46 ATR 1091 by Mr DW Muller, Senior Member, who noted at 2001 ATC 2024; ATR 1095:

It would be a most unusual business operator who would expend large amounts of money and labour, for more than ten years, on a business which was unlikely to ever cover the expenditure and even if it did, was not likely to give a reasonable return for effort. Under the circumstances I find that the orchid growing enterprise of Mr. Crees does not have a significant commercial character and that, therefore, it does not amount to a business of primary production.

To establish whether the qualifying customer has a bona fide intention to make a profit from activities related to supplying solar generating electricity, it is necessary to take into account all of the expected income and expenses. This will include any interest incurred and the decline in value of the PV system while used in generating solar electricity. In Thomas' case interest was clearly considered to be part of the relevant expenses. Further, in Daff v. FC of T 98 ATC 2129; (1998) 39 ATR 1042, the major items of expenditure were noted to include interest and depreciation.

When taking into account all expected income and expenses incurred by the qualifying customer, it could be concluded that the activity of generating solar electricity is not being operated for commercial reasons or significant overall profit. The limitations imposed by the legislation are reflected in the overall profit of the qualifying customer. For example, a sample quarterly invoice provided by the electricity retailer for a qualifying customer resulted in a PFIT of $19.45 (the total invoice amount was in excess of $600).

When comparing the income that the PV system may generate with the associated costs related to the installation and maintenance of the PV system, it is difficult to conclude that at any time, from the first to the 15^th year of operation, the qualifying customer will gain a significant profit. The intention of the amended legislation is to fully or partly cover this initial cost.

Further explanations regarding commercial character are provided by Lord Clyde in I.R. Commrs v. Livingstone (1926) 11 T.C. 538 at p 542:

the operation involved initially are of the same kind and carried on in the same way as those which are characteristic of ordinary trade in the line of business in which the venture was made.

This is not the case, the activities are not conducted in a business like manner as they lack the degree of organisation and system that would be found in the activities of people who normally would be regarded as carrying on a business of supplying electricity. The qualifying customer is an individual that normally, does not have any expertise with regard to the production and supply of solar electricity. After the installation of the PV system, the qualifying customer does not have to undertake any specific activities such as marketing, record keeping or billing. The PFIT acts more as an incentive for residents to contribute to achieving a less carbon intensive society.

Ad hoc nature of those activities and the repetition and regularity

The activities are conducted in an ad hoc manner and there is little repetition or regularity. The qualifying customer has a limited possibility to influence the way those activities are conducted. In regard to repetition and regularity, paragraph 56 of TR 97/11 Income tax: am I carrying on a business of primary production? states '[t]he taxpayer should undertake at least the minimum activities necessary to maintain a commercial quantity and quality of product for sale.' In this case, the qualifying customer has a limited control over the quantity of electricity produced. As explained above, the limitations imposed by the legislation and the other factors listed above restrict the quantity of electricity that could be exported back into the grid.

All of the above seem to indicate the qualifying customers are not carrying on an enterprise. The activities are conducted on a small scale with little excess electricity being generated. The income that is received from exporting the excess electricity into the grid in a financial year is estimated to be minimal compared to the costs of the PV system. Taking into account the amount of equipment used to generate the electricity, the paying for that equipment and the current pricing structure, there is no realistic prospect of a significant profit from this activity.

As the qualifying customer is not carrying on an enterprise, the provisions of section 12-190 of Schedule 1 to the TAA 1953 do not apply. Consequently, the electricity retailer is not required to withhold tax from the payments made to qualifying customer in the form of the PFIT, for the energy supplied by them into the grid.

Issue 2 Question 1

Summary

As the electricity retailer's customers referred to in this ruling are not supplying solar energy in the course of an enterprise, the provisions of section 12-190 of Schedule 1 to the TAA 1953 do not apply to the payment made by the electricity retailer. Consequently, the electricity retailer is not required to obtain any supporting documentation and/or declaration from the payee in relation to their individual circumstances.

Detailed reasoning

Subsection 12-190(6) of Schedule 1 to the TAA 1953 provides the payer does not need to withhold an amount when the payee, an individual, has given the payer a written statement to the effect that the supply is made in the supplier's private capacity or as a hobby. Paragraph 1.58 of the Explanatory Memorandum to the A New Tax System (Pay As You Go) Act 1999 states '[section 12-190] withholding event provides a payer must withhold from the payment for a supply in the course of the recipient enterprise where an invoice or some other document relating to the supply does not quote the recipient ABN (emphasis added).' Consequently, the payer has a withholding requirement only where the supplier is making the supply in the course of their enterprise.

As the electricity retailer's customers referred to in this ruling are not supplying solar energy in the course of an enterprise, the provisions of section 12-190 of Schedule 1 to the TAA 1953 do not apply to the payment made by the electricity retailer. Consequently, the electricity retailer is not required to obtain any supporting documentation and/or declaration from the payee in relation to their individual circumstances.

However, the electricity retailer is still required to obtain the required written statement if the electricity retailer has a reasonable reason to believe that the payee is making the supply as result of carrying on an enterprise.