Edited version of private ruling

Authorisation Number: 1011750210428

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Ruling

Subject: Capital gains tax

Question

Are there any consequences under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) if the body corporate uses their right to create a renewable energy certificate (REC) to acquire a small generation photovoltaic solar system?

Answer

No, there are no consequences under Part 3-1 of the ITAA 1997 in these circumstances for the body corporate.

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

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.

You state that you are eligible to participate in a gross feed-in tariff scheme (the scheme).

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 per cent 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.

You have provided an estimate of your electricity costs and an estimate of the credits you expect to receive for the electricity generated by the PV system.

Relevant legislative provisions

Income Tax Assessment Act 1997

Subsection 104-10(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

The right to create RECs is a CGT asset. The right arises under the Renewable Energy (Electricity) Act 2000 (Taxation Determination TD 1999/77).

CGT event A1 happens if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law, subsection 104-10(2) of the ITAA 1997.

The transfer of the right, viewed separately from the acquisition of the generation unit, might be taken to cause CGT event A1 to happen.

However in this case, where as part of the process of acquiring the small generation unit you assign your rights to the installer it is considered that the reality of the matter is that you are acquiring a generation unit and the assignment of the right to create a REC merely facilitates that acquisition.

Accordingly, where there is an assignment of the right to create a REC, and a reduction in the amount of money required to be paid for the small generation unit (the underlying asset), the CGT provisions of the ITAA 1997 will apply only to the acquisition of the underlying asset and not to the right that merely facilitates the acquisition.

As a result there will be no consequence under Part 3-1 of the ITAA 1997 for the body corporate in assigning their right to create RECs to the installer in the process of acquiring the small generation solar system.

Note: in situations where the taxpayer creates the RECs and disposes of them, such dealings are likely to be CGT events.