Edited version of private ruling

Authorisation Number: 1011783626012

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Ruling

Subject: Income - other - solar

Question 1

Do the non commercial loss provisions under Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to your solar panel activity (the activity)?

Answer

No.

Question 2

If so, will the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from the activity in your calculation of taxable income for the 2009-10 income year?

Answer

As the non commercial loss provisions do not apply to your activity, it is not necessary to answer this question.

Question 3

Would payments received from your electricity retailer for the generation of electricity from a photovoltaic solar system be assessable income under section 6-5 of the ITAA 1997?

Answer

No.

Question 4

Are the costs associated with the solar system, such as interest and depreciation deductible under section 8-1 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

1 July 2009 - 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You entered into a contract for the supply and installation of a photovoltaic solar system (the system) on your main residence.

You entered into a gross feed in tariff scheme. Under the scheme, your electricity retailer will be required to buy all electricity that the system generates at a gross feed in tariff rate per kilowatt hour. You entered into a contract under which you will be paid per kilowatt hour for electricity generated by the network provider through your electricity retailer. Your retailer will pay you an additional tariff per kilowatt hour for electricity generated.

An estimate was provided to calculate annual electricity generation and feed in tariff payments from the system, based on industry figures of daily electricity generation by location.

You will receive the feed in tariff payment as a separate payment either as a direct payment into a bank account or a credit to your electricity bill from your energy retailer.

Your eligibility for the feed-in tariff is not linked to your consumption of electricity.

The solar system is an eligible small generation unit (SGU) for the purposes of the Renewable Energy (Electricity) Act 2000 (REE Act).

The REE Act supports the Federal Government's Renewable Energy Target (RET) scheme which was established to encourage additional electricity generation from renewable energy sources.

Upon ownership and installation of a SGU a statutory right arises under the REE Act entitling you to create Renewable Energy Certificates (RECs).

As provided for under the RET scheme, you entered into an agreement with the installer of the solar system, who is an agent for the purposes of the REE Act, and assigned your right to create RECs to the installer in return for a financial benefit. The financial benefit is effectively the reduction in the amount you paid for the purchase and installation of the solar system. The reduction reflects the value of the right to create RECs that you assign to the installer.

You provided a breakdown of the cost of the system after assigning your rights to create RECs to the installer.

Once installed the system requires minimal ongoing activity.

A business plan has not been prepared. The activity was financed by personal savings.

There is not a separate bank account for the activity; all transactions occur through your accounts.

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 6-10

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-25

Income Tax Assessment Act 1997 Subsection 35-10(2)

Income Tax Assessment Act 1997 Paragraph 35-55(1)(b)

Income Tax Assessment Act 1997 Subsection 35-5(2)

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

Summary

Your activity does not amount to the carrying on of a business electricity generation. As a result Division 35 of the ITAA 1997 is not applicable to your activity.

Detailed reasoning

Division 35 of the ITAA 1997 applies to losses from business activities for the 2000-01 income year and subsequent income years. Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account in an income year unless, amongst other things:

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

You have requested the Commissioner exercise his discretion to allow the loss from the activity to offset your other assessable income in the 2009-10 income year.

Before the Commissioner can consider exercising his discretion it needs to be determined whether your activities constitute the carrying on of a business. Division 35 of the ITAA 1997 does not apply to activities that do not constitute carrying on a business (subsection 35-5(2) of the ITAA 1997).

Carrying on a business

Section 995-1 of the ITAA 1997 defines business as including any profession, trade, employment, vocation or calling, but not occupation as an employee.

Numerous court cases have considered whether certain activities amount to the carrying on of a business. From these cases, various criteria have evolved that can be used to determine if a business is in existence.

An investigation into whether an activity amounts to the carrying on of a business requires consideration as to whether the criteria (otherwise known as the 'indicators of business') are present. No single indicator is decisive (Evans v. FC of T (1989) 20 ATR 922; 89 ATC 4540). Rather, all the indicators are to be considered in combination and a decision is made by the overall weighting. The weighting provided to each indicator when making a decision may differ, depending on the particular case in question.

These indicators are set out below:

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

· whether the activity has a significant commercial purpose or character;

· whether the taxpayer has more than just an intention to engage in business;

· whether there is regularity and repetition of the activity;

· 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;

· whether the activity is planned, organised and carried out in a businesslike manner such that it is described as making a profit; and

· the size, scale and permanency of the activity.

Therefore, to make a decision on whether an activity amounts to the carrying on a business or not, a test must be applied to the case in question. It must be determined whether the facts of the case meet the criteria that support that the taxpayer is carrying on a business. The classification of an activity will vary in each particular case as each case is determined on its own facts.

Furthermore, the test to determine whether an activity constitutes the carrying on of a business is not a once only assessment. Rather, a taxpayer carrying on an activity needs to consider whether their facts and circumstances have changed for every income year in which the activity is conducted. In each income year, it is necessary that such taxpayers consider whether their changed facts and circumstances meet the criteria that a business is being carried on. The point where a business commences is also relevant. This point may occur at any time during the income year.

Application to your circumstances:

Purpose and prospect of profit

· You have not provided any documentation such as a business plan to support your contentions that this activity will be profitable.

· Although you wish to receive income from the system, given its substantial capital cost, there is no prospect of profit in the short or medium term.

Commercial purpose or character

· Your current solar panel system is attached to your home rather than located at a dedicated business facility.

· Before funds were committed to the establishment of the activity, preliminary market analysis was undertaken by discussions and reviews with energy companies.

· You do not have an Australian Business Number.

More than an intention to engage in business

· There has been an investment made in acquiring the system.

· You plan to, though have not committed, to expand the system in time.

Repetition and regularity

· You do not envisage much activity by way of maintenance and the sale contracts are already in place.

Similar manner to ordinary trade in that industry

· Your activity is not carried on in a manner similar to other participants in the electricity generation industry. Commercial electricity providers operate on a size and scale vastly larger than the activity that you currently operate.

· You do not have any relevant qualifications or experience in relation to the activity.

Business like and systematic manner

· The activity is financed by personal savings.

· There is not a separate bank account for the activity, all transactions occur through your individual account.

Size, scale and permanency

· The size and scale of this activity does not compare with industry standards as you have not done this activity before. 

· You have not provided any documentation to support your contentions that this activity will be profitable.

Having regard to all of the above, it is considered that you are not carrying on a business of generating electricity in the 2009-10 income year. As a result Division 35 of the ITAA 1997 is not applicable to your activity and the Commissioner is unable to consider the discretion under paragraph 35-55(1)(b) of the ITAA 1997.

Question 3 and 4

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 it is 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 size of the solar system and its generation capability

· 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 allows you to deduct. Examples of specific deductions include borrowing expenses under section 25-25 and deductions for depreciating assets under section 40-25.

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.

Application to your situation

Under the gross feed-in tariff scheme operating and as described in your ruling application, the electricity company credits or pays a premium feed-in tariff to you for all electricity generated and contributed to the electricity grid. You then separately buy electricity from the company according to your consumption.

Payment for the electricity generated is distinct from and unrelated to the amount of electricity consumed. The rate paid by you for electricity consumed is the same as that applied to any other householder. The payment for the electricity generated can be received by way of credit on your account, cheque or direct deposit into a bank account.

The scheme is connected with the electricity needs of your household as:

· The size of the solar system you would install is essentially designed principally for ordinary domestic needs and will generate an amount of electricity suitable for household needs.

· The electricity retailer is required to buy all electricity that is generated from the system under the gross feed in tariff scheme. The arrangement is under a standard agreement available to any customer to encourage the use of renewable energy.

· Your circumstances indicate that there is no realistic opportunity for you to profit from the arrangement over the life of the arrangement.

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. The size and scale of the system that would be installed and the arrangement with the electricity retailer indicate there is connection of the scheme with the electricity needs of your household (as outlined above).

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

Accordingly, the payments you would receive from the electricity retailer are part of an arrangement that is private or domestic in nature.

Consequently, all of the payments received for your electricity generated and sold to the electricity grid are not considered assessable income.

As a result any expenditure incurred in producing the receipts 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.

Summary

Based on the size of the system you would install, the arrangement with your energy supplier/retailer and your estimated feed-in tariff payments, the arrangement is private or domestic in nature. That being so;

· the payments you would receive for the generation of electricity from the solar system is 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 and they relate to expenses that are private or domestic in nature.