Edited version of private ruling

Authorisation Number: 1011796552638

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Ruling

Subject: Income - Photovoltaic solar system

Question 1

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 Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

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

Answer

No

Question 3

Are there any consequences under Part 3-1 of the ITAA 1997, if you use your right to create a renewable energy certificate (REC) to acquire the solar system?

Answer

No

This ruling applies for the following period:

1 July 2009 - 30 June 2010

1 July 2010 - 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You purchased a solar system. The system is on your private property which is not used for any income-producing purposes.

Under the current scheme, your electricity retailer will be required to buy all electricity that the system generates at a certain gross feed in tariff rate. You will receive this as either a credit on your electricity account or as a separate direct payment from your energy retailer. The frequency of the payment will depend on your arrangement with your electricity retailer.

You are billed for your electricity consumption in the same manner and at the same rate as any other retail electricity customer in the state. You have selected a solar system that will produce enough electricity to help cover some of your domestic consumption.

The solar system is an eligible small generation unit for the purposes of the Renewable Energy (Electricity) Act 2000 (Cth) (the REE Act). Following the purchase and installation of the generation unit a statutory right arises under the REE Act entitling you as the owner of the generation unit to create RECs.

As provided for under the REE Act, you entered into an agreement with the installer of the unit, who is an agent for the purposes of the REE Act, assigning your right to create RECs to the installer in return for a reduction in the amount of money you paid for the purchase and installation. The reduction reflects the value of the right to create RECs that you will assign to the installer.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Subsection 104-10

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 of the ITAA 1936 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 of the ITAA 1936 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

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997 (ITAA 1997).

Summary

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

· the payment you would receive for the generation of electricity from the solar system is not assessable income under section 6-5, and as a result

· the costs you incur in relation to the generation of electricity from the solar system such as depreciation and interest expenses are not deductible under section 8-1 as they are not incurred in gaining or producing assessable income and they relate to expenses that are private or domestic in nature

· there are no consequences under Part 3-1 for assigning your rights to create RECs in return for a reduction in the amount you pay for the purchase and installation of the solar system.

Detailed reasoning

Assessable income

Assessable income is made up of ordinary income under section 6-5 and statutory income under section 6-10. Section 6-10 provides that assessable income includes statutory income which constitutes amounts made assessable by specific statutory provisions. There are no specific legislative provisions relating to money or credits received from electricity suppliers therefore such amounts are not statutory income.

Under subsection 6-5(1) ordinary income means income 'according to ordinary concepts'. Under subsection 6-5(2), the assessable income of an Australian resident includes the ordinary income you derived directly or indirectly from all sources during the income year.

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

· 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

· 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 at 4420; (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. In addition, receipts from property or investments that are on commercial terms and/or that indicate an intention to make a profit from an activity are also likely to be ordinary income. However, receipts that indicate the arrangement is private or domestic in nature are not likely to be ordinary income.

A solar system is considered to be the property of its owner. Receipts received as a result of employing that asset, therefore, are potentially assessable income to the owner. Consequently, it needs to be determined whether the payments or credits received in return for transfer of electricity to the grid are income because they represent a financial return from the investment in the solar system.

The factual circumstances, and in particular whether the receipts represent activity which is more than private or domestic in nature, need to be considered in determining whether or not the receipts are income. The following are important:

· the size of the solar system and its generation capability

· the terms of the arrangement with the electricity retailer in particular any requirement on the retailer to buy all electricity generated from the system

· 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. Under section 8-1 you can deduct from assessable income any loss or outgoing to the extent that it is incurred in gaining or producing that assessable income. However you cannot deduct a loss or outgoing that is capital, private or domestic in nature.

For example, under section 8-1 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. However, if the use of the system is private or domestic in nature then related expenses do not qualify as deductions for taxation purposes.

Renewable Energy Certificates (REC)

Subsection 104-10(2) states that CGT event A1 happens if a change in ownership of an asset occurs from you to another entity, whether because of some act or event or by operation of law. The right to create RECs is a CGT asset. The right arises under the Renewable Energy (Electricity) Act 2000.

Consequently, 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 you assign your rights to the installer as part of the process of acquiring the small generation unit 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 unit (the underlying asset), the CGT provisions will not apply to the acquisition. As a result, there will be no CGT consequences under Part 3-1.

Application to your situation

Under the gross feed-in tariff scheme operating in your state, 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 in your state. 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 your electricity needs as:

· The size of the system you have installed is designed principally for ordinary domestic needs and will generate an amount of electricity suitable for that usage

· 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 plan available to any customer to encourage renewable energy use

· The purpose of installing the system is to offset your average household consumption

· You estimate that annually your consumption will exceed the electricity that the system will generate

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

Based on your circumstances, the payments you receive from the electricity retailer are part of an arrangement that is private or domestic in nature. Accordingly, it is considered that the credits you receive on your electricity account (or payment for credits) are not ordinary 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 depreciation, interest or borrowing expenses.

You assigned your right to create RECs to the installer for a reduction in the purchase price of the solar system. It is considered that the assignment of the right merely facilitated the acquisition of the system. There are no consequences under Part 3-1 in those circumstances.