Edited version of private ruling

Authorisation Number: 1011807032930

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Subject: solar panel income

Question and answer

Will 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)?

No.

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 Government's Electricity Feed-in Renewable Energy Generation scheme is implemented as a gross feed-in system

The local electricity authority will pay customers the applicable Premium Rate for every metered kilowatt hour (kWh) of electricity generated by their solar photovoltaic system.

The local electricity authority will credit payment for an account period against your electricity account for that same account period.

You are considering installing solar power panels to your primary place of residence. This solar system will be a photovoltaic system. This is expected to provide 7750kWh of electricity per annum to the grid. Your current household usage is about 22000kWh of electricity per annum.

The legal title to these premises is held by you and your spouse.

The rate that you pay for electricity consumed is the same as that applied to any other householder.

The solar system that you intend to install is essentially a domestic system.

The local electricity authority is required to buy all electricity that is generated from your solar system.

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

Reasons for decision

Assessable income

Under section 6-5 of the Income Tax Assessment Act 1997 (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

· 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. 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:

· 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

· 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

· the regularity of payments/credits received from the feed-in tariffs such that they can be relied upon.

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.

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 will be received by way of credit on your account.

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

The size of the solar system you have installed 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.

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

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 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 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.

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.