Edited version of private ruling

Authorisation Number: 1011810207670

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Ruling

Subject: Income - net solar feed in tariff scheme

Question 1

Are credits (or payments for credits) you receive from your electricity retailer for the generation of electricity from a solar system 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 depreciation and maintenance, deductible under section 8-1 or 8-5 of the ITAA 1997?

Answer: No

This ruling applies for the following periods:

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

1 July 2012 - 30 June 2013

1 July 2013 - 30 June 2014

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You installed a 2.0 kW photovoltaic solar system on your main residence. You provided a breakdown of the cost of the system.

You assigned the renewable energy certificates (RECs) to the installer, which has been taken into account in working out your purchase price.

You entered into a net feed-in tariff scheme. Under the scheme, owners of eligible renewable energy systems are paid per kilowatt hour for energy exported to the grid that is in excess of the household consumption at the time of generation as recorded by the meter. The tariff is applied on net electricity exported to the grid.

The feed-in tariff will be provided as a credit on your electricity account. If the account is in credit, arrangements can be made with the electricity retailer to receive a payment of this credit.

You provide an estimate of your annual household electricity consumption costs, you are not a large consumer of electricity. Based on the data you have collected you provided an estimate of the amount you expect to receive per year from your electricity retailer through the scheme.

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 8-1

Income Tax Assessment Act 1997 section 8-5

Income Tax Assessment Act 1997 section 40-25

Reasons for decision

Summary

Based on your factual circumstances, and in particular, the fact that your solar system is configured to primarily supply electricity to your home, it is considered that the arrangement is private or domestic in nature. That being so;

the credits (or payments for credits) you would receive for the generation of electricity from the solar system are 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. They are expenses that are private or domestic in nature.

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 the payments/credits are 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 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 of the ITAA 1997 allows you to deduct. Examples of specific deductions include borrowing expenses under section 25-25 of the ITAA 1997 and deductions for depreciating assets under section 40-25 of the ITAA 1997.

Rates and insurance

Under section 8-1 of the ITAA 1997 you can deduct expenses you incurred in operating the solar system if you incur the expense in deriving assessable income from the system.

You cannot deduct expenses relating to your private residence (such as in relation to rates or home insurance) 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. You can deduct the decline in value of the capital cost of your solar system where it is used in gaining your assessable income.

Application to your situation

Under the scheme operating and as described in your ruling application, you receive credits whenever your electricity generation exceeds your household consumption at intervals during the day as recorded by your meter. The credit will be applied to your electricity account. You can make arrangements with the retailer to receive a payment of this credit.

The scheme has a strong connection with the electricity needs of the household as:

· The solar system is configured into the electricity system of the home.

· The solar system primarily supplies electricity to the home and satisfies the electricity consumption of the householder before exporting excess electricity to the grid.

· The size of the solar system is below the cap designed principally for ordinary domestic needs.

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, this being demonstrated by the strong connection of the scheme with the electricity needs of your household (as outlined above). In particular:

o Electricity generated from the solar system is used for personal consumption in your private residence, and only the excess is transferred to the electricity grid.

o The credits you receive for excess electricity offset the cost of your electricity, effectively reducing your electricity account.

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

Consequently, any credits (and payment of credits) received for your electricity generated and sold to the electricity grid are not considered to be assessable income.

As a result any expenditure incurred in producing the credits (and payment of credits) 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 insurance 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.