Edited version of private ruling

Authorisation Number: 1011816447785

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Ruling

Subject: GST and sale of electricity generated by solar power systems

Question

Would Goods and services tax (GST) be payable on your sale of electricity generated by your solar systems to electricity retailers in return for monetary rewards?

Answer

No

Relevant facts and circumstances

You are registered for GST.

You are an employee in a certain occupation.

You have carried on a certain sort of business.

You stated that you propose to establish a business for the purpose of making a profit from the trading of electricity produced by PV solar arrays and utilising certain schemes in which your receive monetary rewards.

You have not carried on a business of selling electricity up to this point in time.

You own a property in a certain state or territory (property X) and a property in another certain state or territory (property Y).

You reside in a residence on property X.

You propose to build a house on property Y and then rent out property Y on a permanent basis. You expect that if you receive a GST ruling on a certain date, construction of the house on property Y would be completed a certain number of months later.

You are considering installing a certain kw solar panel system on property X.

You are considering installing a certain kw solar panel system on property Y.

You may participate in a certain state or territory scheme under which you would sell electricity generated by the solar panels on property X to an electricity retailer (a certain electricity retailer) in return for monetary rewards. The monetary rewards would be a certain number of cents per kwh. From our research, this scheme will come to an end on a certain date.

You may participate in a certain state or territory scheme under which you would sell some of the electricity generated by the solar panels on property Y to an electricity retailer (a certain electricity retailer) in return for monetary rewards. This would be a nett system, that is, you would sell to a certain electricity retailer only the portion of electricity generated by the solar panels that is not used by the tenant. The monetary rewards would be a certain number of cents per kwh. From our research this scheme will come to an end on a certain date.

Under the two schemes you would feed electricity generated by the solar panels into Australian electricity grids.

Your cost of installing the solar power system for property X property is estimated to be a certain amount of money.

Your cost of installing the solar power system for property Y is estimated to be a certain amount of money.

You estimate that the amount of electricity produced by property X's solar panels would be a certain number of kwh p.a.

You estimate that the amount of electricity produced by property Y's solar panels for which you would be paid monetary rewards would be a certain number of kwh p.a.

The monetary rewards relating to property X's solar panels would be credited against your electricity bill and you would be able to claim it as cash once a year.

The monetary rewards relating to property Y's solar panels would be credited against your electricity bill and you would be able to claim it as cash monthly.

The measurement of the electricity you generate from both solar systems and the amount of electricity that you generate that is eligible for the monetary rewards will be the responsibility of the electricity retailers you sell to.

We estimate that you may make an overall loss of a certain amount of money (cost of installing the solar power system on property X - the number of kwh p.a you would generate x a certain number of cents/kwh x a certain number of years) from your activity of selling electricity generated by property X's solar panels to a certain electricity retailer. This estimate is based on an estimated start date of a certain date.

Costs of installing solar power systems may have fallen dramatically since you provided estimates of these costs. If your actual net cost of installing the solar power system for property X is 1/3^rd of the estimate you provided of the cost of installing this solar power system, your actual net cost of installing this solar power system would be a certain amount. In this case, you could make a profit of up to a certain amount of money from your activity of selling electricity generated by property X's solar panels to a certain electricity retailer.

We estimate that you may make an overall profit of up to a certain amount of money (the number of kwh p.a for which you would be paid monetary rewards x a certain number of cents/kwh x a certain number of years - the cost of installing the solar power system on property Y) from your activity of selling electricity generated by property Y's solar panels to a certain electricity retailer. This estimate is based on an estimated start date of a certain date and factors in the fact that it would take a certain number of months to construct the house on property Y.

If your actual net cost of installing the solar power system for property Y is 1/3^rd of the estimate you provided of the cost of installing this solar power system, your actual net cost of installing this solar power system would be a certain amount of money. In this case, you could make a profit of up to a certain amount of money from your activity of selling electricity generated by property Y's solar panels to a certain electricity retailer..

Therefore, the total profit you could make from your activity of selling electricity generated by the solar panels to the electricity retailers would be a certain amount of money.

Reasons for decision

Summary

GST will not be payable on your sales of electricity generated by your solar systems to electricity retailers in return for monetary rewards, as your supplies of this electricity to the electricity retailers will not be made in the course or furtherance of an enterprise that you carry on.

Detailed reasoning

You are liable for GST on taxable supplies that you make.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that

you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(*Denotes a term that is defined in section 195-1 of the GST Act)

The supply of solar generated electricity from a solar owner to an electricity retailer is a supply for GST purposes. If the solar owner is registered for GST and the supply is made in the course or furtherance of their enterprise, it is a taxable supply under section 9-5 of the GST Act.

Supply made for consideration

You propose to be a solar owner and supply solar generated electricity to electricity retailers. Therefore, you would be making supplies for GST purposes.

In accordance with paragraphs 1 to 3 of Goods and Services Tax Determination GSTD 2004/4:

· Consideration can be provided or received by way of setting off mutual liabilities in accordance with the doctrine of set-off.

· A set-off can occur if each party has made a supply to the other and each party is required to pay the other for the supply made to it.

· In each of these cases, the consideration is generally provided or received on the date that the set-off legally occurs.

In your case, you would make supplies of electricity to two electricity retailers and they would make supplies of electricity to you. An electricity retailer would provide consideration for your supply of electricity to the electricity retailer where it sets off the monetary rewards it owes you against your liability for electricity that the electricity retailer supplies to you.

Additionally, where an electricity retailer pays you monetary rewards, it would be providing consideration for your supply of electricity to the electricity retailer.

Therefore, the requirement of paragraph 9-5(a) of the GST Act would be satisfied.

Supply connected with Australia

Your supplies of electricity to the electricity retailers would be connected with Australia. Therefore, the requirement of paragraph 9-5(c) of the GST Act would be satisfied.

GST registration

You are registered for GST. Therefore, the requirement of paragraph 9-5(d) of the GST Act is satisfied.

There are no provisions in the GST Act or in any other Act under which your supplies of electricity to the electricity retailers would be GST-free or input taxed.

Therefore, what remains to be determined is whether your supplies of electricity to the electricity retailers would be made in the course or furtherance of an enterprise that you carry on.

Supply made in course or furtherance of enterprise

In accordance with paragraph 9-20(1)(a) of the GST Act, an activity or series of activities done in the form of a business is an enterprise.

Paragraph 177 of Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number states:

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? provides that the principals in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators to determine the matter. These indicators are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production. These indicators are applicable to business activity generally. Paragraph 13 of TR 97/11 lists these indicators as follows:

· whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

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

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

· whether there is repetition and regularity of the activity;

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

· the size, scale and permanency of the activity; and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Whether the taxpayer has more than an intention to engage in business

In accordance with paragraph 39 of TR 97/11, a mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that:

'The carrying on of a business is not a matter merely of intention. It is a matter of activity. ... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.'

Once each of your solar systems is installed, there would be no more work for you to do other than occasional maintenance.

The measurement of the electricity you generate from both solar systems and the amount of electricity that you generate that is eligible for monetary rewards will be the responsibility of the electricity retailers you sell to.

Hence, the extent of the activity involved in your selling of electricity to electricity retailers would be very low.

Therefore, this indicator would be present to a very small extent.

Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity.

You have a purpose of profit as well as a prospect of profit from your proposed activity of selling electricity to electricity retailers.

Whether there is repetition and regularity of the activity

Paragraph 55 or TR 97/11 states:

55. It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. For example, in Hope the 'transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business'. Similarly, in JR Walker the court held that there was repetition and regularity in the taxpayer's activities directed to the breeding of high quality Angora goats and to keeping up with the latest information on Angora goats.

Once each of your solar systems is installed, there would be no more work for you to do work other than occasional maintenance.

The measurement of the electricity you generate from both solar systems and the amount of electricity that you generate that is eligible for monetary rewards would be the responsibility of the electricity retailers you sell to.

There would be little repetition and regularity in terms of action required by you in respect of your activity of selling electricity to electricity retailers.

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

The activities of a taxpayer are more likely to be a business when carried on in a manner similar to that in which other participants in the same industry carry on their activities.

In accordance with paragraph 64 of TR 97/11, in considering this indicator, the following factors might be compared with the characteristics of others engaged in the same type of business:

· the volume of sales. If there is a small number of sales it is less likely that a business is being carried on;

· the types of customers the taxpayer sells their product to - wholesalers, retailers, the public at large, or friends or relatives - and the manner in which this marketing takes place;

· the sort of expenses incurred by the taxpayer;

· the amount invested in capital items; and

· previous experience of the taxpayer.

You expect to generate recurring receipts from the respective electricity retailers. The volume of sales you would make would be miniscule in comparison to ordinary electricity generation businesses.

You will sell electricity to electricity retailers.

Your contracts to sell electricity to the electricity retailers will not come about through your advertising or promoting of your product, whereas an ordinary electricity generation business would achieve sales as a result of advertising and promoting their product.

Based on the information provided, you would not market the electricity you generate to entities other than two electricity retailers and the tenant.

The biggest expenses you would incur would be the cost of installation of each solar system, and there would be no significant operating costs. These expenses would be miniscule compared to the expenses of an ordinary electricity generation business.

The amount you would invest in capital items would be miniscule compared to the amount invested in capital items by ordinary electricity generation businesses.

You do not have expert knowledge of the electricity industry.

A business of electricity generation would usually require a much larger scale of production than the scale of your proposed production to ensure that the business is able to meet demand levels. You would not be required to meet demand levels of the electricity retailers. Additionally, you would not be required to use the electricity you generate to meet the demand levels of the tenant as electricity supplied by a certain electricity retailer could instead be used to meet the tenant's needs if necessary.

The overall impression from considering the factors set out in paragraph 64 of TR 97/11 and other relevant information is that your activity of selling electricity to electricity retailers would not be carried on in a similar manner to that of the ordinary trade in the relevant line of business - electricity generation businesses.

Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

Your activity of selling electricity to electricity retailers would be planned, organised and carried on in a businesslike manner such that it is directed at making a profit.

Size, scale and permanency of the activity

The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However the size or scale of the activity is not a determinative test and a person may carry on a business though in a small way.

In your case your activity of selling electricity to electricity retailers would involve the installation and operation of two solar systems - one will be a certain kw system and the other will be a certain kw system. Therefore, the size and scale of the operation would be very small.

This indicator alone is not conclusive. The smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business.

Significant commercial activity

Paragraph 29 of TR 97/11 provides that:

· The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of the activity, the repetition and regularity of the activity and the profit indicators.

· A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business.

The size and scale of your activity of selling electricity to electricity retailers would be very small.

There would be little repetition and regularity in this activity in terms of the action you need to take.

You have a purpose of profit.

The profit you are likely to make in a year would be small.

This activity would not be carried on in a similar manner to an ordinary electricity generation business.

The overall impression from considering the factors set out in paragraph 29 of TR 97/11 in combination is that there would not be a significant commercial purpose or character to your activity of selling electricity to electricity retailers.

Whether the activity is better described as a hobby, a form of recreation or a sporting activity

Your activity of selling electricity to electricity retailers could not be described as a hobby, a form of recreation or a sporting activity.

From a consideration of the indicators above, this activity would not amount to the carrying on of a business of selling electricity, because:

· there would be a lack of a significant commercial purpose or character;

· the more than just an intention to engage in business indicator would be present to only a very small degree;

· there would be little repetition and regularity in the activity in terms of action you need to take;

· the activity when compared to an ordinary business of electricity generation could not be said to be similar; and

· the size and scale of the activity would be very small.

This activity would not be any, or part of any, other type of enterprise.

Your supplies of electricity to electricity retailers would not be supplies made in the course or furtherance of any enterprise that you carry on.

Therefore, you will not satisfy the requirement of paragraph 9-5(b) of the GST Act.

Conclusion

As you would not satisfy all of the requirements of section 9-5 of the GST Act, you would not make taxable supplies of electricity to electricity retailers in return for monetary rewards. Therefore, GST would not be payable on your supply of electricity generated by your solar systems to electricity retailers in return for monetary rewards.

Additional information

Where an electricity retailer makes a taxable supply of electricity to a solar owner, the electricity retailer must calculate the GST on the full value of the electricity they supply to the solar owner. The value of electricity supplied by the electricity retailer to the solar owner is not offset or reduced by any electricity that may be supplied by the solar owner to the electricity retailer. The supply of electricity by the electricity retailer to the solar owner is separate from the supply by the solar owner to the electricity retailer.