Edited version of private ruling

Authorisation Number: 1011850655912

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Ruling

Subject: CGT - creation of RECs and disposal for a period

Question 1:

Is the payment for the sale of the Renewable Energy Certificates (RECs) assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No.

Question 2:

Is the payment for the sale of the RECs assessable as a capital gain under Parts 3-1 or 3-3 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010.

1 July 2010 to 30 June 2011.

1 July 2011 to 30 June 2012.

1 July 2012 to 30 June 2013.

1 July 2013 to 30 June 2014.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

You and your spouse acquired and installed a photovoltaic system (solar system), on the roof of your jointly owned private residence.

The solar system you purchased 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 created the certificates and then you sold the RECs to a company that trades in them. You received an amount in return for the RECs.

The RECs were created in your joint names.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 108-5(1).

Income Tax Assessment Act 1997 Subsection 6-5(1).

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Subsection 104-10(2).

Income Tax Assessment Act 1997 Subdivision 110-A.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Ordinary income

Subsection 6-5(1) of the ITAA 1997 provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). However, as there is no definition of ordinary income in income tax legislation, it is necessary to apply principles developed by the courts to the facts of a particular case.

Whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient.

Characteristics of ordinary income that have evolved from case law include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation, (1990) 170 CLR 124; (1990) 21 ATR 1; 90 ATC 4413 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 recipients purpose in engaging in the transaction, venture or business.

Subsection 6-5(2) of the ITAA 1997 states that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. It does not operate to include in a taxpayer's assessable income amounts of a capital nature.

The payment is not assessable as ordinary income in your hands as it is not a product in a real sense of any employment, services or business carried on by you and it does not have the characteristics normally associated with ordinary income such as periodicity and reliance on the payments to meet regular expenditure.

The receipt of the payment is for the sale of the RECs. Payment for the loss of a capital asset will be capital in nature. The receipt of the payment is neither a normal incident of a business nor is it paid for a purpose for which a business was carried on.

Accordingly, payments received for the sale of the RECs are capital in nature and do not constitute assessable income under section 6-5 of the ITAA 1997.

Capital gains tax

A capital gains tax (CGT) asset is defined under section 108-5 of the ITAA 1997 as any kind of property or a legal or equitable right that is not property.

The right to create a renewable energy certificate (REC) which attaches to the purchase of eligible solar systems is a tradeable statutory right and as such is a CGT asset as defined in subsection 108-5(1) of the ITAA 1997. The right arises under the REE Act (Taxation Determination TD 1999/77).

The right to create the REC can be assigned to an agent, or the purchaser of the eligible solar system can create the REC independently. The REC can then be traded for financial return.

CGT event A1 happens if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law under subsection 104-10(2) of the ITAA 1997.

You created the RECs as provided for under the RET scheme and sold the RECs to another entity. The sale of the RECs caused CGT event A1 to happen. You make a capital gain if the proceeds from the disposal are more than the assets cost base.

Cost base

Subdivision 110-A of the ITAA 1997 provides the rules for the cost base of a CGT asset. The cost base of a CGT asset is made up of five elements:

· money or property given for the asset

· incidental costs of acquiring the CGT asset or that relate to the CGT event

· costs of owning the asset

· capital costs to increase or preserve the value of your asset or to install or move it

· capital costs of preserving or defending your ownership of or rights to your asset.

CGT discount

You can use the discount method to calculate your capital gain if:

· you are an individual, a trust or a complying superannuation fund

· a CGT event happens in relation to an asset you own

· the CGT event happened after 11.45 am on 21 September 1999

· you acquired the asset at least 12 months before the CGT event

· you did not choose to use the indexation method.

Discount percentage

The discount percentage is the percentage by which you reduce your capital gain. You can reduce the capital gain only after you have applied all available capital losses.

The discount percentage is 50% for individuals.

Application to your circumstances

You have purchased a solar system for your private residence. The solar system was eligible for the purposes of creating RECs. You created the RECs and sold the use of them for a several year period.

When you purchased the solar system you acquired two separate assets being the solar system and the statutory right to create RECs.

When you created the RECs and sold the use of them for a several year period CGT event A1 occurred at this time.

Your capital proceeds from this CGT event is the amount you received.

You did not pay an amount to acquire the right to create the REC and as such there is no amount for the first element of your cost base.

As you did not hold the RECs for a period of 12 months or more, you are not able to apply the CGT discount.

The amount of the gain should be split between the two of you.