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Ruling

Subject: solar hot water rebate

Question 1:

Is the decline in value of the solar heating system deductible under section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997) in the 2009-10 income year?

Answer: Yes, to the extent it is used for a taxable purpose.

Question 2:

Is the government rebate received in respect of your purchase of a solar hot water system assessable under section 20-20 of the ITAA 1997 in the 2009-10 income year?

Answer: Yes, in part.

Question 3:

Is the amount received from the sale of the associated Renewable Energy Certificates (RECS) assessable income in the 2009-10 income year?

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

The scheme commences on:

1 July 2009

Relevant facts and circumstances

In the 2009-10 income year you purchased a new solar hot water system for installation on your rental property.

The system consists of a solar heating component which is fixed to the roof, and an electric tank component which is on the ground. You estimate these components are of similar value. Essentially, the solar panels heat the water and where there is insufficient power from this source, it uses electricity as an alternate energy source.

The solar heating component was installed on the roof of the rental property in the 2009-10 income year and is fully operational.

The new tank has not been installed. You will continue to use the existing tank until it is no longer serviceable.

You paid the full price for the solar hot water system. After the system was operational you applied for the government solar hot water system rebate.

You arranged for the installation of the system. You were entitled to a certain number of REC's as a result of the purchase. You assigned the REC's in a separate transaction to Envirobank Pty Ltd.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 20-20

Income Tax Assessment Act 1997 Section 20-20(3)

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 40-25(7)

Income Tax Assessment Act 1997 Section 20-40

Income Tax Assessment Act 1997 Section 40-60

Income Tax Assessment Act 1997 Section 40-60

Income Tax Assessment Act 1997 Section 104-10(2)

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 108-5(1)

Income Tax Assessment Act 1997 subdivision 110-A

Income Tax Assessment Act 1997 Part 3.1

Reasons for decision

Summary

As you can claim deductions in respect of the decline in value of the capital cost of the roof mounted solar system in the 2009-10 income year, a portion of the rebate is assessable income in the 2009-10 income year

It is acceptable to halve the total cost of the solar hot water system to enable the depreciation of the assets to be calculated, provided your estimate is reasonable.

The disposal of the RECs resulted in a capital gain in the 2009-10 income year which is included in your assessable income.

Detailed reasoning

Depreciation

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 used in gaining your assessable income.

Under section 40-25 of the ITAA 1997 you can deduct an amount equal to the decline in value for an income year of a depreciating asset that you hold. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time that it is used.

Section 40-60 of the ITAA 1997 provides that a depreciating asset starts to decline in value when you first use it, or have it installed ready for use, for any purpose. Use requires the employment of the asset so that it can be reasonably expected to decline in value. A deduction is only available, however, to the extent that that use is for a taxable purpose. Taxable purpose is defined in subsection 40-25(7) of the ITAA 1997 and includes the purpose of producing assessable income.

Taxation Ruling TR 2011/2 Income tax: effective life of depreciating assets provides a table listing the effective life of depreciating assets as determined by the Commissioner. In accordance with TR 2011/2 the effective life of solar heated hot water systems is 15 years.

In your case, you purchased a solar hot water system. There are two components to the system, the solar heating and the water tank.

The solar heating was installed on your income producing rental property in the 2009-10 income year and has been a depreciable asset since that time.

The water tank has not been installed and as such is not depreciable.

You have advised that the value of the two components would be approximately equal. As such, your proposal to halve the total cost of the system for the purposes of calculating the depreciation is considered acceptable, providing your estimate is reasonable.

Government rebate

TD 2006/31 provides that a government rebate received by a rental property owner is an assessable recoupment under subsection 20-20(3) of the ITAA 1997, where the owner is not carrying on a property rental business and receives the rebate for the purchase of a depreciating asset (for example an energy saving appliance) for use in the rental property.

If the cost of an energy saving appliance is deductible under Division 40 of the ITAA 1997 over two or more income years, section 20-40 of the ITAA 1997 applies so that the total of assessable recoupment to be included in assessable income at a particular time is limited to the total amount of the loss or outgoing that can be or has been deducted at that time. Any part of an assessable recoupment that is not included in assessable income in the year of receipt because of this limit is assessable in later income years to the extent that further amounts are deductible under Division 40 of the ITAA 1997 for the appliance.

Where the recoupment is received before the income year of a deduction, the assessable recoupment is treated as having been received in the deduction year.

In your case, you received a government rebate for the solar hot water system on 29 January 2010. The solar heating component of the system was installed in the 2009-10 income year and a deduction can be claimed for its decline in value from that time.

Therefore, the rebate is assessable income in the 2009-10 income year, to the amount not exceeding the depreciation claimable in respect of that asset.

No decline in value can be claimed in respect of the water storage component of the system in the 2009-10 income year as it was not installed ready to use for a taxable purpose.

Renewable Energy Certificates (RECS)

A 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.

A right to create a REC attaches to the purchase of eligible solar systems. 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. Where created independently, RECs can then be traded for financial return. The REC is a CGT asset as defined in subsection 108-5(1) of the ITAA 1997

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

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:

1. money or property given for the asset

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

3. costs of owning the asset

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

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

In your case, the RECs were created as provided for under the RET scheme and sold to another entity. The sale of the RECs caused CGT event A1 to happen. A capital gain arises if the proceeds from the disposal are more than the cost base of the asset.

As you did not pay an amount to acquire the right to create the REC there is no amount for the first element of your cost base. You will make a capital gain equal to the proceeds of the sale of the REC's.

Conclusion

You have purchased a depreciable asset being the solar hot water system. The cost of the solar hot water system for depreciation purposes is the full invoiced cost, including the rebate received. A solar hot water system consists of the heating component and the tank component. It is reasonable to halve the total cost of the original asset for the purposes of calculating the decline in value deduction. As the solar heating asset was installed ready for an income producing use in the 2009-10 income year, the relevant depreciation amount can be claimed in that year.

Further, the government rebate received for the original asset is assessable recoupment required to be included as assessable income and should be reasonably allocated to the two new assets.

CGT event A1 occurred when you assigned your right to create RECs. You will make a capital gain from the event in accordance with the provisions of Part 3.1.