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Ruling

Subject: Photovoltaic Solar Panels deductibility under Section 328-180

Question 1

Will the Taxpayer be entitled, pursuant to Section 328-180 of the ITAA 1997, to an immediate deduction for the 'cost' of the PV solar panels at the time they are installed ready for use in the business?

Answer

No

This ruling applies for the following periods:

July 2012 - June 2013

Relevant facts and circumstances

The Taxpayer is contemplating becoming a 'Generator' via membership in a consortium of parties grouping together to fund, operate and actively trade the output from a utility sized renewable energy generation business in the form of a solar farm.

The Taxpayer proposes to acquire photovoltaic ('PV') solar panels for use in generating direct current ('DC') electricity where each panel is expected to cost less than $1,000 (inclusive of GST).

The Taxpayer will be one of a number of Generators in the consortium who will each acquire their own PV solar panels to be placed on ground mounted stands to be used to generate DC electricity.

The project involves pooling the collection of their DC electricity, conversion of the DC electricity into alternating current ('AC') electricity and sale into the grid as well as entering into arrangements that ensure the ongoing servicing and maintenance of the Balance of Plant (BoP).

The Generators will only own the PV solar panels; they will have no ownership interest in the BoP. The BoP will be leased from an external unrelated party.

The PV solar panels will be chattels at law and the Generators can remove them on the giving of reasonable notice.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Subsection 40-30(1)

Income Tax Assessment Act 1997 Subsection 40-30(4)

Income Tax Assessment Act 1997 Subsection 40-425(2)

Income Tax Assessment Act 1997 Subdivision 328-D

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 328-180

Income Tax Assessment Act 1997 Paragraph 328-180(a)

Income Tax Assessment Act 1997 Paragraph 328-180(b)

Reasons for decision

Section 328-180 allows you to deduct the taxable purpose proportion of the adjustable value of a depreciating asset for the income year in which you start to use the asset, or have it installed ready for use, for a taxable purpose if:

(a) you were a small business entity for that year and the year in which you started to hold it; and

(ab) you chose to use Subdivision 328-D for each of those years; and

(b) the asset is a low-cost asset.

Where you choose to calculate your deductions under Subdivision 328-D instead of Division 40 you will then need to satisfy that the asset is a low-cost asset under paragraph 328-180(b)

A low-cost asset is defined under subsection 40-425(2) as a depreciating asset (except a horticultural plant) whose cost as at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose is less than $1,000.

Subsection 40-30(1) states that a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except:

· land; or

· an item of trading stock; or

· an intangible asset

Subsection 40-30(4) discusses whether a particular composite item is itself a depreciating asset or whether its components are separate depreciating assets is a question of fact and degree which can only be determined in the light of all the circumstances of the particular case.

Whether the photovoltaic solar panel is a separate unit of property or a component of a unit of property is a question of fact and degree and can only be determined by the facts in this case.

When considering the facts it is important to take into account the actual function the solar panels are serving as part of your income producing activity, and not any theoretical function the item could be put to in circumstances outside of the intended scheme.

TR 94/11 and more recently ATO ID 2011/2 contain some guidelines about the functionality test and how it must be applied to the facts of each case.

TR 94/11 makes reference to a number of court cases in which the term 'unit of property' has been judicially considered. These cases make it clear that a separate unit of property is one which has an identifiable, separate function.

In FC of T v. Veterinary Medical and Surgical Supplies Limited 88 ATC 4642; (1998) 19 ATR 1593 the court determined that a telephone system consisting of a central processing unit and seven interactive handsets was a single unit of property. In reaching his decision Pincus J said:

'…where a system consisting of diverse elements is bought as a system intended to function as a whole and each element interacts with at least one other, one should find unity in the function of the whole system, at least where the elements are physically connected.'

The pumping station in FC of T v Tully Co-operative Sugar Milling Assoc. Ltd. 83 ATC 4495; (1983) 14 ATR 495) which comprised an electric motor, starter and other parts, was held to be a single 'unit of property'. The evidence in this particular case showed that these components had become an integral part of a larger whole, and therefore a single unit of property.

In ATO ID 2011/2 the question asked was where the parts of a cable system that link two places are owned by different entities, are the parts separate depreciating assets pursuant to section 40-30.

The facts in this case involve a cable system that was constructed to transmit data between three places A, B and C. The system was constructed with two major functional segments. Each segment of the system consists of fibre optic cables and transmission and receiving equipment. Different but associated entities own the fibre optic cables, and the transmission and receiving equipment.

In reaching a decision that the each segment was a depreciating asset and not the components of each segment, the relevant function of the cable system was considered. The decision states "While each component of each segment contributes to the system, the relevant function of all components within a segment is to transmit data from one place to another. This is the function the various entities have achieved by making available their part of the cable system for the effective use of the system to produce income".

Specifically, "taken as a whole, each 'segment', being composed of both the fibre optic cable between two places and the necessary equipment at either end is capable of achieving the network function of transmitting data from one place to another. The components within each segment are not separately capable of achieving the network function of a cable system'.

ATO ID 2002/751 concluded that an entire roof mounted photovoltaic solar system is a single depreciating asset pursuant to section 40-30. In reaching this decision the linking of the PV system components in an integrated and interdependent way contributed to the relevant function of producing usable AC power. The function of producing AC electricity can only be achieved by the particular integration of the relevant component parts.

Based on the facts you have provided, the overall functionality of the scheme is to produce DC electricity, convert it to AC electricity and then sell the AC electricity into the grid. A PV solar panel in isolation is not capable of producing AC electricity for sale into the grid. The items identified as the BoP are also incapable of producing AC electricity for sale in to the grid. While each component contributes to the system, the relevant function is that of the system to deliver useable power. The function can only be derived from the integration of all the components in a particular way. Based on this functionality the system rather than each of its components is considered to be the depreciating asset in these circumstances. The fact that the BoP items are leased from a separate entity and you will be the owner of the PV solar panels does not alter the function of the PV solar system to produce AC electricity for sale into the grid. The income you will derive from the scheme is from the sale of AC electricity into the grid. You will not receive income from the sale of DC electricity.

Accordingly the PV solar panels are not considered a separate depreciating asset and as such do not meet the requirements as a low cost asset under section 328-180 and you will not be entitled to an immediate deduction for the cost of the PV solar panels.