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Ruling

Subject: Tax treatment of Small-scale Technology Certificates

Question 1

For an entity operating a business selling solar hot water and solar electricity systems, are Small-scale Technology Certificates (STCs) treated as trading stock?

Answer

Yes.

Question 2

If the STCs are trading stock, is any subsequent profit or loss treated as a trading profit or loss and included in taxable income calculations?

Answer

Yes.

Question 3

Where there is an adjustment to the trading account, will this also adjust GST?

Answer

No.

Question 4

What is the correct GST treatment of STCs

(a) When the customer assigns the STCs to the taxpayer?

(b) When the taxpayer sell the STCs to another entity such as the STC trading house?

Answer

The correct GST treatment of STCs

a) When a customer assigns STCs to the taxpayer this is a supply for GST purposes. It may be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

b) When the taxpayer creates the STC in the clearing house there is nothing supplied from the regulator to create the STC. However, further trades will be a supply for GST purposes and will be taxable where the requirements of section 9-5 of the GST Act are met.

Question 5

How should the point of sale discount for STCs and any associated GST be reflected on a tax invoice from the taxpayer to

(a) Non-registered customers?

(b) Registered customers?

Answer

Liability for GST on the supply of a solar system is not altered by the GST registration status of the customer. A supplier will be liable for GST on the full price of the solar system and installation before any discounts.

Relevant facts and circumstances

The taxpayer (you) is registered for GST.

You operate an enterprise of selling and installing solar hot water and solar electricity systems.

Installation of these units permits the creation of Small-scale Technology Certificates (STCs), which can be exchanged for financial benefit by owners.

Owners have two options for gaining a financial benefit for their certificates:

§ Selling the right to include STCs to a registered Agent, in exchange for discounts or payment, or

§ Selling the certificates themselves, either through the open STC market (pricing subject to market forces) or through the STC Clearing House (price fixed at $40 per STC, excl. GST)

STCs are normally assigned by the customer to you at the point of sale so that the customer pays a lower price for the system. The value of this assignment is based on the current market price of the STCs and counts towards the consideration required for the system.

You include the value of the STCs assigned in your taxable income.

You later sell the assigned STCs through trading houses (or similar) at the current market value.

As the value of the STCs fluctuates according to market conditions the price that you receive for the STCs may differ substantially from the value for which they were acquired from the customer.

The majority of customers are not registered for GST and acquire the units for private or domestic purposes.

However, a small number of customers may be registered for GST and purchase the system as a business as a business asset.

Relevant legislative provisions

Income tax Assessment Act 1997 section 70-10

Income tax Assessment Act 1997 paragraph 70-10(a)

Income tax Assessment Act 1997 subsection 70-35(2)

Income tax Assessment Act 1997 section 70-45

A New Tax System (Goods and Services Tax) Act 1999 section 9-5.

Reasons for decision

Question 1

Summary

For an entity operating a business selling solar hot water and solar electricity systems, STCs should be treated as part of your trading stock.

Detailed reasoning

For general purposes, that is leaving aside livestock and certain shares, trading stock is defined in paragraph 70-10(a) of the ITAA 1997 as including 'anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business.'

It follows that an item will be trading stock where it is held for the purpose of sale or exchange; the definition also requires that the item be held for the requisite purpose in the ordinary course of a business.

'Business' refers to the overall business of the entity by which it produces its assessable income.

In discussing the operation of the loss provisions, TR 1999/9 makes the following general comments at paragraph 12 which are relevant to the meaning of what is an entity's business:

'…..For the purpose of the same business test, a company is treated as carrying on one overall business at the change-over and during the period of recoupment since the reference to 'business' in the same business test is a reference to all of the activities carried on by the company at the change-over and during the period of recoupment, irrespective of whether those activities constitute or are treated by the company as constituting separate or distinct activities, enterprises, divisions or undertakings carried on by the company..'

In considering the term 'ordinary course of business' TR 2005/6 refers to the 'normal ebb and flow' at paragraph 84 to illustrate that a business comprises of a number of activities:

84. A shopping centre proprietor owns a large shopping centre complex in which there are 150 shops. The negotiation of leases is part of the normal ebb and flow of such a business. In the course of business affairs leases will expire and come up for renewal, tenants will want to sell their businesses and request permission to assign leases and other tenants may fail to make a satisfactory profit and want to break their lease. On other occasions it may be the proprietor who wants to terminate particular leases in order to attract high profile tenants or to get rid of poorly performing businesses. In these circumstances the principal asset of the proprietor from a practical and commercial point of view is the shopping centre. The building forms part of the business structure whereas the leases are part of the process by which the proprietor operates to obtain regular rental income. In this case recurring outgoings on lease surrender payments incurred by the proprietor would form part of the normal ebb and flow of the business so that the outgoings would be on revenue rather than capital account.

In this case, it is considered that the STCs are sold in the ordinary course of the taxpayer's business. Accordingly, the STCs fall within the definition of 'trading stock' under section 70-10 of the ITAA 1997 as they are acquired by the seller of solar hot water and solar electricity systems and held for the purpose of sale as a normal incident of the taxpayer's business.

Question 2

Summary

As the STCs are trading stock and are valued at market value each year, any subsequent profit or loss will be treated as a trading profit or loss and included in your taxable income calculations.

Detailed reasoning

The purpose of the trading stock provisions in Division 70 of the ITAA 1997 is to produce an overall result that (apart from concessions) properly reflects a taxpayer's activities with trading stock during the income year: section 70-5 of the ITAA 1997.

The 3 key features of tax accounting for trading stock as listed in section 70-5 of the ITAA 1997 are that:

1. Gross outgoings and earnings are brought to account, not net profits and losses on disposal of trading stock;

2. Those outgoings and earnings are on revenue account, not capital account. As a result, the gross outgoings are usually deductible as general deductions under section 8-1 of the ITAA 1997 (when the trading stock becomes trading stock on hand); and the gross earnings are usually assessable as ordinary income under section 6-5 of the ITAA 1997 (when the trading stock stops being trading stock on hand);

3. The difference between the value of trading stock on hand at the start and at the end of the income year must be brought to account.

An entity's assessable income includes any excess of the value of their trading stock at the end of the income year over the value at the start of the income year: subsection 70-35(2) of the ITAA 1997.

An entity may deduct any excess of the value of their trading stock at the start of the income year over the value at the end of the income year: subsection 70-35(3) of the ITAA 1997.

Section 70-45 of the ITAA 1997 allows an entity to value its trading stock at the end of an income year on the basis of its cost, market selling value or replacement value.

Accordingly, as the STCs are trading stock, they must be valued at the end of each income year on the basis of their cost, market selling value or replacement value. Any subsequent profit or loss will be treated as a trading profit or loss and included in the entity's taxable income calculations.

Question 3

Summary

An adjustment to the trading account does not alter your GST liability.

Detailed reasoning

Liability for GST only arises where you make a supply for consideration (and certain other requirements are met in accordance with section 9-5 of the GST Act).

If there is an adjustment to a trading account there is no supply or sale of an STC or a right to an STC, nor a supply of anything else. Therefore an adjustment to a trading account does not have any implications on your GST liability in this circumstance.

Question 4

Summary

When a customer assigns STCs to you this is a supply for GST purposes. It will be a taxable supply where the requirements of section 9-5 of the GST Act are met.

When you create the STC in the clearing house there is nothing supplied from the regulator to create the STC. However, further trades will be a supply for GST purposes and will be taxable where the requirements of section 9-5 of the GST Act are met.

Detailed reasoning

Owners have two options for gaining a financial benefit for their STCs - either selling the right to STCs to a registered agent or selling the certificates themselves.

As per the information on the Office of the Renewable Energy Regulator website, to be assigned the rights to the STCs you must be a RET registered agent. The registered agent to whom the rights are assigned then creates or validates the STCs in the system, and is then able to sell those STCs.

A sale for GST purposes includes an assignment of a right. When a customer assigns their right to STCs to you this is a supply of a right and therefore a supply for GST purposes. However, this is not a taxable supply unless the customer is making the supply as part of their enterprise and they are registered for GST.

When you create the STC in the clearing house there is nothing supplied from the regulator to create the STCs. Therefore, for GST purposes there is no sale of the STC from the regulator to you so GST is not payable on the creation of a STC.

However, once the STCs have been created they can then be traded, for example through the clearing house. As a supply is any form of sale or transfer, if an STC is transferred for payment and the other requirements of a taxable supply are satisfied the person supplying the STC will have a GST liability on the sale or transfer.

Question 5

Summary

When you supply a system to a customer the registration status of the customer does not impact on your liability for GST. You are making a taxable supply, and GST will be payable on the full price of the solar system and installation before any discounts.

Detailed reasoning

When you supply a solar system and installation to a customer it is a supply from you, and the supply is taxable when the requirements of section 9-5 of the GST Act are met. That is, when you make the supply for consideration, the supply is made in the course of your enterprise, it is connected with Australia and you are registered for GST. Therefore in these circumstances the supply is a taxable supply and you are liable for 1/11th of the price of the supply of the solar system and installation.

An assignment by a customer of a right to create STCs is also a supply for GST purposes. Under GST legislation, the GST consequences of each supply have to be accounted for separately. Even though these two supplies may be dealt with in the same transaction it is not possible to offset one against the other for GST purposes. You are not able to charge GST only on the net value of the two supplies in this situation. GST is payable on the supply of the solar system and installation.

However, the price of the customer's supply to you may be used to reduce the amount of money that they actually have to pay to you. The amount of the 'discount' provided as consideration for this supply will depend on your agreement with the customer.