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Ruling

Subject: GST payable on the supply of solar systems

Question

Will the Commissioner confirm that the GST liability arising from the supply of the solar systems is equal to 1/11^th of the price charged for the supply of the solar system, which comprises the monetary component (where applicable) as well as the non-monetary component (being the GST-inclusive market value of the rights to create a specified number of renewable energy certificates (RECs)?

Answer

Yes, the GST liability arising from the supply of the solar systems is equal to 1/11^th of the price charged for the supply of the solar system, which comprises both the monetary component and the non-monetary component.

Where the supplier offers a discount on the price of the supply of the solar systems in return for the assignment of the rights to create RECs, the GST liability is calculated before the reduction in price.

The price for the supply of the solar system includes the cash discount, if any, provided to the customer for the assignment of the rights to create RECs.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The supplier is an entity and is registered for goods and services tax (GST).

The supplier provides sale, installation and maintenance of solar panels and solar hot water systems to a range of customers. The majority of the customers are not registered for GST.

The entity supplies solar power systems to Australian households under the renewable energy target (RET) scheme.

The solar power systems installed by the supplier give rise to the right to create RECs.

The agreement between the supplier and the customer for the supply of solar systems contains the terms and conditions for the customer to assign the rights to create the RECs to the supplier. The customer generally receives a discount on the price of the solar systems, in return for the assignment.

In addition to the assignment of the rights to create RECs, a monetary payment may be required to be made by the customer to the supplier for the purchase and installation of the solar systems.

Where the customer assigns the rights to create RECs to the supplier, the supplier creates the RECs by registering them on the REC registry. It is only once the RECs are registered on the REC registry that the RECs are created and are able to be traded by the supplier on the market through over-the-counter transactions.

In order to create, buy or surrender registered RECs, businesses must be duly accredited.

The supplier has obtained an independent valuation report, confirming the valuation of the rights to create RECs that are assigned by the customer to the supplier as part (or all) of the consideration for the supply and installation of solar systems.

The report states that the valuation has been conducted in accordance with the Market Valuation Guidelines published by the Australian Taxation Office (ATO) for tax purposes, and APES 225 Valuation Services, an Australian Valuation reporting standard applicable to all valuation reports issued after 1 January 2009.

The valuation obtained is based on a sample of five historical sales of solar systems to household customers, as at their respective dates of sale (Valuation Dates).

It is submitted that the above valuation report is in accordance with the market valuation principles contained in the public ruling GSTR 2001/6 and the guidelines prescribed in the ATO publication "Market valuation for tax purposes".

The supplier has confirmed that it has not asked the Commissioner to confirm the above valuation obtained from the valuer, in this ruling application.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-40,

A New Tax System (Goods and Services Tax) Act 1999 section 9-70,

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-75(1) and

A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the liability for GST on taxable supplies. In accordance with this section, an entity is required to remit the GST payable on any taxable supply that it makes.

The requirements for a taxable supply are set out in section 9-5 of the GST Act. Section 9-5 of the GST Act provides that an entity makes a taxable supply if it makes the supply for consideration, in the course or furtherance of an enterprise that it carries on, the supply is connected with Australia and the entity is registered, or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Based on the facts provided, the supplier makes a taxable supply when it sells solar systems to customers, including installation and maintenance.

In return for the supply and installation of the solar systems, the customer assigns its rights to create RECs in respect of the solar systems to the supplier. In addition to the assignment of the rights to create RECs, a monetary payment may be required to be made by the customer to the supplier for the purchase and installation of the solar systems.

In return for the assignment of the rights to create RECs, the customer may also receive a discount on the cost of the purchase and installation of the products.

Based on the above, the consideration for the supply and installation of the solar systems includes and consists of the customer's rights to create a specified number of RECs which the customer provides to the supplier by way of assignment; any monetary payment required to be made by the customer to the supplier; and any cash discount on the gross price of the solar system given to the customer in return for the assignment.

Section 9-70 of the GST Act provides that the amount of GST on a taxable supply is 10% of the value of the taxable supply. Subsection 9-75(1) of the GST Act provides that the value of a taxable supply is 10/11^th of the price. That is the amount of GST is 1/11th of the price of the taxable supply or 1/11^th of the consideration received for the taxable supply, provided that the transaction occurred at arms length. As such, the price of a taxable supply, which is also the consideration for the taxable supply, is GST-inclusive.

Further, subsection 9-75(1) of the GST Act provides that the price is the sum of any part of the consideration for the supply expressed as an amount of money (monetary consideration) and any part of the consideration for the supply that is not expressed as an amount of money (non-monetary consideration). Under paragraph 9-75(1)(b) of the GST Act, a GST inclusive market value needs to be established and worked out for the part of the consideration that is non-monetary.

Market value of the rights to create RECs that are assigned by the customer

You have submitted that the consideration received by the supplier from its customers for the supply of the solar system has a monetary cash component as well as a non-monetary component, being the assignment of the rights to create a specified number of RECs by the customers to the supplier.

Accordingly, the supplier will have a GST liability based on 1/11^th of the total price charged for the supply of the solar system, which is the monetary payment plus the GST-inclusive market value of the rights to create RECs that are assigned by the customer (in accordance with section 9-70 and 9-75(1) of the GST Act).

By providing non-monetary consideration, in the form of assigning to the supplier, the rights to create RECs, as part of the consideration for the supply of the solar system by the supplier, the customer is in turn making a supply to the supplier. However, the GST law does not allow the price for one supply to be reduced by the price of another, so as to apply GST to the net figure. In this case, for example, the supply and installation of the solar systems by the supplier and the supply by way of assignment of the rights to create RECs by the customer are two separate transactions that must be accounted for separately for GST purposes. It is not possible to net off the two supplies and apply GST to the net figure.

Where the consideration for a supply is non-monetary, the GST inclusive market value of that consideration is used to work out the price and value of the supply. We consider that, in most circumstances, when the parties to a transaction are dealing at arm's length, the things being exchanged are of equal GST inclusive market value. This value can be determined by using a reasonable valuation method that is agreed by the relevant parties. However, this method must produce a reasonable GST inclusive market value of the things exchanged.

Paragraphs 128 to 130 of Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration (GSTR 2001/6) state the following:

Non-monetary consideration does not itself need to be a taxable supply

128. Section 195-1 states: GST inclusive market value of:

(a) consideration in connection with a supply; or

(b) a thing, or a supply or acquisition of a thing;

means the market value of the consideration or thing, without any discount for any amount of GST or luxury car tax payable on the supply.

129. The effect of this provision is that, for the purpose of working out the price of a taxable supply under subsection 9-75(1), the GST inclusive market value of any non-monetary consideration is not reduced by the amount of GST payable on the supply to which the non-monetary consideration is connected. This is in line with paragraph 9-75(1)(a) that provides that price, so far as the consideration is expressed as an amount of money, is 'the amount (without any discount for the amount of GST (if any) payable on the supply)'.

130. The GST treatment of non-monetary consideration (when it is viewed as a supply itself) is not relevant to its status as consideration. Circumstances in which the GST treatment is not relevant include where non-monetary consideration is received from an entity that is not registered for GST purposes, or is a GST-free or an input taxed supply. These things, when they are consideration, have a GST inclusive market value with the GST component being 'nil'.

Market value

Paragraphs 141 to 158 of GSTR 2001/6 provide guidance on the ATO view on market value and the determination of the GST inclusive market value of non-monetary consideration for a taxable supply. Further, paragraphs 159 to 165 of GSTR 2001/6 provide guidance on when the valuation should be done.

The supplier has obtained an independent valuation report. The purpose of the valuation is to assist the supplier in determining the amount of its GST liability on a sample of historical sales of solar systems to household customers, where the rights to create the RECs are regarded as part or full consideration for the supply and installation of the solar systems.

The report states that the valuation has been conducted in accordance with the Market Valuation Guidelines published by the Australian Taxation Office (ATO) for tax purposes, and APES 225 Valuation Services, an Australian Valuation reporting standard applicable to all valuation reports issued after 1 January 2009.

The supplier has submitted that the above valuation report is in accordance with the market valuation principles contained in the public ruling GSTR 2001/6 and the guidelines prescribed in the ATO publication "Market valuation for tax purposes".

Note that an entity can apply for a private ruling about the value of a thing. An entity can ask the Commissioner to provide a valuation of the thing or provide a valuation of the thing and ask the Commissioner to confirm it. We use a professional valuer to undertake the valuation or review the work. The law allows us to pass onto the ruling applicant the fee charged by the valuer for their services. Consequently, the entity must pay for the work of the valuer.

The supplier has confirmed that it has not applied for a private ruling asking the Commissioner to provide a valuation or to confirm the valuation obtained.

As such, this ruling is provided without confirmation of the valuation of the rights to create RECs as contained in the valuation report provided.