Edited version of your private ruling

Authorisation Number: 1012156666598

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Ruling

Subject: Income - other - solar power

Question 1:

Are credits/payments received from your electricity retailer for the generation of electricity from a photovoltaic solar system assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

Question 2:

Are the costs associated with the solar system, such as interest, depreciation and maintenance, deductible under section 8-1 of the ITAA 1997 or other relevant provisions of the ITAA 1997?

Answer: No.

Question 3:

Are there any capital gains tax (CGT) consequences for you in using your right to create renewable energy certificates to acquire the solar system?

Answer: No.

This ruling applies for the following period:

1 July 2011 to 30 June 2012.

The scheme commences on:

1 July 2011.

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.

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

The State Government provides for a net feed-in tariff solar scheme (the scheme). Under the scheme, owners of eligible renewable energy systems are paid per kilowatt hour for energy exported to the grid that is in excess of the household consumption at the time of generation as recorded by the meter. The electricity retailer then pays an additional amount per kilowatt hour under the Renewable Energy Buyback Scheme (REBS).

The electricity account is in your name and your solar system has been connected to the grid.

Your electricity retailer will calculate any credits at each billing cycle and carry them forward and the credit is shown on your account. You do not expect to receive cash payments as you expect that in winter you will use any credits that may be available.

You did not purchase the solar system to make a profit but to merely cover the costs of your electricity usage.

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).

You state that you assigned the RECs back to the installer in return for a discount on the purchase price.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

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

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

Income Tax Assessment Act 1997 Subsection 6-5(4).

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 40-25

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

Reasons for decision

Summary

Based on the configuration of the system you installed, the arrangement with your energy supplier/retailer and your estimated feed-in tariff payments, the arrangement is private or domestic in nature. That being so:

· the credits/payments you will receive for the generation of electricity from the solar system are not assessable income under section 6-5 of the ITAA 1997, and as a result,

· the costs you will incur in relation to the generation of electricity from the solar system such as decline in value, borrowing and interest expenses are not deductible under section 8-1 of the ITAA 1997 or other relevant provisions of the ITAA 1997 as they are not incurred in gaining or producing assessable income and they relate to expenses that are private or domestic in nature.

· There are no CGT consequences when you assign your RECs to the installer for a discount on your photovoltaic solar system.

Detailed reasoning

Assessable income

Under section 6-5 of the ITAA 1997 assessable income is made up of ordinary income and statutory income. There are no specific legislative provisions relating to money or credits received from electricity suppliers, therefore it is not statutory income.

Under subsection 6-5(1) of the ITAA 1997 ordinary income means income 'according to ordinary concepts'.

Under subsection 6-5(2) of the ITAA 1997, the assessable income of an Australian resident includes the ordinary income you derived directly or indirectly from all sources during the income year.

Under subsection 6-5(4) of the ITAA 1997 in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

The tax legislation does not provide specific guidance on the meaning of income according to ordinary concepts. However, a substantial body of case law exists which identifies likely characteristics. In determining whether an amount is ordinary income, the courts have established the following principles:

· what receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as a statute dictates otherwise

· whether the payment received is income depends upon a close examination of all relevant circumstances

· whether the payment received is income is an objective test.

Relevant factors in determining whether an amount is ordinary income include:

· whether the payment is the product of any employment, services rendered, or any business

· the quality or character of the payment in the hands of the recipient

· the form of the receipt, that is, whether it is received as a lump sum or periodically

· the motive of the person making the payment, but noting that this latter factor is rarely decisive, as a mix of motives may exist.

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

Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. The whole of the circumstances must be considered.

Amounts that are periodical, regular or recurrent, relied upon by the recipient for their regular expenditure and paid to them for that purpose are likely to be ordinary income. However, receipts that indicate the arrangement is private or domestic in nature are not likely to be ordinary income.

In this instance, it needs to be determined whether the payments or credits received in return for transfer of electricity to the grid are income because of the nature and the circumstances of the receipt. In determining whether the receipts are income, the factual circumstances, and in particular whether the receipts indicate an activity that is more than private or domestic in nature, need to be considered. Some guidance in the context of rental properties is contained in Taxation Ruling IT 2167, which outlines the circumstances when amounts received will be considered income and when they will be considered to be in the nature of family or domestic arrangements.

A solar system is considered to be property and receipts received in connection with it are potentially assessable income. In determining whether or not the payments or credits are assessable income the following are important:

· the size of the solar system

· the terms of the arrangement with the electricity retailer and in particular whether the solar system:

o is configured into the electricity system of the home - the solar system first supplies electricity to the home to satisfy household electricity consumption before exporting excess electricity to the grid (referred to as a 'net' scheme), or

o exports all electricity to the grid (referred to as a 'gross' scheme).

· the feed-in tariff payments and whether they are considered to represent a return on your investment in the solar system

· whether there is a realistic opportunity for you to profit from the arrangement

· the regularity of payments / credits received from the feed-in tariffs such that they can be relied upon.

Deductions

The general provision that determines the deductibility of expenses is section 8-1 of the ITAA 1997. Under section 8-1 of the ITAA 1997 you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. However you cannot deduct a loss or outgoing that is capital, private or domestic in nature.

Other provisions in the ITAA 1997 contain specific deductions which section 8-5 of the ITAA 1997 allows you to deduct. Examples of specific deductions include repairs under section 25-10 of the ITAA 1997 and deductions for depreciating assets under section 40-25 of the ITAA 1997.

Renewable Energy Certificates

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 (subsection 104-10(2) of the ITAA 1997.

The transfer of the right, viewed separately from the acquisition of the generation unit, might be taken to cause CGT event A1 to happen.

However in this case, where as part of the process of acquiring the small generation unit you assign your rights to the installer, it is considered that the reality of the matter is that you are acquiring a generation unit and the assignment of the right to create a REC merely facilitates that acquisition.

Accordingly, where there is an assignment of the right to create a REC, and a reduction in the amount of money required to be paid for the small generation unit (the underlying asset), the CGT provisions of the ITAA 1997 will apply only to the acquisition of the underlying asset and not to the right that merely facilitates the acquisition.

Application to your situation

Under the scheme operating in your state you would receive credits whenever your electricity generation exceeds your household consumption at intervals during the day as recorded by your meter. The credit will be applied to your electricity account. You do not expect that the credits will be passed on to you as a payment as you expect to use up the credits over winter.

The electricity provider pays you a premium feed in tariff per kilowatt hour for the net electricity you generate through your electricity retailer and the electricity retailer pays you an additional amount per kilowatt hour for net electricity exported.

You receive the payments as credits against your electricity bill for net electricity exported.

The scheme is connected with the electricity needs of your household as:

· The solar system is configured into the electricity system of the home.

· The solar system primarily supplies electricity to the home and satisfies the electricity consumption of the householder before exporting excess electricity to the grid.

· The size of the solar system is essentially designed principally for ordinary domestic needs.

Based on your factual circumstances, it is considered that the credits you receive on your electricity account (or payment for credits) are not ordinary income because:

· The scheme is of a private or domestic nature, this being demonstrated by the strong connection of the scheme with the electricity needs of your household (as outlined above). In particular:

· Electricity generated from the solar system is used for personal consumption in your private residence, and only the excess is transferred to the electricity grid.

· The credits you receive for excess electricity offset the cost of your electricity, effectively reducing your electricity account. You are unlikely to receive payments for excess credits on your electricity account because of your electricity usage.

· There is no realistic opportunity for you to profit from the arrangement.

Accordingly, the payments or credits you receive from the electricity retailer are part of an arrangement that is private or domestic in nature.

Consequently, all of the payments or credits received for your electricity generated and sold to the electricity grid are not considered assessable income.

As a result any expenditure incurred in producing the receipts from the sale of the electricity generated to the electricity grid is not deductible. You would not be able to claim deductions for decline in value, interest or repairs.

However, if there were an increase in the size or scale of the activity in which you are engaged, or an increase in the payments/credits received or the regularity of the payments, this might indicate the payments were ordinary income and therefore assessable.