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Ruling

Subject: Income from solar panels

Question 1

Are there any consequences under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for you, if instead of assigning your right to Renewable Energy Certificates (RECs) to the installer in the acquisition of the solar system, you register and dispose of your RECs separately?

Answer

Yes.

Question 2

Would payments received as feed-in tariffs from your electricity retailer for the generation of electricity from a photovoltaic solar system be assessable income under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 3

Can a government orgainisation treat proceeds from the sale of RECs or generation of energy through the NSW State government's 'feed-in tariff' system as income?

Answer

Decline to rule.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You have installed a 10.8 Kilowatt solar system on your property. This system cost you a considerable amount to install.

This property is used partly for income producing purposes, and is owned solely by you.

You receive a cents per kW hour rate from your State Government and from your electricity retailer. You receive these payments as quarterly cheques.

You received Renewable Energy Credits, which you retained and sold separately.

There is no first element cost base for the acquisition of the REC because you have paid nothing to acquire them.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subdivision 110-A

Reasons for decision

Capital Gains Tax sale of Renewable Energy Certificates (RECS)

A capital gains tax (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.

The right to create an REC which attaches to the purchase of eligible solar systems is a tradeable statutory right and as such is a CGT asset as defined in subsection 108-5(1) of the ITAA 1997.

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. The REC can then be traded for financial return.

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 under 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.

Sale of RECs

You have purchased a solar system for your private residence. The solar system was eligible for the purposes of creating RECs. You created the RECs and you disposed of them separately.

When you purchased the solar system, you acquired two separate assets being the solar system and the statutory right to create RECs.

When you created the RECs and sold them a CGT event A1 occurred at that time.

You did not pay an amount to acquire the right to create the RECs and as such, there is no amount for the first element of your cost base.

Any capital gain or loss should be calculated by subtracting your cost base from your capital proceeds.

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; and

· 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; and

· 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 are assessable income the following are important:

· the size of the solar system and its generation capability

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

· 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

· 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, and

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

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. After a period, you may be able to make arrangements with the retailer to be paid out for any remaining credits on your account.

The scheme is connected with the electricity needs of the householder 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.

However based on your factual circumstances, it is considered that the credits you would receive on your electricity account (or payment for credits) are ordinary income because the scheme is more than private or domestic in nature. This is because:

· the size of the system you have chosen to install is quite sizeable and has a capacity in excess of the needs of a typical household

· the amount of electricity generated by the system is significantly greater than the domestic consumption requirements of your household. In particular:

You expect to generate excess electricity from the solar system. Only a portion will be used for personal consumption in your private residence, the excess will be transferred to the electricity grid.

The credits you would receive for excess electricity do more than offset the cost of your electricity and represent a return on investment for the system.

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

· your property is used partly for income producing purposes

Consequently, any credits (and payment of credits) received for the electricity generated by the solar system and sold to the electricity grid would be considered to be assessable income.

Decline to rule on government agency matters

The Commissioner can only provide a private ruling in response to a valid application. For the following reason we will not be making your private ruling in respect of the question raised in your application.

A private ruling is a written expression of the Commissioner's opinion of the way in which a relevant provision applies, or would apply, to the entity whose tax affairs are the subject of the ruling, in relation to the specified scheme.

Provisions that are relevant for rulings are provisions about certain laws administered by the Commissioner.

Your application asks for a ruling about whether government agency would treat proceeds from the sale of RECs and payments from feed-in tariffs as income. We cannot provide a ruling about this matter as it does not involve a law administered by the Commissioner.

We suggest you contact the government agency to find out if they would treat these amounts as income.