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Ruling

Subject: Income tax treatment of Small Scale Technology Certificates

Question 1

Is the total sale price of equipment assessable income when part of the consideration is received in cash and the remainder is in the form of a right?

Answer

Yes

Question 2

Will capital gains tax (CGT) events happen in both instances where the entity creates an asset from the rights to those assets, and when it disposes those assets?

Answer

Yes

Question 3

Are the rights to receive assets from your customers treated as trading stock?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

The entity sells equipment to installers.

Consumers assign their right to an asset to the installers.

When the equipment is sold to installers, the full purchase price is charged by the entity.

The installers either pay the full amount of the invoice in cash or pay part of the purchase price in cash and the remainder of the purchase price in equivalent value of right to an asset.

The entity currently assigns market value to the right to create an asset when acquiring that right and this value is applied to closing stock.

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 Paragraph 70-10(1)(a)

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Subsection 104-25(1)

Income Tax Assessment Act 1997 Paragraph 108-5(1)(b)

Income Tax Assessment Act 1997 Subsection 118-25(1)

Income Tax Assessment Act 1936 Section 21A

Reasons for decision

Income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with income according to ordinary concepts (ordinary income)

Subsection 6-5(1) of the ITAA 1997 states your assessable income includes income according to ordinary concepts, which is called ordinary income.

Subsection 6-5(2) of the ITAA 1997 states if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Section 21A of the Income Tax Assessment Act 1936 (ITAA 1936) states where, upon any transaction, any consideration is paid or given otherwise than in cash, the money value of that consideration shall, for the purposes of this Act, be deemed to have been paid or given.

The entity sells equipment to installers. It invoices its customers (installers) for the full amount of the equipment. On occasions the installers pay the full invoice amount in cash and consequently the full amount of the invoice is assessable income. However, on other occasions the installers pay part of the full purchase price in cash and the remainder of the purchase price in equivalent value of the right to an asset. The money value of that consideration is also deemed to have been paid to the entity, therefore the total cash received and the deemed money value of consideration in the form of the right to the asset is also assessable income.

Capital gains tax

The rights to create an asset are a CGT asset as per paragraph 108-5(1)(b) of the ITAA.

Upon an installer assigning to the entity their right to create the asset under subsection 23C(2) of the Renewable Energy (Electricity) Act 2000 (REE Act), the entity acquires a CGT asset under section 109-5 of the ITAA 1997.

When the entity:

· creates an asset from the rights to the asset, CGT event C2 under subsection 104-25(1) happens as a result of those rights being discharged, and

· disposes the assets, CGT event A1 under section 104-5 happens as a result of the change in ownership occurring.

However, any capital gain or capital loss that the entity makes under these CGT events will be disregarded under subsection 118-25(1) if both the rights to an asset and the assets are trading stock.

Trading Stock

Trading stock is defined by paragraph 70-10(1)(a) of the ITAA 1997 to include anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of business.

Thus a thing can only relevantly be trading stock where it is held for sale or exchange in the ordinary course of business.

The rights to assets are held by the entity for exchange in the event of the assets being created from those rights, and will be trading stock provided that they are held in the ordinary course of the entity's business. Whilst the term 'exchange' is not defined in the ITAA 1997, the Commissioner's considers its ordinary meaning in ATO Interpretative Decision ATO ID 2009/97 to cover the situation where a thing is given up for something equivalent and the thing given up may not continue to exist.

The assets are held by the entity for sale on the open asset market, and will be trading stock provided that they are held in the ordinary course of the entity's business.

The phrase "ordinary course of business" is considered by the Commissioner in paragraph 83 of Taxation Ruling TR 2005/6 to include secondary activities carried on by a taxpayer that are a normal incident of its business, as they are a part of the normal ebb and flow of the business.

Based on the relevant facts, we accept that it is a normal incident of the entity's business of selling equipment, to acquire rights to assets from its customers (installers) and to subsequently sell the assets created from those rights.

Therefore, we accept that both the rights to assets held for exchange and the assets held for sale are trading stock of the entity.