Edited version of your private ruling

Authorisation Number: 1012442876457

Ruling

Subject: Solar panels

Question 1

Are the payments received from your relation for the solar power generating system on their home assessable income?

Answer

No.

Question 2

Are you entitled to a deduction for the costs associated with the solar system?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

You wish to install a 5kw solar panel system on a relation's home.

You will then rent the solar panels to your relation.

A rental agreement will be drawn up to reflect the arrangement. Under the agreement you will pay for the installation and maintenance costs.

You will charge an amount per kw that the solar panels produce. This amount will be paid quarterly after the power bill is issued. This rate was set as being less than the current electricity charge rate.

You estimate the quarterly income will be less than $500.

The solar bonus feed in tariff will be paid to your relation.

You intend to purchase the property eventually from your relation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Whether the energy payments received are assessable as ordinary income depends upon a close examination of all relevant circumstances.

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.

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

In determining whether the receipts are assessable income, consideration needs to be given as to whether the receipts indicate an activity that is more than private or domestic in nature. The following factors are relevant:

· the size of the solar system,

· the terms of the arrangement with the electricity retailer,

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

· the regularity of payments received such that they can be relied upon.

Taxation Ruling IT 2167 examines the situation where a property is let to relatives and non arms length transactions. Although the property is not being rented to your parents, the principles outlined in the ruling are relevant in your circumstances. Where a property is let to relatives, the essential question is whether the arrangements are consistent with normal commercial practices.

The test that should be considered to show whether the arrangement is at arms length, is whether a reasonable person with no relationship to either party would enter into this arrangement using exactly the same terms and conditions. If the answer is yes, then it would be an arms length arrangement.

Whether parties are at arm's length in relation to solar panels installed on a property is a question of fact.

It is questionable in this case whether you would enter into such an arrangement with an unrelated party. Installing and attaching an asset to a home you do not own is not a normal commercial arrangement. Furthermore the rate you would be charging is less than the commercial rate being charged by the electricity supplier and is less than half of the tariff paid to your relation. It is considered that the arrangement is not at arm's length.

Although you may receive a payment each quarter and own the home in the future, based on your circumstances, it is considered that the payments are largely private and domestic in nature and not assessable income. This is based on the following:

· The system is installed on a home, which you do not own.

· The amount of income to be received is not considered to be substantial.

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

The fact that a written agreement will exist does not change the arrangement to being commercially realistic.

As the system is regarded as private in nature and not used to produce assessable income, no deduction is allowed for the associated costs of the system. Therefore any interest expenses incurred in purchasing the solar system are not an allowable deduction. Similarly no deduction is allowed for the depreciation or other associated costs.