Edited version of your written advice

Authorisation Number: 1012669171342

Ruling

Subject: Solar panels

Question 1

Are the amounts received from the electricity provider assessable income?

Answer

Yes.

Question 2

If the amount is not recognised as income, is the gross cost of electricity recognised as a deduction?

Answer

Not applicable.

Question 3

Are you entitled to a deduction for depreciation in relation to the solar system?

Answer

Yes.

Question 4

Are you entitled to carry forward losses to offset income earned in future years?

Answer

No.

This ruling applies for the following periods

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on

1 July 2012

Relevant facts and circumstances

You and your spouse installed a solar system on your main residence.

An amount was paid for the system, and then you and your spouse were entitled to a rebate from the Government.

You and your spouse began renting out this property to your relative and a number of other tenants. The arrangement for rent includes the provision of utilities.

You and your spouse have received amounts from the electricity provider.

As the rent charged is less than market value, you and your spouse have not claimed deductions in excess of the rent received.

It is likely that in future years the property will make a profit.

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 8-1

Reasons for decision

Question 1

Under section 6-5 of the Income Tax Assessment Act 1997 (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.

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.

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. In addition, receipts from property or investments that are on commercial terms and/or that indicate an intention to make a profit from an activity are also likely to be ordinary income.

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.

In this case, you and your spouse rent a property to your relative and other tenants on a non-commercial basis. You and your spouse have received amounts from the electricity provider under. There is a realistic opportunity for you and your spouse to profit from the arrangement. Consequently, any credits (and payment of credits) received will be considered assessable income.

Question 2

Given the payments received from the electricity provider are assessable, this question is not applicable.

Question 3

For assets that are capital in nature, you cannot claim deductions under section 8-1 of the ITAA 1997. Instead, under the capital allowances system you may be able to claim deductions for the decline in value of the cost of a capital asset used in gaining your assessable income. You can deduct the decline in value of the capital cost of your solar system where it is used in gaining your assessable income.

Under section 40-25 of the ITAA 1997 you can deduct an amount equal to the decline in value for an income year of a depreciating asset that you hold. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time that it is used.

You must reduce your deduction by the part of the asset's decline in value that is attributable to your use of the asset for a purpose other than a taxable purpose.

A solar system comprises modules of photovoltaic cells, a roof mounting frame, various fixings, electrical wiring and conduits and inverters. The entire solar system is considered to be a single depreciating asset.

Taxation Ruling TR 2010/2 Income tax: effective life of depreciating assets provides a table listing the effective life of depreciating assets. In accordance with TR 2010/2 the effective life of solar power generating system assets on residential property is 20 years.

The cost of the solar system is, generally, amounts you are taken to have paid to hold the solar system, such as the purchase price including its installation and connection costs. It is worked out as at the time you begin to hold the solar system, that is, when it is installed and ready for use. It also generally includes amounts you pay overtime to maintain its condition.

In this case, you and your spouse installed a solar system on a property. This property is being used to produce income. Therefore you and your spouse are entitled to a deduction for depreciation. For more information on determining the decline in value of your solar system, refer to the Guide to depreciating assets 2009-10.

Question 4

If you let a property, or part of a property, at less than normal commercial rates, this may limit the amount of deductions you can claim.

Example 7: Renting to a family member

Mr and Mrs Hitchman were charging their previous Queensland tenants the normal commercial rate of rent ($180 per week). They allowed their son, Tim, to live in the property at a nominal rent of $40 per week. Tim lived in the property for four weeks. When he moved out, the Hitchmans advertised for tenants.

Although Tim was paying rent to the Hitchmans, the arrangement was not based on normal commercial rates. As a result, the Hitchmans cannot claim a deduction for the total rental property expenses for the period Tim was living in the property. Generally, a deduction can be claimed for rental property expenses up to the amount of rental income received from this type of non-commercial arrangement.

Assuming that during the four weeks of Tim's residence the Hitchmans incurred rental expenses of more than $160, these deductions would be limited to $160 in total ($40 multiplied by 4 weeks).

If Tim had been living in the house rent free, the Hitchmans would not have been able to claim any deductions for the time he was living in the property.

In this case, the property is rented to your relative on a non-commercial basis. As the deductions are limited to the amount of rental income received there will be no loss to carry forward to future income years.