Edited version of your written advice

Authorisation Number: 1012712320980

Ruling

Subject: Small scale technology certificates

Question 1

Is the payment from the sale of Small Scale Technology Certificate (STCs) assessable as ordinary income?

Answer

No

Question 2

Will the sale of STCs result in a capital gain?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

You own a property.

You built a private residence on the property and also operate a business activity on the property.

Due to the location of the property, you are not connected to any power grid.

Accordingly, you installed a large number of solar panels and batteries across nearly the entire roof space of your residence.

You have only claimed X% of the capitalised costs on installing the solar system on your tax returns relative to the amount of generated power that is used in your business activities.

You were eligible to create Small Scale Technology Certificates (STCs) as a result of installing the solar system.

You created STCs that were sold through an agent.

You have not derived any other income as a result of installing your solar system.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 Section 108-5

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

Reasons for decision

Ordinary income

Subsection 6-5(1) of the ITAA 1997 provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). However, as there is no definition of ordinary income in income tax legislation, it is necessary to apply principles developed by the courts to the facts of a particular case.

Whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient.

Characteristics of ordinary income that have evolved from case law include receipts that:

• are earned

• are expected

• are relied upon, and

• have an element of periodicity, recurrence or regularity.

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

Subsection 6-5(2) of the ITAA 1997 states that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. It does not operate to include in a taxpayer's assessable income amounts of a capital nature.

In your case, you received proceeds from the sale of STCs. The payment is not assessable as ordinary income in your hands as it was not paid as a result of any employment, services or business carried on by you and it does not have the characteristics normally associated with ordinary income such as periodicity and reliance on the payments to meet regular expenditure.

Payment for the loss of a capital asset will be capital in nature. Accordingly, payments you received for the sale of the STCs are capital in nature and do not constitute assessable income under section 6-5 of the ITAA 1997.

Capital gains tax

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 a STC 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 arises under the Renewable Energy (Electricity) Act 2000 (Taxation Determination TD 1999/77).

The right to create the STC can be assigned to an agent, or the purchaser of the eligible solar system can create the STC independently. The STC 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.

In your case you have purchased a solar system. The solar system was eligible for the purposes of creating STCs. You acquired a right to create STCs as a result of installing your solar system. You created the STCs and sold them to another entity. The sale of the STCs caused CGT event A1 to happen. You will make a capital gain if the proceeds from the disposal are more than the assets cost base.