Edited version of private advice

Authorisation Number: 1052172333876

Date of advice: 22 September 2023

Ruling

Subject: Decline in value - temporary full expensing

Question 1

Is the Solar P & E a depreciating asset for which the Taxpayer can claim deductions under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the temporary full expensing (TFE) rules in Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A) apply to modify the decline in value of the Solar P & E acquired and installed ready for use for a taxable purpose in the 2023 income year?

Answer

Yes

Question 3

Is the grant of a right to create Renewable Energy Certificates arising through the operation of the Renewable Energy (Electricity) Act 2000 (REE Act) an assessable recoupment for the purposes of section 20-20 of the ITAA 1997?

Answer

Yes

Question 4

Is the assessable recoupment referred to in question 3 of this ruling limited to the corresponding deduction for decline in value of the Solar P & E?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2023

Relevant facts and circumstances

The Taxpayer is the head company of an income tax consolidated group (the Group). The accounting period for the Group ends on 30 June.

The Group has historically operated a traditional solar panel retail and installation business throughout Australia.

Under a new business strategy, the Group will acquire and install solar panels and batteries across Australian properties and then enter into agreements with energy retailers to offer energy plans to energy customers that include solar and battery systems (Solar P & E) installed by the Group without upfront capital cost or finance from the household or business.

For financing purposes, the Solar P & E will be legally owned in separate legal entities. All asset-holding entities will be members of the Group.

Under the arrangement with the energy retailers, the Group will retain ownership of the Solar P & E for the duration of their life, lease the Solar P & E to the energy retailers for a recurring lease payment and may terminate an arrangement with the retailer in respect of a particular Solar P & E at any point where the retailer ceases to be the energy retailer of the household or business. In such cases, the Solar P & E will remain at the premises and the Group will take steps to enter into a fresh arrangement with an incumbent energy retailer.

The Group will initially fund the acquisition of the Solar P & E from its working capital and may also fund the expansion of its Solar P & E by borrowing funds under a secured debt facility.

Management elected to separate legal ownership of assets from its day-to-day operations so that it would be easier to manage the inventory and procurement process and also make it easy to offer the assets as security in any asset funding arrangements.

Solar P & E will be purchased according to site specifications and requirements.

Each Solar P & E unit may cost between $7,000 and $15,000, including the cost of installation.

The Solar P & E is not an item of trading stock held by the Group (or any member of the Group).

Small-scale Technology and Renewable Energy Certificates

The Solar P & E is an eligible small generation unit (SGU) for the purposes of the REE Act.

Under the REE Act, eligible parties, including owners of SGUs can create certificates known as Small-scale Technology Certificates (STCs) or Renewable Energy Certificates (RECs).

Upon ownership and installation of a Solar P & E, a statutory right arises under the REE Act entitling the owner to create the certificates.

The Group entities will obtain a financial benefit from the right to create certificates by choosing to either:

(a)          enter into an agreement with an agent (this will often be the wholesaler of the Solar P & E) to assign their right to create certificates to the agent in exchange for a financial benefit (this will often be a reduction in the amount the Group pays for the purchase and installation of the solar system - the reduction reflecting the value of the right to create certificates assigned to the wholesaler); or

(b)          become registered in the REC Registry and create the certificates themselves for later sale at any time during the life of the REC scheme. The Group gains a financial benefit from the sale of the certificates.

Small business entity

The aggregated turnover for the Taxpayer was materially less than $10million in the income years ended 30 June 2022 and 2023.

For the purposes of the eligible entity test under section 40-155 of the IT(TP)A, the Taxpayer satisfies the definition of 'small business entity' in Subdivision 328-C of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 former paragraph 26(j)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-10

Income Tax Assessment Act 1997 Subdivision 20-A

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 subsection 20-20(2)

Income Tax Assessment Act 1997 subsection 20-25(1)

Income Tax Assessment Act 1997 paragraph 20-25(1)(b)

Income Tax Assessment Act 1997 section 20-35

Income Tax Assessment Act 1997 subsection 20-35(1)

Income Tax Assessment Act 1997 subsection 20-35(2)

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 subsection 40-25(1)

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 subsection 40-30(1)

Income Tax Assessment Act 1997 subsection 40-30(2)

Income Tax Assessment Act 1997 subsection 40-35(7)

Income Tax Assessment Act 1997 section 40-40

Income Tax Assessment Act 1997 section 40-45

Income Tax Assessment Act 1997 section 40-295

Income Tax Assessment Act 1997 Subdivision 40-E

Income Tax Assessment Act 1997 Subdivision 40-F

Income Tax Assessment Act 1997 Subdivision 328-C

Income Tax Assessment Act 1997 section 701-1

Income Tax (Transitional Provisions) Act 1997 Subdivision 40-BB

Income Tax (Transitional Provisions) Act 1997 section 40-140

Income Tax (Transitional Provisions) Act 1997 section 40-145

Income Tax (Transitional Provisions) Act 1997 section 40-150

Income Tax (Transitional Provisions) Act 1997 subsection 40-150(1)

Income Tax (Transitional Provisions) Act 1997 subsection 40-150(2)

Income Tax (Transitional Provisions) Act 1997 subsection 40-150(3)

Income Tax (Transitional Provisions) Act 1997 subsection 40-150(4)

Income Tax (Transitional Provisions) Act 1997 section 40-155

Income Tax (Transitional Provisions) Act 1997 paragraph 40-155(a)

Income Tax (Transitional Provisions) Act 1997 section 40-157

Income Tax (Transitional Provisions) Act 1997 section 40-160

Income Tax (Transitional Provisions) Act 1997 subsection 40-160(1)

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(1)(a)

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(1)(b)

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(1)(c)

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(1)(d)

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(1)(e)

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(1)(f)

Income Tax (Transitional Provisions) Act 1997 subsection 40-160(2)

Income Tax (Transitional Provisions) Act 1997 subsection 40-160(3)

Income Tax (Transitional Provisions) Act 1997 section 40-190

Renewable Energy (Electricity) Act 2000

Reasons for decision

All subsequent legislative references are to the ITAA 1997, unless otherwise indicated.

Question 1

Summary

The Solar P & E is a depreciating asset for which the Taxpayer can claim deductions under Division 40.

Detailed reasoning

Section 40-25 allows deductions for the decline in value of depreciating assets to the extent the asset's decline in value is attributable to its use, or it being installed ready for use, for a taxable purpose (defined in subsection 40-35(7) to include a purpose of producing assessable income).

Depreciating asset is defined in section 40-30. Subsection 40-30(1) provides that a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. However, the definition excludes land, items of trading stock and intangible assets (other than intangible assets covered by subsection 40-30(2)).

The Commissioner makes a determination of the effective life of a depreciating asset by estimating the period (in years, including fractions of years) the asset can be used by any entity for a specified purpose. In Taxation Ruling TR 2022/1[1], the Commissioner has determined the effective life of Photovoltaic electricity generating system assets (incorporating photovoltaic panels, mounting, frames and inverters) to be 20 years.[2]

The Solar P & E falls within the category of Photovoltaic electricity generating system assets (incorporating photovoltaic panels, mounting, frames and inverters), and therefore will have a limited effective life of 20 years.

Paragraph 1.14 of the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Act 2001 states:

...Depreciating assets may hold their value for a time, or even increase it for a time. The test of a depreciating asset requires only that the asset lose its value overall (or down to no more than scrap value) by the end of its effective life. From that effective life, the statutory methods produce a statutory decline from time to time, which is not required to be correlated to an expected decline in market value with the same timing. The balancing adjustment rules bring the adjustable value, that is the cost as declined by statute from time to time, back into line with value when a balancing adjustment event occurs - essentially when a taxpayer stops holding the asset.

The Solar P & E can be reasonably expected to lose its value by the end of its effective life which is 20 years, and does not constitute land, an item of trading stock or an intangible asset. It is therefore a depreciating asset under section 40-30.

The Taxpayer is able to claim a deduction pursuant to subsection 40-25(1) for an amount equal to the decline in value for an income year (as worked out under Division 40) of the Solar P & E that it holds for any time during the year. As the Solar P & E will be held for a taxable purpose (i.e. a purpose of producing assessable income) and will not be held for a purpose other than a taxable purpose, the deduction worked out under Division 40 need not be reduced.

Question 2

Summary

The TFE rules in Subdivision 40-BB of the IT(TP)A will apply to modify the decline in value of the Solar P & E

acquired and installed ready for use for a taxable purpose in the 2023 income year.

Detailed reasoning

For the purposes of Division 40, the TFE rules in Subdivision 40-BB of the IT(TP)A modify the decline in value of qualifying depreciating assets held for an income year by allowing eligible entities to claim an upfront deduction for the cost of those depreciating assets (and relevant additional expenditure).

Where the provisions of Subdivision 40-BB of the IT(TP)A apply to work out the decline in value of a depreciating asset held for an income year (worked out under subsection 40-160(3) of the IT(TP)A), no other provision in the ITAA 1997 (including Division 40) or the IT(TP)A apply to work out that decline in value (section 40-145 of the IT(TP)A).

All relevant conditions for TFE, as set out in section 40-160 of the IT(TP)A, are met by the Taxpayer in respect of Solar P & E acquired and installed ready for use for a taxable purpose in the 2023 income year. Each of the relevant conditions are considered in the following table.

TFE conditions: section 40-160

None of the additional exclusions in subsection 40-160(2) of the IT(TP)A are relevant to the Taxpayer.

Question 3

Summary

The grant of a right to create RECs arising through the operation of the REE Act is an assessable recoupment for the purposes of subsection 20-20(2).

Detailed reasoning

Under Subdivision 20-A, certain amounts received by way of insurance, indemnity or other recoupment are assessable income if amounts are not income under ordinary concepts or assessable income under another provision outside Subdivision 20-A.

The grant of a right to create RECs under the REE Act is not included in the assessable income of the Taxpayer under section 6-5 (as ordinary income) or section 15-10 (as a bounty or subsidy received in relation to carrying on a business).

Subsection 20-20(2) provides that an amount you have received as recoupment of a loss or outgoing is an assessable recoupment if:

(a) you received the amount by way of insurance or indemnity; and

(b) you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act.

In order to determine if the Taxpayer's right to create RECs is an assessable recoupment it must first be considered whether the right acquired is a recoupment. The meaning of 'recoupment' is given by subsection 20-25(1). Under paragraph 20-25(1)(b), a recoupment of a loss or outgoing includes a grant in respect of the loss or outgoing.

A grant is not a defined term and therefore must be given its ordinary meaning. In Taxation Ruling TR 2006/3[3]the term 'grant' is defined to mean that which is granted, as a privilege or right, including a sum of money by government to encourage business. TR 2006/3 states at paragraph 97 that:

... It is essential to determine what the grant is actually for. The question as to the nature and quality of any payment must be determined by reference to the agreement or the terms which created in the recipient the right to the government grant...

The Taxpayer's right to create certificates under the REE Act is intended to provide the Taxpayer with a financial benefit whether they assign their rights to create certificates or create the certificates themselves. In this sense, the scheme effectively provides a financial incentive to the Taxpayer to purchase the Solar P & E. Given this intention and the objectives of the Federal Government's Renewable Energy Target scheme, the right to create certificates arising under the REE Act constitutes a grant. This is because the grant of the right to create certificates provides a financial benefit in kind to the Taxpayer under the scheme.

The subject of the grant, being the right to create certificates, is dependent on ownership and installation of the Solar P & E. The Taxpayer incurs an outgoing to own and install the Solar P & E. Upon ownership and installation of the Solar P & E, the Taxpayer is granted the right to create certificates. The entitlement to the grant is therefore a result of the outgoing to acquire and install the Solar P & E, meaning a discernible, rational and material link is present between the grant and the outgoing such that the grant is 'in respect of' the loss or outgoing for the Solar P & E for the purposes of paragraph 20-25(1)(b).

For the recoupment of the loss or outgoing to be an assessable recoupment under subsection 20-20(2), the amount the Taxpayer receives must be by way of insurance or indemnity. The recoupment will not be received by the Taxpayer by way of insurance.

Indemnity is not a defined term and therefore must be given its ordinary meaning. By reference to dictionary definitions and the case of Batchelor v Federal Commissioner of Taxation (2014) 219 FCR 453, the Federal Court in Denmark Community Windfarm Ltd v. Federal Commissioner of Taxation 2018 ATC 20-646 noted that the ordinary meaning of the word 'indemnity' includes 'a sum of money paid to compensate a person for liability, loss or expense incurred by the person' or 'compensation for damage or loss sustained' and 'something paid by way of such compensation'.

The issue of whether an amount is received by way of indemnity for the purposes of the predecessor provision to subsection 20-20(2) (paragraph 26(j) of the Income Tax Assessment Act 1936) has been considered in a number of cases.

Those cases make it clear that an amount received 'by way of indemnity' is not restricted to amounts received under a contract of indemnity, and would include a receipt pursuant to an antecedent obligation (whether by virtue of a contract, statute or a breach of some common law duty of care) to make good or compensate for a loss which arises after the obligation comes into existence.

The granting of the right to the Taxpayer to create certificates satisfies the antecedent statutory obligation arising under the REE Act to partially compensate the Taxpayer for the outgoing to own and install the Solar P & E. That being so, the value of the right granted is an amount received by way of indemnity.

As the Taxpayer can deduct an amount for the loss or outgoing of the Solar P & E under Division 40, the recoupment, being the grant of the right to create certificates, will be an assessable recoupment under subsection 20-20(2).

Question 4

Summary

The assessable recoupment referred to in question 3 of this ruling will be limited to the corresponding deduction for decline in value of the Solar P & E.

Detailed reasoning

Section 20-35 sets out the amount to be included in assessable income where the assessable recoupment relates to a loss or outgoing that is deductible in a single income year.

Subsection 20-35(1) states:

Your assessable income includes an assessable recoupment of a loss or outgoing if:

(a)          you can deduct the whole of the loss or outgoing for the current year; or

(b)          you have deducted or can deduct the whole of the loss or outgoing for an earlier income year.

However, under subsection 20-35(2) the total of all amounts that subsection (1) includes in your assessable income for one or more income years in respect of a loss or outgoing cannot exceed the amount of the loss or outgoing.

Any assessable recoupment received by the Taxpayer in accordance with question 3 of this ruling will be included in the assessable income of the Taxpayer pursuant to subsection 20-35(1) as the Taxpayer can deduct the whole of the loss or outgoing for the current year or would have deducted the whole of the loss or outgoing for an earlier income year.

The amount of the assessable recoupment included in the Taxpayer's assessable income pursuant to subsection 20-35(1) in respect of that loss or outgoing cannot exceed the amount of the loss or outgoing pursuant to subsection 20-35(2),and will align with the amount that can be deducted under Division 40.

[1] Income tax: effective life of depreciating assets (applicable from 1 July 2022).

[2] See TR 2022/1 Table A Industry Category 'Electricity Supply (26110 to 26400)', at page 177.

[3] Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business.