Private ruling: Income - other - solar
Ruling period: 1 July 2010 - 30 June 2011 | 1 July 2011 - 30 June 2012 | 1 July 2012 - 30 June 2013 | 1 July 2013 - 30 June 2014
Date scheme commenced: 1 July 2010

Ruling: Q1: 1. Would the generation of electricity from a photovoltaic solar system on your private residence amount to the carrying on of a business? | A4: 

Relevant facts and circumstances: You intend to acquire install a large photovoltaic system (the system) on your private residence. The system will require a power upgrade to your home. You will enter into a net solar feed-in tariff scheme. Under the scheme, owners of eligible renewable energy systems are paid per kilowatt hour for energy exported to the grid that is in excess of the household consumption at the time of generation as recorded by the meter. The tariff is applied on net electricity exported to the grid. You can receive this as a separate payment either by cheque or direct deposit into a bank account from your energy retailer or as a credit against your electricity account. The frequency of the payment will depend on your arrangement with your electricity retailer, but it is expected that your electricity account will be credited quarterly. The scheme will operate for a number of years. You provided an estimate of the maximum payment you expect to receive per year from your electricity retailer through the feed-in tariff rate.

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 6-10 | Income Tax Assessment Act 1997 Section 20-25 | Income Tax Assessment Act 1997 Subsection 20-25(1) | Income Tax Assessment Act 1997 Paragraph 20-25(1)(b) | Income Tax Assessment Act 1997 Subsection 20-20(2) | Income Tax Assessment Act 1997 Section 20-40 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 43-10 | Income Tax Assessment Act 1997 Subsection 43-20(2) | Income Tax Assessment Act 1997 Section 43-170

Reasons for decision: Summary: Based on the facts provided, you would not be considered to be carrying on a business by receiving payments or credits for the export of excess electricity generated from the photovoltaic solar system. | Detailed Reasoning - Carrying on a business: The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators to determine the matter, these indicators are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production . These indicators are applicable to business activity generally, relevant indicators include: · the size, scale and permanency of the activity. · whether there is repetition and regularity of the activity, and · whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business. | Detailed Reasoning - Size, scale and permanency of the activity: The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However the size or scale of the activity is not a determinative test and a person may carry on a business though in a small way. In your case the activity involves the installation and operation of the system. Once the system is installed no more work other than occasional maintenance is required to operate it. The size and scale of the operation is very small. A smaller scale of activity usually detracts from the commercial purpose or character of the activities, for example the activity may more properly be described as the management of a capital investment rather than the carrying on of a business. This factor alone is not conclusive. The smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business. | Detailed Reasoning - Whether there is repetition and regularity of the activity: It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. TR 97/11 refers to Hope v. The Council of the City of Bathurst (1980) 144 CLR 1, 80 ATC 4386, (1980) 12 ATR 231 where 'the transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business'. In your case the measurement of and payments for the electricity generation are the responsibility of the energy retailer. There is little repetition and regularity in terms of action required for the activity. This factor must be considered together with the other relevant indicators. | Detailed Reasoning - Whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business: The activities of a taxpayer are more likely to be a business when carried on in a manner similar to that in which other participants in the same industry carry on their activities. The factors below, set out at paragraph 64 of TR 97/11, are used to compare the characteristics of others engaged in the same type of business: · the volume of sales, if there is a small number of sales it is less likely that a business is being carried on · the types of customers the taxpayer sells their product to - wholesalers, retailers, the public at large, or friends or relatives - and the manner in which this marketing takes place; · the sort of expenses incurred by the taxpayer; · the amount invested in capital items. You expect to generate recurring receipts from the energy retailer. The major expense you will incur is the cost and installation of the system. There will be no significant operating costs. You will have a single customer. There would be a contract agreement in place, however, you would not be required to meet or maintain a certain supply level, rather you would merely sell back the amount of electricity the system generates that is in excess of domestic requirements. A business of electricity generation would usually be expected to produce and maintain certain amounts of electricity and meet certain levels of demand. It would also require a larger scale of production to ensure they were able to manage demand levels. It could not be said that your activity is alike to an ordinary business of solar electricity generation. From a consideration of the factors above the activity would not amount to the carrying on of a business. The size and scale of the activity is small, there is little repetition and regularity in the activity and the activity when compared to an ordinary business of electricity generation could not be said to be similar. As a result you would not be considered to be carrying on a business by receiving payments for the export of electricity generated from a photovoltaic solar system. | Summary: Based on the configuration of the solar system installed, the arrangement with your energy supplier/retailer and your estimated feed-in tariff payments, the arrangement is other than private or domestic in nature. That being so: · the payments you would receive for the generation of electricity from the solar system are ordinary assessable income under section 6-5 of the ITAA 1997, · the costs you would incur in relation to the generation of electricity from the solar system are deductible under section 8-1 of the ITAA 1997 to the extent that they are not capital or private or domestic in nature, · you would be able to claim deductions in respect of the decline in value of the capital cost of the system because the solar system would be used to produce assessable income, and · the value of the right granted to you to create RECs is an assessable recoupment and must also be included in your assessable income. Any income generated from the solar system would be assessable to the legal owner of the system. | Detailed Reasoning - Assessable income: Under section 6-5 of the 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. The tax legislation does not provide specific guidance on the meaning of income according to ordinary concepts. However, a substantial body of case law exists which identifies likely characteristics. 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. In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1, 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 recipient's purpose in engaging in the transaction, venture or business. Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. The whole of the circumstances must be considered. 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 this instance, it needs to be determined whether the payments or credits received in return for transfer of electricity to the grid are income because of the nature and the circumstances of the receipt. 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. A solar system is considered to be property and receipts received in connection with it are potentially assessable income. In determining whether or not the payments are assessable income the following are important: · the terms of the arrangement with the electricity retailer and in particular whether the solar system: o is configured into the electricity system of the home - the solar system first supplies electricity to the home to satisfy household electricity consumption before exporting excess electricity to the grid (referred to as a 'net' scheme), or o exports all electricity to the grid (referred to as a 'gross' scheme). · the feed-in tariff payments and whether they are considered to represent a return on your investment in the solar system · whether there is a realistic opportunity for you to profit from the arrangement, and · the regularity of payments / credits received from the feed-in tariffs such that they can be relied upon. Amounts that you may receive as a recoupment of a deductible expense (that is the financial benefit arising from the RECs which offset the cost of the system) may also be included in your assessable income. This is explained further below. | Detailed Reasoning - Deductions: The general provision that determines the deductibility of expenses is section 8-1 of the ITAA 1997. Under section 8-1 of the ITAA 1997 you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. However you cannot deduct a loss or outgoing that is capital, private or domestic in nature. Other provisions in the ITAA 1997 contain specific deductions which section 8-5 allows you to deduct. Examples of specific deductions include repairs under section 25-10 and deductions for the decline in value of depreciating assets under section 40-25. | Detailed Reasoning - Interest: Under section 8-1 of the ITAA 1997 you can deduct interest expenses you incurred in financing the acquisition and installation of the solar system on your private residence where you incur the expense in deriving assessable income from the system. However, you cannot deduct interest expenses relating to your private residence (such as in relation to a home loan) on which the system would be fixed. Expenses associated with your home are usually of a private or domestic nature and do not qualify as deductions for taxation purposes. | Detailed Reasoning - Repairs and Maintenance: Under section 25-10 of the ITAA 1997 you can deduct expenditure you incur for repairs and maintenance to the solar system as you incur the expense in deriving assessable income from the system. A repair involves restoring the efficiency of function of the property being repaired without changing its character. A repair may improve to some extent the condition the property was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997. In addition, under subsection 25-10(3) expenditure incurred for repairs is not deductible if it is of a capital nature. For further information refer to Taxation Ruling TR 97/23 Income tax: deductions for repairs . | Detailed Reasoning - Decline in value: 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 over time to maintain its condition. For more information on determining the decline in value of your solar system, refer to the Guide to depreciating assets 2009-10. | Detailed Reasoning - Apportionment: A net feed in tariff scheme is configured into the electricity system of the home - the solar system first supplies electricity to the home to satisfy household electricity consumption before exporting excess electricity to the grid. Where income received under a net feed in tariff scheme is assessable, any expenses incurred in generating the assessable income will need to be apportioned to take into account expenses incurred for electricity generated for private and domestic purposes. One method to apportion would be to reduce the deduction by the percentage of electricity consumed by the household divided by total electricity generated by the system. | Detailed Reasoning - Assessable recoupments: Under Subdivision 20-A of the ITAA 1997, your assessable income may include an amount you receive by way of insurance, indemnity or other recoupment if it is for a deductible expense and it is not otherwise assessable income. This provision needs to be considered where your solar system produces assessable income and you incur a loss or outgoing (that is, expense) to install and own that system. Under the Renewable Energy (Electricity) Act 2000 (REE Act), if you install an eligible solar system on your private residence, you have a statutory right to create RECs after the system is installed. You can assign the right to another person, for example the installer of the system, or you may create the RECs and sell them on the market. Assigning the right to create RECs to another entity (such as the installer) is considered to result in a financial benefit to you. The financial benefit is the reduction in the amount you paid for the purchase and installation of the solar system. You incur a loss or outgoing when you acquire and install your solar system. The RECs are effectively a financial incentive given to you to purchase the system. The amounts received in respect of the RECs are considered to be an indemnity (and therefore a recoupment) as they satisfy a statutory obligation under the REE Act to partially compensate you for the cost to install and own the solar system. The recouped amount is an assessable recoupment where you can deduct an amount for the loss or outgoing for the solar system being the decline in value deduction under Division 40 as outlined above. Where the cost of the solar system is deductible under Division 40 of the ITAA 1997 over several income years, the total assessable recoupment included in a particular year is the amount of the deduction for the loss or outgoing in that year. Any part of the assessable recoupment that is not included in assessable income in the year it is received is assessable in later income years. For example, on 1 July 2009 Wilma installed a 10 kilowatt solar system costing $60,000 on the roof of her private residence. She received the right to create RECs to the value of $12,000. She assigned these to the installer, reducing the price she paid for the solar system to $48,000. Wilma claims decline in value of her solar system using the prime cost method and an effective life of 20 years. She can claim a deduction for decline in value of the system of $3,000 for the 2009-10 income year and each of the following 19 income years (being $60,000 x 100%/20). As Wilma received the right to RECs to the value of $12,000, this is considered to be an assessable recoupment. As her deduction for decline in value of the system is $3,000 each year, she will include an assessable recoupment of $3,000 each year in her assessable income for the first four income years. Taxation Determination TD 2006/31 deals with recoupments for rebates received for the purchase of a depreciating asset for use in a rental property. It provides further guidance on how the recoupment provisions operate in relation to depreciating assets. In addition ATO ID 2010/218 deals with when the right to create RECs is an assessable recoupment, again in the context of rental properties. | Detailed Reasoning - Application to your situation: Under the scheme operating in Queensland you would receive credits whenever your electricity generation exceeds your household consumption at intervals during the day as recorded by your meter. The credit will be applied to your electricity account. You can make arrangements with the retailer to receive a payment of the credit. Based on your factual circumstances, it is considered that the credits you would receive on your electricity account (or payment for credits) are ordinary income because: · The scheme is more than private or domestic nature, this being demonstrated by the excess the system will provide over your domestic consumption requirements of your household. In particular: o You expect to generate excess electricity from the solar system, only one of the three phases will connect to the household and be used for personal consumption in your private residence, the excess will be transferred to the electricity grid. o The credits you would receive for excess electricity would offset the cost of your electricity and in addition would provide receipts that represent a return on investment for the system. · There is a realistic opportunity for you to profit from the arrangement. Consequently, any credits (and payment of credits) received for your electricity generated and sold to the electricity grid would be considered to be assessable income. However, if there were a decrease in the size or scale of the activity in which you engaged in, or a decrease in the payments / credits received or the regularity of the payments, this might indicate the payments were not ordinary income and therefore no longer assessable. As the payments received for the electricity generated are assessable income, the expenditure incurred in producing the income from the sale of the electricity generated to the electricity grid would be deductible to the extent it were not private or domestic in nature. You may be entitled to deductions for the installation and operating expenses of the solar system, such as for: · interest on the borrowings to acquire the solar system; · repairs and maintenance of the solar system ; · decline in value of the solar system based on 20 year effective life You would be required to apportion your deductions to take into account expenses incurred for private and domestic electricity generation by the system. For more information on deductions and apportionment you can refer to Tax Pack 2010 and the Guide to depreciating assets 2009-10. The grant of the right to you to create RECs would be an assessable recoupment. This is because it is considered to be a grant in respect of a loss or outgoing and you can deduct an amount for that loss or outgoing. The amount by which the cost of the system is reduced because of an assignment is the value of the assessable recoupment. The amount of the assessable recoupment is applied to reverse the effect of a deduction for decline in value of the full cost of the solar system. Depending on the original cost of the solar system and the amount of the decline in value deductions, the assessable recoupment will reduce such allowable deductions over a number of years. | Detailed Reasoning - Construction expenditure: Section 43-10 of the ITAA 1997 provides that an amount may be deducted for capital works for an income year if there is a construction expenditure area, a pool of construction expenditure for that area and 'your area' is used in a deductible way (including the use of 'your area' to produce assessable income (section 43-140 of the ITAA 1997). Subsection 43-20(2) of the ITAA 1997 provides that Division 43 of the ITAA 1997 applies to capital works that are structural improvements or extensions, alterations, or improvements to structural improvements whose construction commenced after 26 February 1992. It is considered that the installation of the power upgrade is a structural improvement and is therefore a capital work under subsection 43-20(2) of the ITAA 1997. Deductions cannot be claimed under subdivision 40-B of the ITAA 1997 for the power upgrade. Note that under section 43-170 of the ITAA 1997, where the capital work is part of an individual's home, it will not be taken to be used to produce assessable income. For further information see Taxation Determination TD 93/21 which deals with capital expenditure deductions on residential property. This ruling does not consider the issues relating to any potential capital gains tax consequences.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | 2. Would payments received from your electricity retailer for the generation of electricity from a photovoltaic solar system be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | 3. Would the costs associated with the solar system, such as interest and depreciation, be deductible under section 8-1 or 8-5 of the ITAA 1997? | To the extent they are not capital or private or domestic in nature. | 4. Could you claim decline in value deductions under Subdivision 40-B of the ITAA 1997 for the power upgrade?