Private ruling: Solar energy income
Published: March 2013
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you carrying on a business of solar energy for taxation purposes? | A1: No. | Q2: Are the payments received from the solar power generating system on your home assessable income? | A2: No. | Q3: Are you entitled to a deduction for the costs associated with the solar system? | A3: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You wish to install a solar energy or wind turbine to produce electricity. You will register as a sole trader and apply for an ABN. You intend to develop an energy production entity, with sales of electricity to electrical distributors. A 5KW solar power generating system will be installed on your home. All energy produced will be sold to the energy wholesalers. You intend to declare this income as business income. You expect to have an overall loss in the early years. You have a business plan, however this is not written down as yet. Later you intend to expand your entity and sell your experience and sell solar units to others. You will work as a salesman. You have researched the production of solar energy. However, you do not have electrical qualifications. After the initial installation of the system, you don't intend to spend much time on the system apart from the maintenance required every six months.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: Carrying on a business Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 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. To determine whether your activities are assessable, we need to consider if you are carrying on a business. Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. 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 that are applied to determine the matter on the particular facts. Taxation Ruling TR 97/11 outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. No individual factor is determinative, but should be weighed up in conjunction with the other factors. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: · whether the activity has a significant commercial purpose or character · whether the taxpayer has more than just an intention to engage in business · whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity · whether there is regularity and repetition of the activity · 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 · whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit · the size, scale and permanency of the activity, and · whether the activity is better described as a hobby, a form of recreation or sporting activity. TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' ( Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case, and no one indicator will be decisive ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). Applying the relevant indicators to your circumstances Significant commercial purpose The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators. Your activity is the installation and maintenance of a solar system on your home. You do not have a written business plan. Your activities do not have a significant commercial purpose. Intention of the taxpayer The carrying on of a business is not a matter merely of intention, it is a matter of activity. It is appropriate to look at when the activities started and whether they add up to more than a mere intention to conduct a business. You will be installing a solar system on your home. The system will produce energy which will be sold to produce income. You will invest money into the activity. You will carry out maintenance on the system as required, estimating this to be each six months. Prospect of profits The taxpayer's involvement in a business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business of the taxpayer. You advise that you intend to make a profit from your activities. However, this will not occur in the initial years. Repetition and regularity The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. In your case, after the installation of the system, it can not be concluded that the level of repetition and regularity of your activity is a business. You will be spending minimal time on the system after the installation. Maintenance is expected to be carried out each six months. Activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristic of ordinary trading in that particular line of business ( IR Commissioners v. Livingston 11 TC 538). Generally, where a solar system is installed on a home, the associated activity is more likely to be passive investment rather than a business. Activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business. Organisation in a business-like manner, the keeping of books, records and the use of a system The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. The size and scale of the activity The business should be large enough to make it commercially viable. Although you will organise the maintenance on the system, the size and scale of your activities are not considered to be significant and you spend minimal time each week on your activities. Conclusion The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Where a business exists, there is usually a business plan of how the activities will be conducted. Generally, the indicators with the greatest weighting are the scale or volume of operations and the repetition and regularity of activities. The fact that income will be derived does not indicate that an activity is a business. A person who simply owns a solar system is not necessarily carrying on a business. Such an activity has a limited scope of activities and a limited degree to which an owner can actively participate. We acknowledge you intend to make a profit, however, your activities are not conducted on a sufficient scale to be considered to be a business. You will have one 5kW solar system. The size and scale of your activity is not large enough to be a commercially viable business. This is not considered to be of a scale to take the activity beyond a passive activity. Although you will carry out the required maintenance, this is not sufficient to regard your activity as a business. After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business of solar energy for taxation purposes. Assessable income 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. Your situation Under the scheme that will operate for your solar system, you will receive payments when the energy is sold. Although you may receive a payment each quarter, 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 size of the solar system is essentially designed principally for ordinary domestic needs. · The system is installed on your home. · 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. 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.