Private ruling: goods and services tax (GST) and sale of electricity generated by solar power system in return for Feed In Tariffs (FIT)
Published: December 2011
Date scheme commenced: You are registered for GST.

Ruling: Q1: Are you liable to remit GST to the Australian Taxation Office (ATO) in respect of your sales of electricity to the electricity companies in return for FIT? | A1: No. | Q2: Are you entitled to input tax credits for acquisitions you make in relation to your activity of generating and selling electricity? | A2: No.

Relevant facts and circumstances: You are registered for GST. You have a number of X kW solar panel power systems installed on your property, which is located in a certain State or Territory (the property). You sell all of the electricity generated from the solar panels to a small number of Australian electricity retailers in return for FIT. The electricity companies offset the amounts they owe you for electricity they buy from you against amounts you owe the electricity companies for electricity you purchase from them. The cost of construction of the solar assets was X. You received certificates due to your installation of the solar assets. You have not sold the certificates. The certificates are worth X. The solar cells are guaranteed for X years. However, it is expected that they will continue to produce power beyond that at about X% of their original specification. The tracker motors and the inverters have a life of X to X years. The operating and maintenance expenses relating to the solar power generation activity are small. The operating and maintenance involved is cleaning the solar surfaces, maintaining the trackers and keeping the grounds clear of weeds and free from shadowing on the surface of the cells. You currently receive X to X per quarter for the sale of electricity. You believe that you will receive income of approximately X per annum from FIT. You entered into the activity of generating and selling electricity with the intention of making a profit and to make money. You have calculated a rate of return on your solar investment of X% a year. The amounts you receive from the electricity companies are currently subsidised by the State or Territory government. Even at the regulated rate for electricity sales of X cents per kWh, your return on the solar investment would be X% a year. The relevant government solar scheme started on a certain date and will end on a certain date. You keep accounting records in relation to all your business activities and your activity of generating and selling electricity. You have a business plan in relation to your activity of generating and selling electricity. You do not have expert knowledge of electricity or the solar power industry but you have developed knowledge over time. The property has small orchards of certain fruits. These have proved non-viable for business income. The fruits will not mature for at least another X years. There was a fruit plantation on the property. This plantation could have produced approximately X per annum in income. However, due to storm damage, droughts and pests, you were not able to harvest a commercial crop and you could not find a lessee, so you abandoned the maintenance of the plantation. Having abandoned the unprofitable/failed fruit plantation, you have sought to find an alternative income source for the farm. Hence, the orchards and now the solar activity. The property has a residence which is leased to a third party. The property has a manager's residence which you occupy as your home. The property has a large shed, which houses your farming equipment. You own commercial properties and you determined that you needed to be registered for GST because of these properties.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 9-70 | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-75(1) | A New Tax System (Goods and Services Tax) Act 1999 section 11-5 | A New Tax System (Goods and Services Tax) Act 1999 section 11-15 | A New Tax System (Goods and Services Tax) Act 1999 section 11-20 | Taxation Administration Act 1953 s ection 359-5 of Schedule 1

Reasons for decision: Summary: You are not liable to remit GST on your sales of electricity to electricity companies in return for FIT, as your supplies of this electricity to the electricity companies are not made in the course or furtherance of an enterprise that you carry on. | Detailed Reasoning - Detailed reasoning: You are liable for GST on taxable supplies that you make. You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (*Denotes a term that is defined in section 195-1 of the GST Act) The supply of solar generated electricity from a solar owner to an electricity retailer is a supply for GST purposes. If the solar owner is registered for GST and the supply is made in the course or furtherance of their enterprise, it is a taxable supply under section 9-5 of the GST Act. Supply made for consideration You are a solar owner and you supply solar generated electricity to electricity retailers. Therefore, you are making supplies for GST purposes. In accordance with paragraphs 1 to 3 of Goods and Services Tax Determination GSTD 2004/4: § Consideration can be provided or received by way of setting off mutual liabilities in accordance with the doctrine of set-off. § A set-off can occur if each party has made a supply to the other and each party is required to pay the other for the supply made to it. § In each of these cases, the consideration is generally provided or received on the date that the set-off legally occurs. In your case, you make supplies of electricity to a number of electricity retailers and they make supplies of electricity to you. An electricity retailer would provide consideration for your supply of electricity to the electricity retailer where it sets off the FIT it owes you against your liability for electricity that the electricity retailer supplies to you. Additionally, where an electricity retailer pays you a FIT amount, it would be providing consideration for your supply of electricity to the electricity retailer. Therefore, the requirement of paragraph 9-5(a) of the GST Act is satisfied. Supply connected with Australia Your supplies of electricity to the electricity companies are connected with Australia. Therefore, the requirement of paragraph 9-5(c) of the GST Act is satisfied. GST registration You are registered for GST. Therefore, the requirement of paragraph 9-5(d) of the GST Act is satisfied. There are no provisions in the GST Act or in any other Act under which your supplies of electricity to the electricity companies are GST-free or input taxed. Therefore, what remains to be determined is whether your supplies of electricity to the electricity companies are made in the course or furtherance of an enterprise that you carry on. Supply made in course or furtherance of enterprise In accordance with paragraph 9-20(1)(a) of the GST Act, an activity or series of activities done in the form of a business is an enterprise. In accordance with paragraph 9-20(1)(b) of the GST Act, an activity or series of activities done in the form of an adventure or concern in the nature of trade is an enterprise. Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of enterprise for the purposes of entitlement to an ABN. Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the principals in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes. Paragraph 170 of MT 2006/1 provides that an activity in the form of a business includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own. Paragraph 177 of MT 2006/1 states: 177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. We shall now consider whether your activity of selling electricity is 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 . These indicators are applicable to business activity generally. Paragraph 13 of TR 97/11 lists these indicators as follows: § whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators; § 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 repetition and regularity of the activity; § whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; § whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity. | Detailed Reasoning - Whether the taxpayer has more than an intention to engage in business: In accordance with paragraph 39 of TR 97/11, a mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that: 'The carrying on of a business is not a matter merely of intention. It is a matter of activity. ... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.' Once each of your solar systems was installed, there would have been little work for you to do. The measurement of the electricity you generate from both solar systems is the responsibility of the electricity companies you sell to. Hence, the extent of the activity involved in your activity of generating and selling electricity would be very low. Therefore, this indicator would be present to a very small extent. | Detailed Reasoning - Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity.: You have a purpose of profit from your activity of generating and selling electricity to electricity companies. Additionally, based on the figures provided and information the ATO has obtained on similar activities, there is a prospect of making a profit from this activity. This indicator indicates that you may be carrying on a business. | Detailed Reasoning - Whether there is repetition and regularity of the activity: Paragraph 55 or TR 97/11 states: 55. 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. For example, in Hope 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'. Similarly, in JR Walker the court held that there was repetition and regularity in the taxpayer's activities directed to the breeding of high quality Angora goats and to keeping up with the latest information on Angora goats. Once each of your solar systems was installed, there would have been little work for you to do. The measurement of the electricity you generate from both solar systems would be the responsibility of the electricity companies you sell to. There would be little repetition and regularity in terms of action required by you in respect of your activity of generating electricity and selling it to electricity companies. | 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. In accordance with paragraph 64 of TR 97/11, in considering this indicator, the following factors might be compared with 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; and § previous experience of the taxpayer. You are generating recurring receipts from the respective electricity companies. The volume of sales you would make would be miniscule in comparison to ordinary electricity generation businesses. You sell electricity to electricity retailers. Your contracts to sell electricity to the electricity companies do not come about through your advertising or promoting of your product, whereas an ordinary electricity generation business would achieve sales as a result of advertising and promoting their product. Based on the information provided, you would not market the electricity you generate to entities other than a small number of electricity companies. The biggest expenses you would incur would be the cost of installation of each solar system, and there would be no significant operating costs. These expenses would be miniscule compared to the expenses of an ordinary electricity generation business. The amount you have invested in capital items would be miniscule compared to the amount invested in capital items by ordinary electricity generation businesses. You do not have expert knowledge of the electricity industry. A business of electricity generation would usually require a much larger scale of production than the scale of your production to ensure that the business is able to meet demand levels. You would not be required to meet demand levels of the electricity companies. The overall impression from considering the factors set out in paragraph 64 of TR 97/11 and other relevant information in combination is that your activity of selling electricity to electricity companies is not carried on in a similar manner to that of the ordinary trade in the relevant line of business - electricity generation businesses. | Detailed Reasoning - Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit: Your activity of selling electricity to electricity companies is planned, organised and carried on in a businesslike manner such that it is directed at making a profit. | 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 your activity of selling electricity to electricity retailers involved/involves the installation and operation of a number of X kW solar systems. Therefore, the size and scale of the operation is very small. It is likely that you will carry on your activity of selling electricity for at least a few years. This indicator 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 - Significant commercial activity: Paragraph 29 of TR 97/11 provides that: § 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 the activity, the repetition and regularity of the activity and the profit indicators. § A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. The size and scale of your activity of generating and selling electricity would be very small. There would be little repetition and regularity in this activity in terms of the action you need to take. You have a purpose of profit. The profit you may make would be small. This activity would not be carried on in a similar manner to an ordinary electricity generation business. The overall impression from considering the factors set out in paragraph 29 of TR 97/11 in combination is that there would not be a significant commercial purpose or character to your activity of selling electricity to electricity companies. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity: Your activity of selling electricity to electricity companies could not be described as a hobby, a form of recreation or a sporting activity. From a consideration of the indicators above, your activity of selling electricity would not amount to the carrying on of a business of selling electricity, because: § there is a lack of a significant commercial purpose or character; § the extent of your activity is very low § the profit that you may make would be low § there is little repetition and regularity in the activity in terms of action you need to take to operate the solar power activity; § the activity when compared to an ordinary business of electricity generation could not be said to be similar; and § the size and scale of the activity is very small. The relevant factors point more strongly to the conclusion that you are not carrying on a business of generating and selling electricity. While you have a profit motive and there is a realistic prospect of profit, your activity is not extensive enough to amount to a business. Your activity when considered against the relevant indicators is better described as the management of an investment, similar to the management of an investment property or a share investment portfolio. Paragraphs 206 to 208 of MT 2006/1 give an example of a passive investment activity. They state: Example 24 - investment activities that are not an enterprise 206. A trust is set up in respect of 12,000 blue chip shares and term deposits of $100,000 from which dividends and interest are received. The total portfolio is worth $350,000 to be held for the benefit of the trustee's children and grandchildren. The trustee incurs expenses including bank fees, accountancy fees and brokerage associated with the management of the portfolio. The net income of the trust is distributed to the beneficiaries of the trust. The shares are held for investment purposes. 207. Once or twice a year small parcels of underperforming shares in one or two of the companies in the portfolio are sold and the proceeds reinvested in other shares or deposits. The trustee has no other activities. 208. The trustee for the trust is not entitled to an ABN. The activities undertaken are insufficient to amount to an enterprise. As in the example in paragraphs 206 to 208 of MT 2006/1, your activity of generating and selling electricity is a passive investment activity and the activities you undertake in your activity of selling electricity are insufficient to amount to an enterprise. Therefore, your sales of electricity are not supplies made in the course or furtherance of an electricity generation and sale enterprise. Your sale of electricity is not connected with your activities of farming various fruits or leasing property. Therefore, your sales of electricity are not supplies you make in the course or furtherance of a various fruits farming enterprise (if the various fruits farming activities are an enterprise) or property leasing enterprise (if your property leasing activities are an enterprise). Your sales of electricity are not supplies made in the course or furtherance of any enterprise that you carry on. Therefore, you do not satisfy the requirement of paragraph 9-5(b) of the GST Act. Conclusion As you do not satisfy all of the requirements of section 9-5 of the GST Act, you do not make taxable supplies of electricity to electricity companies in return for FIT. Therefore, GST is not payable on your supplies of electricity to electricity companies in return for FIT. Hence, you are not liable to remit GST to the ATO on these supplies. | Summary: You are not entitled to input tax credits for acquisitions you make in relation to your activity of generating and selling electricity, because this activity is not an enterprise or an enterprise activity. | Detailed Reasoning - Detailed reasoning: You are entitled to input tax credits on your creditable acquisitions. You make a creditable acquisition where you satisfy the requirements of section 11-5 of the GST Act, which states: You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you is a *taxable supply; and (c) you provide, or are liable to provide, *consideration for the supply; and (d) you are *registered or *required to be registered. Creditable purpose Subsection 11-15(1) of the GST Act states: You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your *enterprise. Subsection 11-15(2) of the GST Act states: However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature. You do not acquire the solar power related items (for example, the solar panels) in carrying on an enterprise, as: § you use the solar power related items solely in your activity of generating and selling electricity, and § this activity is not an enterprise or an enterprise activity. You do not acquire the solar power related items in carrying on your various fruit farming activities or your property leasing activities (which may potentially be enterprises) as you do not use the solar power related items in these activities. You use the solar power related items solely in your activity of generating and selling electricity as you are selling all of the electricity generated by the solar panels. You do not use the solar power related items in your various fruit farming activities or property leasing activities as you would not be using the solar panels to provide electricity for any of these activities. Even if your activity of generating and selling electricity was considered a farming activity and your other farming activities were an enterprise, your activity of generating and selling electricity would not form part of a farming enterprise because your activity of generating and selling electricity is not an enterprise activity. Therefore, you do not acquire the solar power related items for a creditable purpose. Hence, you do not satisfy the requirement of paragraph 11-5(a) of the GST Act. Therefore, the acquisitions you make in relation to your activity of generating and selling electricity are not creditable acquisitions. Hence, you are not entitled to input tax credits for acquisitions you make in relation to your activity of selling electricity.

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