Private ruling: Income - Solar power
Published: March 2013
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are payments received by you from an electricity retailer for the generation of electricity from a photovoltaic solar system installed on a property that you live in, considered assessable income to you under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are the costs associated with the solar system, such as decline in value, deductible under section 8-1 of the ITAA 1997? | A2: No

Relevant facts and circumstances: You live rent free in a property owned by another party. The property owner acquired and had installed an X.xkW system (solar system) on the roof of a property. Your government provides for a net feed-in tariff solar scheme (the scheme). Under the scheme, electricity providers pay the electricity account holder an amount 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 electricity account is your name. For the last billing period the net amount exported to the grid, after household usage, resulted in a credit of less than $Y00. You can receive this as a separate payment either by cheque or direct deposit into a bank account from your energy retailer. Based on the first quarter results, you could receive less than $500 per year from your electricity retailer through the feed-in tariff rate. You are billed for your electricity consumption in the usual way. The solar system is an eligible small generation unit (SGU) for the purposes of the Renewable Energy (Electricity) Act 2000 (REE Act). The REE Act supports the Federal Government's Renewable Energy Target (RET) scheme which was established to encourage additional electricity generation from renewable energy sources.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Subsection 6-5(1) | Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 8-5 | Income Tax Assessment Act 1997 Section 25-25, and | Income Tax Assessment Act 1997 Section 40-25.

Reasons for decision: Detailed Reasoning - Assessable income: Assessable income is made up of ordinary income and statutory income. Section 6-10 provides that assessable income includes statutory income which constitutes amounts made assessable by specific statutory provisions. There are no specific legislative provisions relating to money or credits received from electricity suppliers therefore such amounts are not statutory income. Subsection 6-5(1) defines ordinary income as income 'according to ordinary concepts'. Under subsection 6-5(2), the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources during the income year. 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 · 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 · 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 at 4420; (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. A solar system is considered to be the property of its owner. Receipts received in connection with it, therefore, are potentially assessable income. Consequently, it needs to be determined, in light of the nature and the circumstances of the receipt; whether the payments or credits received in return for transfer of electricity to the grid are income. In determining whether or not the payments are assessable 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. The following are important: · the terms of the arrangement with the electricity retailer and in particular any requirement on the retailer to buy all electricity that is generated from the system (as occurs under a gross feed in tariff 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 · the regularity of payments/credits received from the feed-in tariffs such that they can be relied upon. | 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 borrowing expenses under section 25-25 and deductions for depreciating assets under section 40-25. | 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 a deduction for the decline in value of the cost of a capital asset if it is used in gaining your assessable income. | Detailed Reasoning - Application to your situation: Under the scheme operating in your state 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. The scheme is connected with the electricity needs of your household as: · the solar system is configured into the electricity system of the home. · the solar system primarily supplies electricity to the home and satisfies the electricity consumption of the householder before exporting excess electricity to the grid. · the size of the solar system is essentially designed principally for ordinary domestic needs. Based on your factual circumstances, it is considered that the credits you receive on your electricity account (or payment for credits) are not ordinary income because: The scheme is of a private or domestic nature, this being demonstrated by the strong connection of the scheme with the electricity needs of your household (as outlined above). In particular: · Electricity generated from the solar system is used for personal consumption in your private residence, and only the excess is transferred to the electricity grid. · The credits you receive for excess electricity offset the cost of your electricity, effectively reducing your electricity account. You are unlikely to receive payments from Synergy for excess credits on your electricity account because of your electricity usage. · There is no realistic opportunity for you to profit from the arrangement. Accordingly, the payments you receive from the electricity retailer are part of an arrangement that is private or domestic in nature. Consequently, all of the payments received for your electricity generated and sold to the electricity grid are not considered assessable income. As a result any expenditure incurred in producing the receipts from the sale of the electricity generated to the electricity grid is not deductible. As such you cannot claim a deduction for the decline in value of the solar system. However, if there were an increase in the size or scale of the activity in which you are engaged, or an increase in the payments / credits received or the regularity of the payments, this might indicate the payments were ordinary income and therefore assessable. This ruling does not consider the issues relating to any potential capital gains tax or goods and services tax consequences.