Private ruling: Income - photovoltaic solar system - electricity generation
Ruling period: 1 July 2010 to 30 June 2011 1 July 2011 to 30 June 2012 1 July 2012 to 30 June 2013 1 July 2013 to 30 June 2014 1 July 2014 to 30 June 2015 1 July 2015 to 30 June 2016 1 July 2016 to 30 June 2017
Date scheme commenced: 1 July 2010

Ruling: Q1: 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)? | A1: No | Q2: Are the costs associated with the solar system, such as interest and depreciation deductible under section 8-1 of the ITAA 1997? | A2: No | Q3: Are there any consequences under Part 3-1 of the ITAA 1997 for the prospective owner of a small generation solar system, if they use their right to create a renewable energy certificate (REC) to acquire the solar system? | A3: No

Relevant facts and circumstances: You are in the process of acquiring and installing a 3 kilowatt photovoltaic system (solar system), on the roof of your private residence. You are obtaining a larger inverter for the solar system which will allow you the option for expanding the system to 4 kilowatt capacity at a later date. You state that the State Government's Solar Bonus Scheme (scheme) provides for a gross feed-in tariff. Under the current scheme, your electricity retailer will be required to buy all electricity that the system generates at a gross feed in tariff rate of xx cents per kilowatt hour. You intend to enter into a contract under which you will be paid for electricity generated by the network provider through your electricity retailer. You will receive this as either a credit on your electricity account or as a separate direct payment from your energy retailer. The frequency of the payment will depend on your arrangement with your electricity retailer, but it is expected that you will be paid quarterly. You are billed for your electricity consumption in the same manner and at the same rate as any other retail electricity customer in your state. You have selected a solar system that theoretically should produce enough electricity to help cover some of your domestic consumption. Given the position of your roof and environmental impacts it is estimated that the system would provide maximum generation of approximately 4 hours over the period of a day. Your estimated annual electricity usage is about XX kW. You estimate that the system may generate approximately XX kW. The solar system is an eligible small generation unit for the purposes of the Renewable Energy (Electricity) Act 2000 (Cth) (the REE Act). Following the purchase and installation of the generation unit a statutory right arises under the REE Act entitling you as the owner of the generation unit to create RECs. As provided for under the REE Act, you will enter into an agreement with the installer of the unit, who is an agent for the purposes of the REE Act, assigning your right to create RECs to the installer in return for a financial benefit. The financial benefit you will receive under the agreement with the installer is a reduction in the amount of money you will pay for the purchase and installation of the generation unit. The reduction reflects the value of the right to create RECs that you will assign to the installer. You do not have final figures for the cost of the solar system at this stage.

Relevant legislative provisions: Income Tax Assessment Act 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 8-1 Income Tax Assessment Act 1997 Part 3-1 Income Tax Assessment Act 1997 Subsection 104-10(2)

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Based on the size of the system you will install, the arrangement with your energy supplier/retailer and your estimated feed-in tariff payments, the arrangement is private or domestic in nature. That being so: · the payments you would receive for the generation of electricity from the solar system is not assessable income under section 6-5 of the ITAA 1997, and as a result · the costs you would incur in relation to the generation of electricity from the solar system such as decline in value, borrowing and interest expenses are not deductible under section 8-1 of the ITAA 1997 as they are not incurred in gaining or producing assessable income and they relate to expenses that private or domestic in nature · there are no consequences under Part 3-1 of the ITAA 1997 for assigning your rights to create RECs in return for a reduction in the amount you pay for the purchase and installation of the solar 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 · 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. However, receipts that indicate the arrangement is private or domestic in nature are not 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 size of the solar system and its generation capability · 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 · 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 - 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 if you incur the expense in deriving assessable income from the system. You cannot deduct interest expenses relating to your private residence (such as in relation to a home loan) on which the system is 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 - 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 - Renewable Energy Certificates (REC): The right to create RECs is a CGT asset. The right arises under the Renewable Energy (Electricity) Act 2000 (Taxation Determination TD 1999/77). CGT event A1 happens if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law, subsection 104-10(2) of the ITAA 1997. ATO ID 2011/26 provides some guidance on the assignment of RECs. The transfer of the right, viewed separately from the acquisition of the generation unit, might be taken to cause CGT event A1 to happen. However in this case, where as part of the process of acquiring the small generation unit you assign your rights to the installer it is considered that the reality of the matter is that you are acquiring a generation unit and the assignment of the right to create a REC merely facilitates that acquisition. Accordingly, where there is an assignment of the right to create a REC, and a reduction in the amount of money required to be paid for the small generation unit (the underlying asset), the CGT provisions of the ITAA 1997 will apply only to the acquisition of the underlying asset and not to the right that merely facilitates the acquisition. As a result there will be no consequence under part 3-1 of the ITAA 1997 for you in assigning your right to create RECs to the installer in the process of acquiring the small generation solar system. Note: In situation where the taxpayer creates the RECs and disposes of them, such dealings are likely to be CGT events. | Detailed Reasoning - Application to your situation: Under the gross feed-in tariff scheme operating in your State and as described in your ruling application, the electricity company credits or pays a premium feed-in tariff to you for all electricity generated and contributed to the electricity grid. You then separately buy electricity from the company according to your consumption. Payment for the electricity generated is distinct from and unrelated to the amount of electricity consumed. The rate paid by you for electricity consumed is the same as that applied to any other householder. The payment for the electricity generated can be received by way of credit on your account, cheque or direct deposit into a bank account. You have stated that you will receive this as either a credit on your electricity account or a separate direct payment from your energy retailer. The scheme is connected with the electricity needs of your household as: · The size of the solar system you have installed is essentially designed principally for ordinary domestic needs and will generate an amount of electricity suitable for household needs · The electricity retailer is required to buy all electricity that is generated from the system under the gross feed in tariff scheme. The arrangement is under a standard agreement available to any customer to encourage the use of renewable energy · The purpose of installing the system is to offset your average household consumption · You estimate that you will consume more electricity than the system will generate over a year · Your family circumstances indicate that there is no realistic opportunity for you to profit from the arrangement over the life of the arrangement. 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. The size and scale of the system installed and the arrangement with the electricity retailer indicate there is connection of the scheme with the electricity needs of your household (as outlined above). · 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. You would not be able to claim deductions for decline in value, interest or borrowing expenses. However, if there were an increase in the size of the system above 4 kW 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. | Detailed Reasoning - RECs: You intend to assign your right to create RECs to the installer for a reduction in the purchase price of the solar system. It is considered that the assignment of the right to create a REC merely facilitates the acquisition of the solar system. Accordingly there are no consequences under Part 3-1 of the ITAA 1997 in these circumstances.

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.