Private ruling: Solar Electricity Systems
Published: July 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the grant to the entity of a right to create Renewable Energy Certificates (certificates), arising through the operation of the Renewable Energy (Electricity) Act 2000 (REE Act), an assessable recoupment for the purposes of section 20-20 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-10 | Income Tax Assessment Act 1997 Section 20-20 | Income Tax Assessment Act 1997 Subsection 20-25(1) | Income Tax Assessment Act 1997 Section 20-40 | Income Tax Assessment Act 1997 Subsection 995-1

Reasons for decision: Summary: Under Subdivision 20-A of the ITAA 1997 certain amounts received by way of insurance, indemnity or other recoupment are assessable income if the amounts are not income under ordinary concepts or otherwise assessable. Under subsection 20-20(2) of the ITAA 1997, an amount received as recoupment of a loss or outgoing is an assessable recoupment if: (a) you received the amount by way of insurance or indemnity; and (b) you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for the loss or outgoing for an earlier income year under any provision of this Act. In order to determine whether a right to create a certificate is an assessable recoupment it must first be considered whether the right acquired is a recoupment. Recoupment is a defined term and has the meaning given by subsection 20-25(1) of the ITAA 1997. Under paragraph 20-25(1)(b), a recoupment of a loss or outgoing includes a grant in respect of the loss or outgoing. A grant is not a defined term and therefore must be given its ordinary meaning. The Macquarie Dictionary , [Multimedia], version 5.0.0, 1/10/01, defines a grant as 'that which is granted, as a privilege or right, a sum of money, as for a student's maintenance, or a tract of land'. In Taxation Ruling TR 2006/3 the term 'grant' is defined to mean that which is granted, as a privilege or right, including a sum of money by government to encourage business. The Ruling states at paragraph 97 that: ... It is essential to determine what the grant is actually for. The question as to the nature and quality of any payment must be determined by reference to the agreement or the terms which created in the recipient the right to the government grant... A taxpayer's right to create certificates under the REE Act is intended to provide the taxpayer with a financial benefit whether they assign their rights to create certificates or create the certificates themselves. In this sense, the scheme effectively provides a financial incentive to the taxpayer to purchase an eligible solar system. Given this intention and the objectives of the Federal Government's Renewable Energy Target (RET) scheme, it is clear that the right to create certificates arising under the REE Act constitutes a grant. This is because the grant of the right to create certificates provides a financial benefit in kind to the taxpayer under the scheme. For the grant to be a recoupment it must be 'in respect of' the loss or outgoing. The meaning of 'in respect of' has not been considered in the context of section 20-25 of the ITAA 1997. However a number of judicial decisions have considered the meaning of the phrase in relation to other areas of the law. In Federal Commissioner of Taxation v. Scully (2000) 201 CLR 148; 2000 ATC 4111; (2000) 43 ATR 718, consideration of the words 'in respect of' highlighted the importance of the context in which the phrase appears and resulted in the requirement that there be some 'discernible rational link' between the two subject matters. J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; 44 ATR 22 also supported this interpretation, stating that 'in respect of' requires 'a nexus, some discernible and rational link', which is sufficient for the purposes of the particular legislation. In this case, the subject of the grant, being the right to create certificates, is dependent on ownership and installation of a solar system. The entity incurs an outgoing to own and install the solar system. Upon ownership and installation of the solar system, the entity is granted the right to create certificates. The entitlement to the grant is therefore a result of the outgoing to acquire and install the solar system, therefore the required discernable, rational, material link is present between the grant and the outgoing. The grant is therefore in respect of the loss or outgoing for the solar system for the purposes of paragraph 20-25(1)(b) of the ITAA 1997. As the grant of the right to create certificates is a grant in respect of the outgoing for the solar system under paragraph 20-25(1)(b) of the ITAA 1997, there is a recoupment of a loss or outgoing under section 20-25. For the recoupment of the loss or outgoing to be an assessable recoupment under subsection 20-20(2) of the ITAA 1997, the amount the entity receives must be by way of insurance or indemnity. It is clear that the recoupment will not be received by way of insurance. Indemnity is not a defined term and therefore must be given its ordinary meaning. The Macquarie Dictionary , [Multimedia], version 5.0.0, 1/10/01, definition of indemnity includes compensation for damage or loss sustained. The issue of whether an amount is received by way of indemnity for the purposes of the predecessor provision to subsection 20-20(2) of the ITAA 1997 (paragraph 26(j) of the Income Tax Assessment Act 1936 ) has been considered in a number of cases including: Federal Commissioner of Taxation v. Wade (1951) 84 CLR 105; (1951) 9 ATD 337; 5 AITR 214, Robert v. Collier's Bulk Liquid Transport Pty Ltd (1959) VR 280, Goldsbrough Mort & Co Ltd v FC of T (1976) 76 ATC 4343, 6 ATR 580 ( Goldsbrough ); and Commercial Banking Company of Sydney Limited v. FC of T 83 ATC 4208 (1983); 14 ATR 142 ( Commercial Banking ). These cases make it clear that an amount received by way of indemnity is not restricted to amounts received under a contract of indemnity. This was made clear by Hunt J. in Commercial Banking who, referring to the decision in Goldsbrough , stated ... his Honour was correct in ruling that the expression "by way of... indemnity" should not be construed narrowly in the sense of "pursuant to a contract of indemnity". The cases also make it clear that an amount received 'by way of indemnity' would include a receipt pursuant to an antecedent obligation (whether by virtue of a contract, statute or a breach of some common law duty of care) to make good or compensate for a loss which arises after the obligation comes into existence. Therefore, the phrase 'by way of indemnity' broadens the range of receipts to be considered an assessable recoupment under subsection 20-20(2) of the ITAA 1997 to include receipts other than amounts received under a contract of indemnity. The granting of the right to the taxpayer to create certificates satisfies the antecedent statutory obligation arising under the REE Act to partially compensate the taxpayer for the outgoing to own and install the solar system. That being so, the value of the right granted is an amount received by way of indemnity. A taxpayer can deduct an amount for the loss or outgoing of the solar system under Division 40 of the ITAA 1997, the recoupment, being the grant of the right to create certificates, will be an assessable recoupment under subsection 20-20(2) of the ITAA 1997. Note : Section 20-40 of the ITAA 1997 will apply where the cost of the solar system is deductible under Division 40 of the ITAA 1997 over two or more income years. In this case, the grant to the entity of a right to create a certificate, arising through the operation of the REE Act, is an assessable recoupment under subsection 20-20 of the ITAA 1997. The right to create a certificate is considered to be a recoupment because it is a grant in respect of a loss or outgoing. The recoupment is assessable because the taxpayer can deduct an amount for the loss or outgoing under the ITAA 1997. There will be an assessable recoupment for each installation the entity undertakes. In your private ruling application it was your opinion that the subsidy was a Government payment to commence business and was not assessable as ordinary income under section 6-5 or section 15-10. The issue of assessability of the grant under those provisions will now be addressed. | Detailed Reasoning - Ordinary Income: Under section 20-20(1) of the ITAA 1997 an amount is not an assessable recoupment to the extent that it is ordinary income, or it is statutory income because of a provision outside this subdivision. As the grant is considered an assessable recoupment it is not considered ordinary income. | Detailed Reasoning - Statutory Income: Section 15-10 of the ITAA 1997 states your assessable income includes a bounty or subsidy that you receive in relation to carrying on a business and is not assessable as ordinary income under section 6-5. As stated above the grant is not assessable as ordinary income under section 6-5, however, the question about whether a business is currently, or will be carried on, needs to be addressed. Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. Taxation Ruling TR 97/11 incorporates the general indicators. Its principles are not restricted to questions of whether a primary production business is being carried on. 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. In the Commissioner's view, the indicators 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. In this case the entity entered into a lease agreement with a non-related third party to lease roof space on which it installed a solar system. As a result the entity received a right to acquire a certificate. It has sold the certificate to an agent for a cash payment. The entity also has an IES Network Agreement with an electricity supplier. The entity intends to duplicate this arrangement in other locations in Australia. The general impression gained is that once the solar system is installed on the roof the activity is of a passive nature. After initially finding suitable space for a solar system, arranging and signing contracts with the landlord and the electricity supplier and installing the SES, it is a passive activity akin to an investor with a share portfolio and would therefore not be considered to be an activity in the nature of business. The grant received is not considered to be in relation to carrying on a business, it is therefore not assessable under section 15-10 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The entity has commenced an activity of purchasing, installing and managing solar photovoltaic electrical generation systems (solar system). | The entity approached a non-related company and leased roof space on its building upon which it installed a solar system. | Upon purchasing the solar system, the entity received a right to acquire a certificate. | The entity is the end user. | The entity assigned this right to an agent which resulted in a cash payment. | The entity has an Inverter Energy System (IES) Network Agreement in place with an energy provider. | The entity plans to duplicate this process on separate sites in various locations across Australia.