Private ruling: Photovoltaic solar system
Published: October 2011
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: Are credits/payments received from your electricity retailer for the generation of electricity from a photovoltaic solar system assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1:  | Q2: Are the costs associated with the solar system, such as interest and depreciation, deductible under section 8-1 of the ITAA 1997? | A2: 



Reasons for decision: Summary: Unless otherwise stated, all legislative references in the following Reasons for Decision are from the Income Tax Assessment Act 1997 (ITAA 1997) Based on the configuration of the system you installed, 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 credits/payments you will receive for the generation of electricity from the solar system are not assessable income under section 6-5, and as a result · the costs you will 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 as they are not incurred in gaining or producing assessable income and they relate to expenses that are private or domestic in nature. · There are no CGT consequences when you assign your Renewable energy certificates to the installer for a discount on your photovoltaic solar system. | Detailed Reasoning - Assessable income: Under section 6-5 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) ordinary income means income 'according to ordinary concepts'. Under subsection 6-5(2), 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) 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 the payments are assessable income the following are important: · the size of the solar system · 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. Under section 8-1 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 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. 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 Queensland 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. The electricity provider pays you a premium feed in tariff per kilowatt hour for the net electricity you generate through your electricity retailer and the electricity retailer pays you an additional amount per kilowatt hour for net electricity exported. You receive the payments as credits against your electricity bill for net electricity exported. However, you can have the credits paid out to you if requested. 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: o 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. o The credits you receive for excess electricity offset the cost of your electricity, effectively reducing your electricity account. You are unlikely to receive payments for excess credits on your electricity account because of your electricity usage. o 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. | Detailed Reasoning - Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

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: You acquired and installed a photovoltaic system, on the roof of your jointly owned private residence. | The State Government provides for a net feed-in tariff solar scheme (the scheme). Under the scheme, owners of eligible renewable energy systems are paid 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. | You paid $x in cash for your photovoltaic system, the electricity account is in your name only and your solar system has been connected to the grid. | Your electricity retailer will calculate any credits at each billing cycle and carry them forward and you will receive a credit on your account from your electricity retailer through the feed-in tariff. | The solar system you purchased 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. | Upon ownership and installation of a SGU a statutory right arises under the REE Act entitling you to create Renewable Energy Certificates (RECs). | You state that you assigned the RECs back to the installer in return for a discount on the purchase price. | Following your 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. | Relevant legislative provisions | Income Tax Assessment Act 1997 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.