Private ruling: Renewable Energy
Ruling period: 1 July 2009 to 30 June 2010 | 1 July 2010 to 30 June 2011 | 1 July 2011 to 30 June 2012
Date scheme commenced: 1 July 2009

Ruling: Q1: Is the reduction in cost of a photovoltaic generating system which results from the assignment of Renewable Energy Certificates (RECs) to the system supplier treated as assessable income? | A1: No. | Q2: Is the depreciable value of a photovoltaic generating system the gross cost prior to adjusting for the value of the assigned RECs? | A2: Yes. However, an assessable recoupment may result.

Relevant facts and circumstances: You have installed a small photovoltaic system on a residential investment property which is owned solely by you. The system is not large and may be expanded to a larger system.

Relevant legislative provisions: Income Tax Assessment Act 1997 8-1 , | Income Tax Assessment Act 1997 8-5, | Income Tax Assessment Act 1997 25-10 , | Income Tax Assessment Act 1997 40-25 and | Income Tax Assessment Act 1997 104-10.

Reasons for decision: Summary: In accordance with ATO Interpretative Decision 2011/26 ( ATO ID 2011/26), the Capital Gains Tax (CGT) consequences of disposing of the right to RECs and any resulting income effects are disregarded. If you expand the size of the system as outlined in your application, the same principles would apply to the new figures. Detailed reasoning CGT event A1 happens if a change in ownership of a CGT asset from you to another entity occurs, whether because of some act or event or by operation of law (subsection 104-10(2)). The right to create RECs is a CGT asset. Consequently, the transfer of that right, viewed separately from the acquisition of the generation unit, might be taken to cause CGT event A1 to happen. That issue is considered in ATO ID 2011/26. It states that where as part of the process of acquiring the solar 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 resultant reduction in the amount of money required to be paid for the solar generation unit, there are no CGT consequences under Part 3-1 in those circumstances for the prospective owner of the unit. Please note that if you expanded the size of the system as outlined in your application, the same principles would apply to any new figures. | Summary: The cost base of the system for depreciation purposes is the gross cost including the value of any RECs. If you expanded the size of the system as outlined in your application, the same principles would apply to new cost figures. However, in cases where the purchase price of the solar system installation was reduced because you assigned to the installer your right to create RECs, the grant of the right to create the certificates is an assessable recoupment. That is because it is considered to be a grant in respect of a loss or outgoing and you can deduct an amount for that loss or outgoing. The amount by which the cost of the system is reduced because of the assignment is the value of the assessable recoupment. The amount of the assessable recoupment is applied to reverse the effect of a deduction for decline in value of the full cost of the solar system. The assessable recoupment will reduce such allowable deductions for a certain number of years, that period being determined by the original cost of the system and the annual amount of the deductions. | Detailed Reasoning - Detailed reasoning: 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. You cannot deduct a loss or outgoing that is capital, private or domestic in nature. However, other provisions in the ITAA 1997 contain specific deductions which are made allowable by section 8-5. Examples of specific deductions include repairs under section 25-10 and deductions for the decline in value of 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. Instead, under the capital allowances system you may be able to claim deductions for the decline in value over time of the cost of a capital asset used in gaining your assessable income. Under section 40-25, each income year you can deduct an amount equal to the decline in value of a depreciating asset that you hold. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time that it is used. Where it is used in producing assessable income a solar system would fall into that category. Consequently, you can deduct the decline in value of the capital cost of your solar system where it is used in gaining your assessable income. Where appropriate, you must reduce any applicable deduction by the part of the asset's decline in value that is attributable to your use of the asset for a purpose other than a taxable purpose. The purpose of producing assessable income is a taxable purpose but private usage is not. Taxation Ruling TR 2010/2 Income tax: effective life of depreciating assets provides a table listing the effective life of depreciating assets. In accordance with TR 2010/2 the effective life of solar power generating system assets that are on residential property is twenty years. Generally speaking, the cost of a solar system is those amounts which you are taken to have paid to hold the solar system, such as the purchase price and its associated installation and connection costs. It is worked out as at the time that you begin to hold the solar system; in other words, when it is installed and ready for use. A solar system comprises modules of photovoltaic cells, a roof mounting frame, various fixings, electrical wiring and conduits and inverters. The entire solar system is considered to be a single depreciating asset and would be depreciated accordingly rather than its constituent parts being depreciated separately. In the present case, the relevant cost for depreciation purposes is the gross cost of the system which you purchased (including the value of any RECS) plus any associated costs. Please note that if you were to expand the size of the system as outlined in your application, the same principles would apply to the new cost figures. For more information on determining the decline in value of your solar system, you should refer to the Guide to depreciating assets 2009-10 . However, under Subdivision 20-A, your assessable income may include an amount which you receive by way of insurance, indemnity or other recoupment if it is for a deductible expense and it is not otherwise assessable income. This provision needs to be considered where your solar system produces assessable income and you incur a loss or outgoing (i.e. expense) in respect of installing and owning that system. Under the Renewable Energy (Electricity) Act 2000 (REE Act), if you install an eligible solar system on your private residence, you have a statutory right to create RECs after the system is installed. You can assign that right to another person, for example the installer of the system, or you may create the RECs and sell them on the market. Assigning the right to create RECs to another entity (such as the installer) is considered to result in a financial benefit to you. Effectively, the financial benefit is the reduction in the amount which you would otherwise pay for the purchase and installation of the solar system. That reduction is the price discount which the installer offers you in return for surrendering the RECs to them. The RECs are effectively a financial incentive given to you to purchase the system. The amounts received in respect of the RECs are considered to be an indemnity (and therefore a recoupment) as they satisfy a statutory obligation under the REE Act to partially compensate you for the cost to install and own the solar system. Where you can deduct an amount for the decline in value of the solar system under Division 40 (as outlined above) the recouped amount in respect of the RECs is an assessable recoupment. Where the cost of the solar system is deductible under Division 40 over several income years, the total assessable recoupment included in a particular year is the amount of the deduction which you can claim for the loss or outgoing in that year. Any part of the assessable recoupment that is not included in assessable income in the year it is received should be included in subsequent income years until it has been fully accounted for. By way of clarification, consider the following example: On 1 July 2009, a taxpayer installed on the roof of his private residence a 10 kilowatt solar system costing $60,000. He received the right to create RECs to the value of $12,000. He assigned them to the installer, resulting in a reduction in the price paid for the solar system to $48,000. The taxpayer claims the decline in value of his solar system using the prime cost method and an effective life of twenty years. He can claim a deduction for decline in value of the system of $3,000 for the 2009-10 income year and each of the following 19 income years (being $60,000 /20). He received the right to RECs to the value of $12,000 and that is considered to be an assessable recoupment. As his deduction for decline in value of the system is $3,000 each year, he will include an assessable recoupment of $3,000 each year in his assessable income for the first four income years. The total value of the RECs will then be fully recouped. In subsequent years, the deduction of $3,000 can still be claimed but with no off-setting recoupment. Taxation Determination TD 2006/31 deals with recoupments for rebates received for the purchase of a depreciating asset for use in a rental property. It provides further guidance on how the recoupment provisions operate in relation to depreciating assets. In addition ATO ID 2010/218 discusses when the right to create RECs is an assessable recoupment, again in the context of rental properties. | Summary: Based on the relevant facts, including that the property is a tenanted investment property which is currently used to derive assessable income, the arrangement is not private or domestic in nature. That being so: · the payments you would receive for the generation of electricity from the solar system are ordinary assessable income under section 6-5 of the ITAA 1997, · the costs you would incur in relation to the generation of electricity from the solar system are deductible under section 8-1 of the ITAA 1997 to the extent that they are not capital or private or domestic in nature, · you would be able to claim deductions in respect of the decline in value of the capital cost of the system because the solar system would be used to produce assessable income, and · the value of the right granted to you to create RECs may be an assessable recoupment. If you chose to expand the size of the system, the principles outlined above would apply equally in respect of that new system. Please note that this ruling does not consider the issues relating to any potential capital gains tax or goods and services tax consequences.

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. | Reasons for decision: Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997 (ITAA 1997).