Private ruling: Income - photovoltaic solar system
Ruling period: 1 July 2009 - 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Are the renewable energy certificates considered assessable income under section 6-5 of the ITAA 1997? | A1: No | Q2: What is the effective life of the photovoltaic solar system? | A2: 20 years | Q3: Are you eligible for the small business 50% tax break on the purchase of the system? | A3: No | Q4: Is the operation of the system considered to be a business for consideration under the non commercial loss rules? | A4: No

Relevant facts and circumstances: You are a partnership. You entered into a contract for the purchase of a photovoltaic solar system (system) sometime in 2009. You provided information detailing the cost of the system and the value of the renewable energy certificates (RECs). You assigned your right to RECs to the installer of the system in return for a discount on the system. The system is free standing and is located on a property owned by the partners in the partnership. The property contains the main residence of the partners and a smaller house which is used as a tenanted investment property. The system is located in an Australian state. The relevant State Government provides for a net feed-in tariff solar scheme (the scheme). Under the scheme, owners of eligible renewable energy systems are paid X cents 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 provided an estimate of the maximum payment you could receive per year for electricity generated from the system.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-10(2) Income Tax Assessment Act 1997 Paragraph 41-20(1)(d) Income Tax Assessment Act 1997 Subsection 35-5(2)

Reasons for decision: Summary: To qualify for the small business 50% tax break (the tax break) the use of the asset must satisfy the purpose test as set out under paragraph 41-20(1)(d) of the ITAA 1997. The purpose test would not be satisfied in this situation. | Detailed Reasoning - Detailed reasoning: Under the Tax Laws Amendment (Small Business and General Business Tax Break) Act 2009 a deduction is available for eligible expenditure on new investment in tangible, depreciating assets. Small business entities are able to claim the tax break for eligible assets costing $1,000 or more (excluding GST) that they: · commit to investing in between 13 December 2008 and 31 December 2009, and · start to use or have installed ready for use by 31 December 2010. There are a number of conditions required to be satisfied. | Detailed Reasoning - Eligible assets: The tax break is available for new tangible, depreciating assets for which a deduction is available under Subdivision 40-B of the ITAA 1997. Subdivision 40-B of the ITAA 1997 provides for a deduction equal to the decline in value of a depreciating asset to the extent the asset is used for a taxable purpose. | Detailed Reasoning - The purpose test: Under paragraph 41-20(1)(d) of the ITAA 1997 to be eligible for the tax break, it must be reasonable to conclude that when a taxpayer first starts to use an eligible asset, the asset will be used principally in Australia for the principal purpose of carrying on a business (the purpose test). | Detailed Reasoning - Assets held by partners: A partnership is not a separate legal entity. It is a relationship which exists between persons carrying on business in common with a view to a profit. Therefore, for the purposes of the tax break, where a business is being carried on in partnership, each partner is considered to be carrying on the business. | Detailed Reasoning - Carrying on a business: The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators to determine the matter, these indicators are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production. These indicators are applicable to business activity generally, relevant indicators include: o the size, scale and permanency of the activity. o whether there is repetition and regularity of the activity, and o 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. | Detailed Reasoning - · Size, scale and permanency of the activity: The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However the size or scale of the activity is not a determinative test and a person may carry on a business though in a small way. In your case the activity involves the installation and operation of the system. Once the system is installed no more work other than maintenance is required to operate it. The size and scale of the operation is very small. A smaller scale of activity usually detracts from the commercial purpose or character of the activities, for example the activity may more properly be described as the management of a capital investment rather than the carrying on of a business. This factor alone is not conclusive. The smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business. | Detailed Reasoning - · Whether there is repetition and regularity of the activity: It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. TR 97/11 refers to Hope v. The Council of the City of Bathurst (1980) 144 CLR 1, 80 ATC 4386, (1980) 12 ATR 231 where 'the transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business'. In your case the measurement of and payments for the electricity generation are the responsibility of the energy retailer. There is little repetition and regularity in terms of action required for the activity. This factor must be considered together with the other relevant indicators. | Detailed Reasoning - · 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: The activities of a taxpayer are more likely to be a business when carried on in a manner similar to that in which other participants in the same industry carry on their activities. The factors below, set out at paragraph 64 of TR 97/11, are used to compare the characteristics of others engaged in the same type of business: · the volume of sales, if there is a small number of sales it is less likely that a business is being carried on · the types of customers the taxpayer sells their product to - wholesalers, retailers, the public at large, or friends or relatives - and the manner in which this marketing takes place; · the sort of expenses incurred by the taxpayer; · the amount invested in capital items; You expect to generate recurring receipts from the energy retailer. The major expense you will incur is the cost and installation of the system. There will be no significant operating costs. You will have a single customer. There would be a contract agreement in place, however, you would not be required to meet or maintain a certain supply level, rather you would merely sell back the amount of electricity the system generates that is in excess of your domestic requirements. A business of electricity generation would usually be expected to produce and maintain certain amounts of electricity and meet certain levels of demand. It would also require a larger scale of production to ensure they were able to manage demand levels. It could not be said that your activity is alike to an ordinary business of solar electricity generation. From a consideration of the factors above the activity would not amount to the carrying on of a business. The size and scale of the activity is small, there is little repetition and regularity in the activity and the activity when compared to an ordinary business of solar generation could not be said to be similar. As a result you would not be considered to be carrying on a business by receiving payments for the export of electricity generated from the solar system. | Detailed Reasoning - Application to your situation: The activity does not amount to the carrying on of a business, as a result the purpose test will not be satisfied. Therefore, the investment in the asset will not be eligible for the tax break. | Detailed Reasoning - Non commercial loss rules: Division 35 of the ITAA 1997 sets out rules on the deductibility of losses from business activities for individuals, either on their own, or in a general law partnership. Under subsection 35-5(2) of the ITAA 1997, in order for Division 35 to apply, an individual must be carrying on an activity that constitutes a business. In Question 3 (above) reasoning was set out concluding your investment in the solar system does not amount to the carrying on of a business. As a result the non commercial loss rules will not apply in your situation.

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. | 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. | Question 1: The right to create RECs is a CGT asset. The right arises under the Renewable Energy (Electricity) Act 2000 (Cth) ( 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). | The transfer of the right, viewed separately from the acquisition of the system, might be taken to cause CGT event A1 to happen. | However in this case, where as part of the process of acquiring the system you assign your rights to the installer, it is considered that the reality of the matter is that you are acquiring a system 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 system (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 the discount received on the system from the assignment of the RECs will not form part of your assessable income. | Question 2: Taxation Ruling TR 2010/2 Income tax: effective life of depreciating assets (applicable from 1 July 2010) sets out that the effective life of solar power generating system assets is 20 years.