Occasionally clients and friends present documents prepared by Solar Panel sales staff showing how solar panels can lead to extraordinary savings such that my clients or friends will make a net profit from solar after a very short period of time. The Net Present Value calculations are often based on 1 or 2 years of data then extrapolated after making many generous assumptions.
In addition to the mathematical concerns I have, I am also concerned that I have heard of sales staff advising clients that there are no tax implications on solar investments. This does remind me of numerous situations when car sales persons have kindly offered tax advice to clients to finalise a car sale!
Mr Ken Mansell, a tax consultant, wrote an article in the “Taxation in Australia” journal, volume 46(2) pg37-38 which discusses some of the concerns I have regarding the potential tax implications of solar investments. Mr Mansell has kindly allowed the article to be included below:
Solar feeding into tax
Over the last few years, governments have been providing money to people who install solar panels on the roof of their home. They have done this irrespective of the fact that “[t]he implicit abatement subsidy for the programs that subsidise solar PV (photovoltaic)… was estimated to be in the range of A$431/t CO2-A$1043/t CO2″[1]. This fact makes roof top solar one of the least effective uses of money to reduce CO2 by governments – given that the world carbon price is currently estimated to be around $50/t CO2 and Australia is looking to introduce a price on carbon of around $30/t CO2.
So why have so many people rushed to put solar on their roof if it is a highly inefficient way to reduce CO2? The answer can only be the money. However, it appears that many people who think they have found the golden goose on their roof have forgotten that the taxman wants his part – that the feed-in tariffs available can be assessable income.
Tax Office Rulings
While the Tax Office has not released a public ruling on the assessability of solar feed-in tariffs, they have numerous private rulings on their website and these show a trend towards many solar feed-in tariffs being assessable income.
Numerous private rulings by the Tax Office (see 1011739693623 about PV on strata units, 101157831449 about PV on a farm house and 1011659307333 about PV on a normal private residence) have concluded that the feed-in tariff is assessable income. Other rulings (like 1011733968747 and 1011677090553) have concluded that payments or credits (net feed-in tariff) for very small scale PV that will only cover the emissions of the household and nothing more are not assessable income.
Assessable income on the feed-in tariff may not be the only problem. Most of the private rulings also remind the owner that:
� Under many of these schemes the Government also makes payments to the installer on the home owner’s behalf to bring down the costs they had to pay. This payment is made because the Government gives the owner Renewable Energy Certificates (RECs) for installing solar and the owner assigns them to the installer to get the discounted installation price. These private rulings make it clear that in many cases the value of these RECs given to the installer (the amount of the discount) is an assessable recoupment and must also be included in the home owner’s assessable income. Ouch!
� Capital gains tax and goods and services tax (GST) consequences may also apply. GST may only apply if the owner is required to register (turnover above $75,000). However, the main residence exemption under Division 118 of the ITAA97 will not apply to the solar system on the roof when the property is sold. The home owner may therefore need to apportion the amount received on any future sale.
Tax Office Reasoning
There are two provisions that the Tax Office focuses on in their rulings about the assessability of the feed-in tariffs. These are:
� Subsection 6-5(1) of the ITAA97 – ordinary income means income ‘according to ordinary concepts’.
� Subsection 6-5(4) of the ITAA97 – 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 private rulings summarise the case law in relation to ordinary income into the following long held factors:
� 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; and
� the motive of the person making the payment, but noting that this latter factor is rarely decisive, as a mix of motives may exist.
Some of the private rulings look at Taxation Ruling IT 2167 on rental properties and the discussion in this public ruling about when amounts received will be considered income and when they will be considered to be in the nature of family or domestic arrangements. They conclude from this analysis that there are four important questions:
1. The terms of the arrangement with the electricity retailer and in particular any requirement on the retailer to buy all electricity that is generated from the system (as occurs under a gross feed-in tariff scheme).
2. The feed-in tariff payments and whether they are considered to represent a return on your investment in the solar system.
3. Whether there is a realistic opportunity for you to profit from the arrangement.
4. The regularity of payments / credits received from the feed-in tariffs such that they can be relied upon.
Questions 1 and 4 will suggest any feed-in tariff is assessable income for all the current feed-in tariff arrangements. The way these systems have been marketed would suggest that these feed-in tariffs are assessable income under question 2. So that just leaves question 3, whether there is a realistic opportunity to profit from the arrangement. It is this question that appears to be the main difference between the private rulings that have held the feed-in tariffs to be assessable and the private rulings that have held the feed-in tariffs are not assessable income.
If you thought the fact the feed-in tariff is assessable is bad, the worst is yet to come. The private rulings remind us that under subdivision 20-A of the ITAA97, certain recoupments are assessable, including a grant in respect of a loss or outgoing.
The private rulings conclude that the “government rebates on installation”, as they are often called, are assessable recoupments and so are to be included in assessable income. However, as these systems may be depreciated under Division 40 of the ITAA97, the amount of the recoupment that is assessable in each year will be the amount of any depreciation claimed (section 20-40 of the ITAA97).
This means that although the tariff might be assessable income, you may not get any depreciation deductions for many years due to the installation rebates from the government. Note that in TR 2010/2 the effective life of solar power generating system assets on residential property is 20 years.
Final Thoughts
So what can we draw from these rulings? To quote from private rulings 101168079104 and 1011733968747:
� “There is a realistic opportunity to profit from the arrangement” – feed-in tariffs are assessable income.
� “There is no realistic opportunity for you to profit from the arrangement” – feed-in tariffs are not assessable income.
In layman terms – if the roof top solar system looks big enough to make a profit then the whole payment or credit on your utility bill is taxable. What is big enough? Again from the private rulings we can see that a 2.5 KV system can be seen as small enough to just cover the households emissions (see 1011733968747). However, get a 7.5KV system and tax will be payable (see 1011676003047).
Remember, if the feed-in tariff is assessable, you may be able to claim deductions (interest, repairs, etc) but any depreciation may be limited by installation rebates.
Three last comments:
1. Some have argued that a net feed-in tariff (one that reduces your electricity bill before giving you and payment) is non-assessable but a gross feed-in tariff is assessable. This cannot be concluded from the private rulings. In the private rulings where net feed-in tariffs were found to be non assessable the reasoning clearly states the size of the solar PV installed were only to cover the households CO2 emissions so it was likely there would be no net tariff payments. And we must remember that under subsection 6-5(4) of the ITAA97 a taxpayer is taken to derive income as soon as it is applied or dealt with in any way on their behalf or as they direct. Therefore, offsetting the amount against your other utility bills will not stop an amount from being assessable.
2. Others have argued if the property is used for income producing activities the feed-in tariff is assessable but not if the house is used for private and domestic purposes. Again this cannot be concluded from the private rulings. Private ruling 101168079104 is about solar PV on the roof of a rental property and the reasoning is the same as the private dwelling private rulings.
3. It does appear that many people are just ignoring the tax issues but I doubt it will go away. The Tax Office could easily ask each State and Territory for a list of people who are getting the feed-in tariff or RECs and match that to tax returns.
References
1 Australian Government, Carbon Emission Policies in
Key Economies, Productivity Commission Research
Report, 9 June 2011.
2 See private rulings 1011739693623 (PV on strata
units), 101157831449 (PV on a farm house), and
1011659307333 (PV on a normal private residence).
3 For example, private rulings 1011733968747 and
1011677090553.
4 See private ruling 1011733968747.
5 See private ruling 1011676003047.