Capital Gains Tax Implications - Term Paper Example

Introduction to Taxation Law –7229 Semester 2 - Assignment – 30 marks Solicitor: ___ Phone: ___ Matter ID: ___ ___ Mr. James Paul ACT Solar Systems Ltd. Sydney, Australia Dear Mr. Paul: Thank you for contacting me with regards your taxation concerns. Based on the information you provided, the ACT Solar Systems Ltd as manufacturer for solar panels qualifies for the feed-in tariff program of the Australian government. Also called the renewable energy payments, this is a government policy which encourages electric grid utilities to use renewable energy such as solar power. Feed-in-tariff has been adopted by Australia together with 62 other countries. This program pays the PV system owner for any surplus energy that is produced. This means that end-consumer of the solar panel will be paid for any saved kilowatt for installing the PV system. More details are provided below: Income Tax Section 4-1of the Income Tax legislation states that income tax is paid by each individual and company, and by some other entities. Income tax is paid for each year ending on 30 June, and it is called the financial year. Your income tax is worked out by reference to your taxable income for the income year. The income year is the same as the financial year, except in these cases: (a) The income year is the previous financial year for companies; (b) An accounting period that is not the same as the financial year, any such accounting period or, for a company, each previous accounting period is an income year. The Commissioner allow an adoption of an accounting period ending on a day other than 30 June as provided in Sction 18 of the Income Tax Assessment Act 1936. 1 Assessable Income Energy Matters reported that as of May 2010, there is no specific legislation dealing with incomes generated from feed-in tariff.2 However, the common law may be used. The assessable income tax as provided for by law states that: Assessable Income (s 6-5 and s 6-10 Less: Allowable Deductions (s 8-1 & Div 25) = Taxable Income x Tax rate + Medicare levy (1.5%) + (surcharge 1% if applicable) = Tax payable - Less: tax offsets + rebates = Tax refund or payment to ATO This is applied to all entities, whether from business, property, hobby, profit-making scheme, or as shareholder for a corporation. Even compensation for loss of salary, pain and suffering are considered incomes. Assessable income includes ordinary incomes derived from all sources including outside of Australian jurisdiction as long as one is an Australian resident. For non-Australian residents, assessable incomes include only those gained from all Australian sources for the covered financial year. There are also incomes that are called statutory incomes and considered assessable incomes. For ACT Solar Systems Ltd., a flat rate of 30% will be filed for payment as income tax. All statutory incomes derived from Australian sources are assessable incomes.3 Australian residence is an important distinction because only Australian residents are provided tax-free threshold from $6,000 up to $11,000 income rebate while non-residents have a flat rate for gross income of 29%. There is also no medical levy for non-residents. ACT Solar Systems Ltd. being a company incorporated in Australia meets 3 criteria as a resident company: carries on business in Australia, and has either its central management or control in Australia, or its voting power controlled by shareholders who are residents of Australia Income Deductions ACT Solar Systems Ltd. may deduct from assessable income any and all incurred expenses in carrying on a business for the purpose of gaining or producing the assessable income. As a business entity or manufacturer for solar panels, ACT Solar Systems Ltd may apply for private ruling. Private ruling Authorisation Number: 92788 states that credits or payments received for power generated by solar panels on residence is not assessable for income tax. The end-users, however, are not entitled to either an outright deduction or a decline in value deduction for the cost of the solar panels and are not entitled to any deductions in relation to funds borrowed in order to purchase the solar panels (ATO, 2010). Losses that cannot be deducted are outgoing a capital nature, private or domestic nature, exempt income, and fines or penalties.4 Sufficient nexus acceptable by the court for loss or outgoing must be incidental or relevant expense to earn or produce an income. It must also be an income-earning expense. Other non-taxable expenses include death duty although capital gains tax applies, gifts, inheritance tax, sales tax which was replaced by GST, Poll tax, and window tax.5 Other possible deduction may be filed by ACT Solar Systems Ltd, for goods and services tax (GST) under section 8-1 of the «Income» Tax Assessment Act 1997 (ITAA 1997) provided that it “meets the requirements in subsection 8-1(1) of the ITAA 1997 and is not excluded by subsection 8-1(2) of the ITAA 1997.”6 Incidental and Relevant Loss ACT Solar Systems Ltd. proposed to make the cost and installation of a solar panel a tax deduction. This may be possible through the Herald and Weekly Times Ltd v FCT ruling which held that natural consequence for conducting business.7 The income derived from installation of solar panels to households will be considered assessable incomes. While the tax deduction scheme was allowed, it also becomes an instrument to install more solar panels to households. Tax deducted from the residents or homeowners for the installation of the solar panels will be directly credited to ACT Solar Systems Ltd. While this same amount may be considered as installation fees, this has been paid for by the government through tax deduction, and enters into the coffers of ACT Solar Systems Ltd. as income. It is therefore considered an assessable income. The tax deduction is like a subsidy of which made into agreement with the government8 in order to make solar panels become attractive to end-users. The subsidy has been received in order to carry on a business9 and that is to sell solar panels. As Hill J stated: Hill J stated: . . . the word "in" means "in the course of" and requires a direct relationship to exist between the bounty, on the one hand, and the carrying on of the taxpayers business, on the other. The second limb comprehends a bounty or subsidy received "in relation to" the carrying on of the taxpayers business. These words no doubt are sufficiently wide to cover the first limb, but were obviously intended to extend it. Thus the relationship between the receipt of the bounty on the one hand, and the carrying on of the business, on the other, may be less direct where the second limb is sought to be applied than where the first limb is applied.10 The tax deduction may be considered above the ordinary income category because it is only the actual trading receipts that are considered such. The main issue becomes the tax deduction and the business activity as seller of solar panels. Closer scrutiny will identify that the tax deduction made on the end-user has been characterised as government subsidy in order for ACT Solar Systems Ltd. to gain the process. It was made to assist in meeting costs of acquisition of solar panels and may not be assessable income under section 6-5 of the ITAA 1997. However, under the Explanatory Memorandum (EM) to Tax Law Improvement Bill 1997, it was stated that “…subsidies of a capital nature related to carrying on of business will be assessable under this provision.”11 Capital Gains Tax Implications Capital gains applicable to any form of investment, in this case the solar panel or photovoltaic system, is considered assessable income. The feed-in tariff to be paid to every electricity producer or individual is a capital gain that is taxable. Residents may claim for tax deduction on the use of solar panel as provided for under the ACT’s Electricity Feed-in (Renewable Energy Premium) Act 2008. It was stated specifically that: (2) It is a condition of the distributor’s licence that the distributor must, on application by the occupier of premises at which there is an NEL compliant renewable energy generator— (a) connect the generator to the distributor’s network to enable electricity generated by the generator to be supplied to the network; and (b) reimburse the utility that is the electricity supplier to the premises the difference between— (i) the amount payable under subsection (3) for electricity generated by the generator; and (ii) the normal cost of that electricity; and (c) pass on to the occupier any additional metering costs in relation to electricity generated by the generator.12 However, once the feed-in tariff payments started coming in, residents or electricity producers which may be individuals or groups, need to include the income or capital gains in their assessable income. Feed-in Tariffs Feed-in tariff has helped manufacturers for alternative energy to reduce their cost as mass production and use have pushed improvements, innovations and eventually, gains.13 There are territorial differences in the application of feed-in tariffs such that Canberrans can install photovoltaic or solar cells to produce their own energy as well as sell to the power grid any excess unused. This will be paid for 3.88 multiplied to the retail cost of electricity. This is applicable for 20 years.14 Energy Matters pointed out that: Individuals will not need to pay/remit GST from their feed in tariff income. The reason being that selling electricity back to the utility providers is considered an enterprise but you need to receive $75k per annum from this source to be required to register for GST. However, businesses will need to pay/remit GST for their feed in tariff income.15 In addition, the feed-in tariff applicability is as follows: 6 Feed-in from renewable energy generators to electricity network (1) This section applies to— (a) an electricity distributor licensed to distribute electricity through an electricity network; and (b) an electricity supplier licensed to supply electricity from the network. (2) It is a condition of the distributor’s licence that the distributor must, on application by the occupier of premises at which there is an NEL compliant renewable energy generator— (a) connect the generator to the distributor’s network to enable electricity generated by the generator to be supplied to the network; and (b) reimburse the utility that is the electricity supplier to the premises the difference between— (i) the amount payable under subsection (3) for electricity generated by the generator; and (ii) the normal cost of that electricity; and (c) pass on to the occupier any additional metering costs in relation to electricity generated by the generator.16 The following table provides an overview of the scheme: Source: Energy Matters, 2010 Public Housing Tenants For public housing tenants, same rule for feed-in tariff may apply. There are various ways to make available the PV system to low-income families including tax deduction of installation. A form of subsidy or grant may be sought by low-income families in public housing. However, all forms of grants or subsidies are considered assessable income and each taxpayer or tenant who availed of the PV system will be taxed for it. As mentioned earlier, subsidies or grants, received in order to carry on a business17, i.e. feed-in tariffs are assessable incomes. Occupier or Owner It is a general rule that those who rent a property pay the electricity consumed by it. Where PV system has been installed, the Occupier will be considered as end-user and therefore, buyer of the PV system. He or she will be beneficiary of possible tax deductible installation as well as assessed of the capital gains tax once feed-in tariff becomes effective. To conclude, I therefore advice that it is possible to apply cost and installation of PV system or solar panels as tax deduction for end-users. However, the income derived from the sales of the solar panels will be assessable income on the part of ACT Solar Systems Ltd. The suggestion of making the cost and installation of solar panels tax deduction would make the use of solar panels become more popular among households in Australia and will certainly increase profit for shareholders. The Electricity (Renewable Energy Premium) Feed-in Act 2008 states that: 5B Application of Act (1) This Act applies to an NEL compliant renewable energy generator installed in the ACT. (2) However, this Act does not apply to an NEL compliant renewable energy generator installed at premises if the capacity of the generator, or the total capacity of all the NEL compliant renewable energy generators installed at the premises, is more than 30kW. (3) Also, this Act does not apply to an NEL compliant renewable energy generator if the occupier of the premises at which the generator is installed is— (a) a territory agency; or (b) a territory-owned corporation; or (c) the Commonwealth or a Commonwealth authority; or (d) an entity determined by the Minister.18 In the long run, income and gain will be realized through the massive production and distribution of PV systems. I hope, the above clarified the matter. Regards, Name Reference: Australian Taxation Office (ATO). 2010. Edited Version of Private Ruling. Accessed from http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/92788.htm David Toke (5 February 2006). "Renewable financial support systems and cost-effectiveness". Journal of Cleaner Production 15 (3): 280–287 Energy Matters. 2010. Feed in tariffs in Australia - at a glance. Accessed from http://www.energymatters.com.au/government-rebates/feedintariff.php#fit-gross-net Read More