Solar panels for your business: Don’t forget the tax consequences
If the prospect of punishing electricity bills continuing to arrive has led you to think about installing solar panels at your business premises, further considerations could include the fact that not only will you be helping the environment, but you could also be helping your own bottom line — and not just through reduced energy bills. There can also be some positive tax outcomes that should flow through to ease your energy impost. The outcomes, while relying to some extent on a taxpayer’s specific circumstances, can certainly go some way to reducing operating expenditure.
The two main types of taxpayer who stand to be able to use the existing tax guidances to their benefit when making an investment in solar panels are businesses and investors. The problem however, and which theoretically has resulted in these strategies not being more widely utilised, is that the tax laws as they stand have very few provisions that specifically address the treatment of solar panels for tax purposes.
There are however some public documents and interpretive decisions that are able to point taxpayers in the right direction. Importantly, as these are Tax Office guidances, they serve to protect a taxpayer from penalties where they are relied upon in good faith, should any of the principles outlined be subsequently proven to be not applicable.
Assessable income and deductions
Before the introduction of the renewable energy target, the government had a scheme that offered cash rebates through issuing “Renewable Energy Certificates” based on the amount of solar panels that were bought and installed. On the back of this scheme, the Tax Office released an interpretive decision that makes it clear that Renewable Energy Certificates (RECs) will be considered as “assessable recoupments”. This basically means that where there is a reimbursement of costs (such as legal fees if you win a court case, to give another example), this is to be considered as assessable income.
The impact of following this interpretation is largely on a taxpayer’s cash flow. When looking at the price of solar panels, an invester or business taxpayer should be aware that the rebate should be included in assessable income for the year of purchase.
The other significant inflow that will need to be addressed is the recurrent feed-in tariff — in other words the amount a power retailer pays to the owner of a solar panel installation for the power generated from their unit in any given period. Generally, this feed-in tariff will be viewed as assessable income, and mostly likely as a form of ordinary income.
The cost of electricity for a business represents an allowable deduction, much like other relevant taxpayers for their income generating property. It is important to note that for taxpayers with solar panels, this gross deduction will need to be offset by the incomings derived by the feed-in tariff provided by power retailers.
Clearly interest on loans taken to fund the purchase of solar panels used on premises that are used wholly to produce assessable income will be deductible.
The two main considerations that will arise when thinking about solar panels for investors as opposed to businesses are the application of depreciation provisions, and how GST will apply to various transactions.
CGT and depreciable assets
The Tax Office interpretation is that although a Renewable Energy Certificate is a CGT asset, the assignment of that certificate to the installer of solar panels will not result in a CGT event. Instead an assessable recoupment will arise, as discussed earlier, which will flow through to assessable income.
The Tax Office makes it clear that it considers a small energy generation unit or a solar water heater to be a depreciating asset. This means that a deduction is available where that asset is installed on a property wholly used to produce assessable income through rent or through the operation of a business. Importantly, the cost for the purposes of this deduction would be the gross price of the unit. In other words, the cost for depreciation purposes would be the amount the taxpayer pays the installer to install the unit plus the rebate they have received (and included in assessable income).
So while the saving in energy costs is a big consideration, the value of this depreciation deduction should be factored in by a business or investor when analysing whether the installation of this type of asset makes economic sense.
Whether a taxpayer makes taxable supplies such as those typically produced in a majority of businesses, or input taxed supplies such as rent from residential property, will largely drive the GST consequences of acquiring a solar unit.
A business taxpayer who wholly makes taxable supplies from the use of premises is able to claim input tax credits associated with the purchase of a solar unit. However, where a taxpayer is making supplies of residential accommodation and receiving rent, they will typically not be able to claim GST credits.
Bringing it all together
One way to see how a typical scenario would play out is to look at a hypothetical case study; in this case let’s look at the Smith family, which has a family company that owns a property, which it uses in a warehouse and distribution business.
The property is solely used to derive assessable income. The managers of the business have recently complained that their electricity bills are continually rising and that if solar panels are installed this could provide significant cost savings, as energy use is predominately at peak hours during the day.
The Smiths commission their accountant to produce an economic analysis and feasibility study to examine this proposal. They ask that he provide some guidance in relation to how income tax and GST will affect the economics of this proposal. As explained above, in the absence of direct Tax Office provisions that specifically address the treatment of solar panels, the accountant conducts his analysis in accordance with general principles.
To start with, he looks at the business’s current electricity tariffs, including the previous bill. Then he works out how this would change with installation of the solar panels. His analysis is laid out in the table below and the flow of transactions is shown in the chart at the bottom of page 7.
It is determined that a cash flow saving of $3,600 will be made in the first financial year of installation. The accountant also makes it clear that the deduction of the solar panels for depreciation purposes will persist, however no additional tax will be charged on the rebate (as this is a one-off item on the purchase of the panels).
The Smiths note that the company’s cash flow in year one will improve by a small amount, and the company will thereafter enjoy lower electricity bills and also the benefits of additional depreciation deductions.
SMITH FAMILY TRUST
|FIRST YEAR – CASHFLOWS ($)|
|WITHOUT SOLAR PANELS||WITH SOLAR PANELS|
|COSTS||GST ex||GST||GST inc||GST ex||GST||GST inc|
|Cost of solar panels|
|Cost paid by family trust||–||–||–||20,000||2,000||22,000|
|Cost paid by government (rebate)||–||–||–||7,000||700||7,700|
|Additional tax on rebate (30% x 7,000)||–||2,100|
|Deduction for depreciation (20 year effective life)||–||(2,700)|
|Total after tax cost – electricity and solar panels||80,000||76,400|