Taxing the sun

If you or your friends or neighbours have solar panels on the roof of their home it is likely the excess electricity is being sold back to the retailer for a credit on the bill. It is also likely that not much thought has been given to whether that ‘credit’ is actually taxable, however Inland Revenue (IRD) has given some thought to it.

Technically, the credit is likely to comprise taxable income, which then leads down the ‘rabbit hole’ of what costs can be claimed against the income, e.g. depreciation on the solar panels, and a portion of rates, interest, house cleaning costs, etc.

Draft legislation released in August includes a proposed new income tax exemption for electricity generated at the home that is sold back to the grid. The exemption is to apply from the 2026–27 income year and is a pragmatic change to eliminate the need to calculate and return income by the general population, who typically derive income from salary or wages which are subject to automatic assessment by IRD.

The exemption will apply to income derived from the sale of excess electricity generated at a dwelling by a natural person. “Excess electricity” refers to power generated but not consumed at a dwelling, which is then supplied to an electricity retailer. The exemption does not impact payments or discounts provided by retailers for a person’s own electricity use.

A dwelling includes a residence and its associated structures or improvements but excludes commercial accommodation such as hotels or motels. Therefore, income from electricity generated at commercial properties will not qualify for the exemption. However, in most cases, it would be captured as part of the ‘netting’ of the income against the deductible electricity cost.

For farms, only electricity generated at the farmhouse or its immediate surroundings qualifies for the exemption, as this area is considered the dwelling. Income from panels on the wider farmland or other farm structures will remain taxable.

Of note, and somewhat unusually, the exemption only applies to natural persons (including tenants), the definition of which excludes individuals who are trustees. Hence, if an electricity account is in the name of a trustee who is not also a beneficiary, the exemption will not apply. In most cases, the power account will be in the name of the beneficiary / occupier anyway. But this is something worth checking to ensure taxable income is not ‘inadvertently’ being generated.