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Edited version of private ruling
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Ruling
Subject: Exempt from income tax
Facts
The entity will be exempt from income tax from the specified date.
Prior to this the entity received a government payment (the payment).
Prior to the specified date was the start up and establishment period of the entity
Reasons for decision
For the payment to the entity to be assessable income it must be either ordinary income or statutory income.
Ordinary income is defined in section 6-5 of the Income Tax Assessment Act 1997 as follows:
Section 6-5 Income according to ordinary concepts (ordinary income)
6-5(1) your assessable income includes income according to ordinary concepts, which is called ordinary income.
The term 'ordinary income' is not otherwise defined in the Income Tax Assessment Act 1997 or the Income Tax Assessment Act 1936.
In Scott v Commissioner of Taxation 3 ATD 142 Jordan CJ provided the following meaning on the word 'income':
The word 'income' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of receipt(at 144-45).
The payment will be ordinary income if it is income according to ordinary concepts from carrying on a business.
The ATO view on carrying out a business is stated in Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? Paragraph 13 to 17 set out the indicators for determining whether an activity is a business:
13. The courts have held that the following indicators are relevant:
· whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;
· whether the taxpayer has more than just an intention to engage in;
· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
· whether there is repetition and regularity of the activity;
· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;
· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;
· the size, scale and permanency of the activity; and
· whether the activity is better described as a hobby, a form of recreation or a sporting activity.
15. We stress that no one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way, so that the costs are kept down and the production and the price obtained for the produce are increased.
16. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.
17. Subject to all the circumstances of a case, where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business .
To be a business the entity has to have a profit making motive.
From the time of its establishment, the entity has been a non-profit organisation concerned with improving energy technologies. At the relevant date, the entity was in the process of being established and was not actively pursuing its objects.
We do not consider the entity to have had a profit making motive at the relevant date. As such, we do not consider the entity to have been carrying on a business at that time.
As the entity was not carrying on a business at the time of the payment, the payment is not considered to be ordinary income for the purposes of section 6-5 of the Income Tax Assessment Act 1997.
As the payment is not considered to be ordinary income, it is necessary to determine if the amount is statutory income. The tax legislation provides several categories of statutory income, however, we consider the rules in section 15-10 of the Income Tax Assessment Act 1997 to be relevant to the payment.
Section 15-10 applies to bounties or subsidies received in relation to carrying on a business, it states:
Section 15-10 Bounties and Subsidies
15-10 your assessable income includes a bounty or subsidy that:
· you receive in relation to carrying on a business; and
· is not assessable as ordinary income under section 6-5.
As we have determined that the entity was not carrying on a business at the relevant date, section 15-10 can not apply to the payment.
Conclusion
As the entity was not carrying on a business at the relevant date, the payment is not considered to be assessable income.
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