Edited version of private ruling

Authorisation Number: 1011727276670

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Ruling

Subject: Online seller fees and charitable donations

Question 1

Will seller upload fees generated as a fundraising initiative for locally based charities and not-for-profit organisations be considered assessable income for your business?

Answer:

Yes.

Question 2

Are you entitled to claim a tax deduction for donations made to charities and not-for-profit organisations which have deductible gift recipient (DGR) status?

Answer:

Yes.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are in the process of developing an online business which will focus on local communities and local businesses.

You will provide a range of services for families and derive revenue from business advertising, profiling and by hosting online 'stores' for local businesses.

Once section of your website is a second hand classified service where sellers can list their goods for sale for a small fee which is donated to charity.

The seller will use a drop down list on the website to nominate a charity or not-for-profit organisation from a list that you have selected and this organisation will receive the seller fee at the time of payment.

The fees will be paid into a master Paypal account and then distributed to participating charities or organisations on a regular basis.

You will not receive any portion of the fees, use these funds for the business in any way or accrue interest on the funds.

The only deduction made from the seller fees will be for the merchant banking fee, payable to Paypal.

While some of the participating charities and organisations will have DGR status there are others, particularly schools and not-for-profit organisations, which will not.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5 and

Income Tax Assessment Act 1936 Section 21.

Reasons for decision

Ordinary income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

In this statement, the word 'derived' and the phrase 'ordinary income' require explanation. Subsection 6-5(4) of the ITAA 1997 states that: 

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.

Taxation law does not contain a clear definition of ordinary income. Over the years the Courts have identified several different characteristics of ordinary income. The main characteristics that have been identified may include the receipt being:

· Received periodically and regularly,

· Relied upon or expected, and

· Earned.

Earned ordinary income has generally been held to include three categories, namely income from:

· Personal services, such as salary and wages

· Property or investment returns, such as dividends and interest

· Carrying on a business, such as proceeds from providing goods or services.

Barter transactions

Section 21 of the Income Tax Assessment Act 1936 provides that where, upon any transaction, any consideration is paid or given otherwise than in cash, the money value of that consideration shall be deemed to have been paid or given.

Taxation Ruling IT 2668 deals with barter transactions. The essential principle in this ruling is that barter transactions are assessable and deductible for income tax purposes to the same extent as other cash or credit transactions.

IT 2668 also provides at paragraph 12 that:

It is also necessary, if the consideration from barter or counter trade transactions is to fall within the concept of income in subsection 25(1), that the consideration be received or receivable as money, in the form of money's worth or in a form which can be employed in the acquisition of some other right or commodity (Federal Commissioner of Taxation v. Cooke & Sherden 80 ATC 4140; 10 ATR 696)

Although IT 2668 deals with subsection 25(1) of the ITAA 1936 (now repealed), the discussion is equally relevant to the application of section 6-5 of the ITAA 1997.

Application to your circumstances

In your case, you are in the process of setting up an online business which will provide a range of services for families and derive its revenue from business advertising, profiling and by hosting online 'stores' for local businesses.

One section of your business websiteis a second hand classified service where sellers can list second hand goods for sale for small fee. However, these fees will be classified as donations and sellers will use a drop down list to nominate a locally based charity or not-for-profit organisation who will receive their seller fee at the time of payment. The fees will be paid into a master Paypal account and then distributed to participating charities, schools or organisations on a regular basis.

Although you will not receive any portion of the fees, use these funds for the business in any way or accrue interest on the funds, these fees are still considered to be ordinary income for the purposes of section 6-5 of the ITAA 1997. The amounts are received regularly, they are expected and they are earned in respect to services you provide (ie - selling services) through carrying on a business. More importantly, the use of these funds is directed by you and your business. The seller fees, although eventually donated to charity, are not optional. They are a requisite expense for clients using your service and the fact that you choose to donate these amounts to charity is inconsequential to the client. You nominate the charities and organisations that can be selected to receive the seller fee and, therefore, are still dealing with the client's money in the direction of your choice in accordance with subsection 6-5(4) of the ITAA 1997.

In fact, the provision of a charitable donation to an organisation of your choosing instead of a straightforward cash payment for the services rendered falls within the concept of barter. The value of the seller fee or charitable donation was in a form which could be employed in the acquisition of some other right or commodity by you. Therefore the monetary value of the seller fee that your client provides in exchange for selling services provided by you is assessable as income under section 6-5 of the ITAA 1997.

Deduction for donations

Division 30 of the ITAA 1997 allows a deduction for gifts or donations of two dollars or more made to an 'eligible' organisation. These are organisations which have been endorsed by the Commissioner as DGRs and include school building funds. Generally, a gift of money will be acceptable if:

· the gift is made to a fund, authority or institution that is endorsed by the Commissioner as a DGR, or it is mentioned in a table in subdivision 30-B of the ITAA 1997;

· the gift is for $2 or more;

· the gift is made voluntarily;

· no material benefit is received in return for the gift, and

· an appropriate record of the gift is kept.

Application to your circumstances

In your case, you will be eligible to claim a deduction for the donations you make to the charities and organisations who receive the seller fees from your business providing that the recipients are endorsed by the Commissioner as a DGR.

At this stage, you are yet to finalise the complete list of gift recipients although you have suggested that not all of the participants have DGR status, particularly some schools and not-for-profit organisations.

You can check if an organisation is an endorsed DGR by visiting their website and entering either the organisation's Australian business number (ABN) or name in the search box.

If only one record matches your search criteria - the current ABN details are displayed. If more than one record matches your search criteria - a 'Search Results' list is displayed - select the organisation's ABN to access its current ABN details.

If the organisation is a DGR, information about its current DGR status is recorded under 'Deductible Gift Recipient'.

A complete list of endorsed DGRs can also be downloaded from the ABN Lookup website. Two lists are available:

1. entities that are DGR endorsed as a whole

1. entities that are DGRs in relation to the operation of a fund, authority or institution.

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