Edited version of private advice

Authorisation Number: 1051572753046

Date of advice: 12 September 2019

Ruling

Subject: Income

Question

Is the money you receive from a seed ordinary income?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commenced on:

1 July 2018

Relevant facts and circumstances

You own land.

You are participating in a seed trial.

As part of this arrangement you agree to allow a third party to plant and harvest flora on your land.

In return for this you are entitled to a share of the harvest revenue.

You retain ownership of your land and you grant the third party the rights as outlined in Clause X.X, to access the land, establish, grow and maintain the flora, and harvest and sell the flora.

You are not expected to provide any services to the third party during the period of the arrangement, unless engaged as a contractor separately to the arrangement (clause X.X).

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Based on case law, it can be said that ordinary income generally includes receipts that are earned, expected, relied upon, and have an element of periodicity, recurrence or regularity.

The legislation does not provide specific guidance on the meaning of income according to ordinary concepts. However, a substantial body of case law exists which identifies likely characteristics.

In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation, the Full High Court stated:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

Amounts that are periodical, regular or recurrent, relied upon by the recipient for their regular expenditure and paid to them for that purpose are likely to be ordinary income, as are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient.

Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. The whole of the circumstances must be considered and the motive of the payer may be relevant to this consideration.

Taxation Determination TD 95/62 - Income tax: will the owner (or lessor) of land who allows the land to be used in a sharefarming arrangement be considered to be engaged in a business of primary production as defined by the Income Tax Assessment Act 1936 ('the Act')?.

While this TD is not exactly the same as your circumstances the principals still apply to your circumstances. The TD describes analogous situations to this where one party allows another to farm and harvest crop on their land and in return they receive a portion of the crop proceeds. It mainly deals with the question of primary production but at paragraph 6 it provides the following:

... The receipt by the landowner of a payment from the farmer for the use of the land would be in the nature of income from property rather than from the carrying on of a business of primary production.

Income derived from property is considered ordinary income under section 6-5 of the ITAA 1997, normally associated with interest, rent, and dividends income.

In your case the $XX, XXX.XX you receive from the Forest products Commission is ordinary income as it is income from property.

Therefore the income you receive is assessable income and must be declared in your Australian tax return in the year it is received.

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