Edited version of private advice

Authorisation Number: 1052325033641

Date of advice: 19 November 2024

Ruling

Subject: Assessable income and general deductions - business

Question 1

Will the price paid to you for each entry into the prize draw be assessable income to you under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will each payment made by you to the relevant Recipient be deductible under section 8-1 of the ITAA 1997?

Answer

Yes.

Question 3

Will payment of prizes by you to the winner of the prize draw be deductible under section 8-1 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2025

Year ending 30 June 2026

Year ending 30 June 2027

Year ending 30 June 2028

Year ending 30 June 2029

The scheme commenced on:

1 July 2024

Relevant facts and circumstances

You are a private company limited by shares.

You intend to launch a business in the year ending 30 June 20XX.

The business will be an online fundraising platform, through a digital prize draw where registered users indirectly support charitable and not-for profit (NFP) enterprises by purchasing tickets in the draw, where a percentage of the proceeds goes to the charitable or NFP enterprises.

You will list and sell entries to the prize draw on the online platform.

A purchaser can purchase multiple entries and each entry has an equal chance of winning the prize in the prize draw.

The selection of the winner for a prize draw will be conducted at random using an open-source algorithm.

Each charitable or NFP enterprise must:

•         have an ABN;

•         sign a fundraising beneficiary agreement.

You intend to fundraise only for worthy causes. To protect the brand, you will carefully screen applications to ensure a prospective charitable or NFP enterprises is appropriate for the platform.

Initially, you will be focused exclusively on community clubs that make a significant contribution to their community.

The following will be indicative of an appropriate cause:

•         volunteers from the community play a significant role in running the club;

•         the club is a not-for-profit organisation;

•         the club actively seeks a diverse range of participants from the community; and

•         the club promotes healthy and pro-social activities, even if within a competitive environment.

Proceeds from the sale of prize draw entries will be applied by you as follows:

a)    a percentage of the proceeds will be retained by you as an administration fee for operating the platform;

b)    a percentage of the proceeds will be allocated to the prize pool for the prize draw; and

c)    50% of the proceeds will be paid to the cause within a timeframe as set out in each fundraising beneficiary agreement to the cause's bank account.

Your obligations under the fundraising beneficiary agreement are to:

a)    list and sell the prize draw entries on the platform;

b)    apply the proceeds from the sale of prize draw entries in accordance with the agreement;

c)    comply with Australian state and territory trade promotions laws and charity fundraising laws in operating the platform; and

d)    comply with the Privacy Laws and the Privacy Policy in operating the platform.

The obligations of the cause under the fundraising beneficiary agreement are to:

a)    provide you with accurate and up-to-date information about the cause and its objectives;

b)    promote the platform through its own channels, including social media, newsletters, and website content;

c)    use the proceeds in accordance with its stated charitable or fundraising objectives as notified to you;

d)    provide you with access to the contact list for the purpose of promoting the platform, including sending promotional emails, notifications about the prize draw and updates on the fundraising campaign to the persons on the contact list; and

e)    comply with the Privacy Laws and the Privacy Policy.

To become a registered user of the Platform, a person must:

a)    be at least 18 years of age;

b)    possess the legal right and ability to enter into a legally binding agreement with you;

c)    complete your details in the manner required on the Platform sign-in page to create a password protected user account.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Question 1

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). 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.

Characteristics of ordinary income that have evolved from case law include receipts that:

a) are periodical, regular or recurrent;

b) are relied upon by the recipient for their regular expenditure and paid to them for that purpose; and

c) 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 payment is assessable as ordinary income in your hands as it is a product in a real sense of the business carried on by you and it will have the characteristics normally associated with ordinary income such as periodicity and reliance on the payments to meet regular expenditure.

The full amount of the token price will be assessable income to you under section 6-5 of the ITAA 1997.

Questions 2 and 3

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are necessarily incurred in gaining or producing exempt income.

A loss or outgoing must be incidental and relevant to operations or activities the taxpayer carries out to earn their income (Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236). There must be a sufficient connection (or nexus) between the loss or outgoing and the operations the taxpayer undertakes to earn assessable income.

Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, the commercial and practical implementation of the term 'necessarily incurred', imply that voluntary expenditure incurred for business needs may be deductible. In determining if the expense is reasonable in light of the circumstances, consideration should be given to the business and the context of the expense. An expense need not be compulsory to meet this requirement as it may be voluntary or arise inevitably due to the nature of the business.

It is up to the taxpayer to decide what is necessarily incurred in carrying on their business [Federal Commissioner of Taxation v. Snowden & Wilson Pty Ltd (1958) 99 CLR 431; (1958) 11 ATD 463 (1958) 7 AITR 308 (Snowden's Case)]. This was further supported in Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) 80 ATC 4542; (1980) 11 ATR 276; when the Court stated:

For practical purposes and within the limits of reasonable human conduct, it is for the man who is carrying on the business to be the judge of what outgoings are necessarily incurred.

The payments that you will make to the Cause, in return for the access to their contact lists and promotion of the platform, will be necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

Similarly, the payment of the prize to the winner of the prize draw, will also be necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, as without a prize, there is no prize draw.

These payments are not of a capital, private or domestic nature, and are not incurred in gaining or producing exempt income.

Therefore, the payments to the Cause and the prize winner payments will be deductible to you under section 8-1 of the ITAA 1997.

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