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Ruling

Subject: Assessability of money received as a gift

Question

Is the one-off payment received as a gift from a not-for-profit organisation to be used to create a business assessable income?

Answer: No.

Relevant facts

The rulee operates a business. The rulee received money as a gift from a non-profit organisation to assist in the establishment of the business.

The payment was a one-off payment.

At the time the payment was made, no business has been established and no work had been carried on.

Reasons for Decision

In determining if the prize is assessable income, reference is made to whether the amount is considered ordinary income (section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)) or statutory income (section 6-10 of the ITAA 1997).

Pursuant to subsection 6-5(1) of the ITAA 1997, your ordinary income includes income according to ordinary concepts. However, the ITAA 1997 provides no guidance as to the meaning of "income from ordinary concepts".

Ordinary income has generally been held to include income from rendering personal service, income from property and income from carrying on a business.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income may be included in assessable income under another provision as statutory income.

Case law has established certain factors to be taken into consideration in determining whether an amount received is considered income according to ordinary concepts.

Frequent characteristics of income are the elements of periodicity, recurrence and regularity. Generally speaking, a receipt will be income according to ordinary concepts if it is a receipt arising out of a taxpayer's employment or business activities, e.g. the payment of salary or wages. This will be so even if the receipt is not directly related to any service provided by the recipient to the donor (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540). However, a windfall gain or a receipt that is a mere gift will not constitute income according to ordinary concepts.

Generally, a gift or prize is regarded as a personal wind fall gain and not as ordinary income unless the taxpayer has received the prize or gift because of, in respect of, or in relation to any income producing activity of the taxpayer.

In determining whether a prize or gift is ordinary income the following factors need to be taken into account:

· how, in what capacity, and for what reason the recipient received the prize or gift (Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570, (1953) 5 AITR 496; (1953) 10 ATD 126 (Squatting Investment Case)

· whether the prize or gift is of a kind which is a common incident of the recipient's calling or occupation (Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 10 AITR 367; (1966) 14 ATD 286 (Scott's Case)

· whether the prize or gift is made voluntarily

· whether the prize or gift is solicited (Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 6 AITR 248; (1956) 11 ATD 68 (Hayes' Case) and Scott's Case)

· whether the prize or gift can be traced to gratitude engendered by some service rendered by the recipient to the prize of gift donor (Squatting Investment Case)

· the motive of the prize or gift donor (though this factor is rarely decisive in itself) (Hayes' Case); and

· whether the recipient relies on the prize or gift for regular maintenance of themselves and any dependants (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; (1952) 10 ATD 82 (Dixon's Case) and Federal Commissioner of Taxation v. Blake (1984) 75 FLR 315; (1984) 15 ATR 1006; 84 ATC 4661).

When the above factors are applied to the circumstances in the present case and the recipient's individual circumstances, the money does not take on the character of ordinary income.

In particular:

· the rulee received the money from a not-for-profit orgnisation to assist in the establishment of a business;

· the prize cannot be characterised as relating to a provision of services, especially as the payment was received prior to the commencement of the business;

· the payment was one-off payment;

· the rulee does not rely on the money for general living expenses.

There is no characteristic of periodicity, recurrence or regularity about the payment. It is not a product of any employment, services rendered or any business. The receipt is a one-off lump sum payment.

Statutory income is defined at section 6-10 of the ITAA 1997 as "amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income". The ITAA 1997 lists the various provisions for statutory income at section 10-5.

The money received is not statutory income, as it does not fall for assessment under any of the sections listed in section 10-5 of the ITAA 1997.

In conclusion, the money received as a gift to assist in the establishment of the business fails to be caught by either the ordinary or statutory income tests and therefore is not assessable income in the hands of the recipient.