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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012468003103

Issue 1

Subject: Whether receipts derived by a Family Trust are income

Question 1

Are receipts derived by the AAA Family Trust from Associated parties income for the purposes of section 6-5 of the Income Tax Assessment Act 1997 (ITAA97)?

Answer

Yes.

This ruling applies for the following period(s)

Financial year ending 30 June 2007.

Financial year ending 30 June 2008.

Financial year ending 30 June 2009.

Financial year ending 30 June 2010.

Financial year ending 30 June 2011.

Financial year ending 30 June 2012.

The scheme commences on

On or after 1 July 2006.

Relevant facts and circumstances

The AAA Family Trust

    1. The AAA Family Trust (AAA) is a discretionary family trust established by way of deed in late 200X. It was controlled by AA and AA or their Associates until a trustee in bankruptcy was appointed in early 20YY.

    2. The AAA carries on a business;

Vacant residential property

    1. AA (AA) and AA (AA) owned a residential house block as joint tenants;

    2. This house block was purchased in or around 200Z by AA and AA;

    3. The AAA commenced development of the house block in or around June 200X;

    4. AA at early 20YY, the development of the house block is still ongoing and is approximately V% complete;

Development of vacant residential property

    1. The AAA is developing the residential house block by constructing a W bedroom home and garage;

    2. The development is conducted by the AAA;

    3. The expenditure for the development is paid for by the AAA;

    4. The AAA invoices AA and AA on a quarterly basis on an arm's length basis for its development services;

    5. In or around 200T, AA and AA deposited up to $X with the AAA for the development it was conducting;

    6. As the AAA issued invoices to AA and AA, it drew down an amount equivalent to the invoice from the deposit; and

    7. So far, the AAA has billed $Y for its development services and there remains $Z of the deposit with the trust.

Assumptions

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5.

Reasons for decision

Question 1

Summary

The receipts derived by the AAA from AA and AA are ordinary income for the purposes of the tax law because these receipts exhibit the character of income according to principles laid down by the courts. It is irrelevant to a question of whether a receipt is income that the payer was and remains an associated entity

Detailed reasoning

1. Section 6-5 of the ITAA97 - Income according to ordinary concepts

1.1. Sub-section 6-5 of the ITAA97 provides that Assessable income includes an entity's ordinary income. Ordinary income means income according to ordinary concepts.

1.2. Ordinary income is not defined in the tax law. In the case of FC of T v Sherden 80 ATC 4140, the Full Federal court said

    'Whether a receipt is to be treated AA income or not is determined according to 'the ordinary concepts and usages of mankind'... except where statute sweeps in particular receipts or amounts which would not ordinarily be taken to fall within the concept.'

1.3. Whether a receipt is to be treated as income or not requires a consideration of the ordinary characteristics and quality of receipts treated as income. In FC of T v Myer Emporium 87 ATC 4363, the Full High Court considered that the key features of income include periodicity, recurrence and regularity. Although, these features are not necessarily decisive.

1.4. Indeed, where a business is carried on by an entity and that entity derives a profit, such profits are income if the transactions from which the profits arise are in the ordinary course of the entity's business.

1.5. On the facts, the AAA carries on a stonemason, cleaning and contracting business. During the financial years ending 30 June 200V to 30 June 20TT, it provided property and development services to AA and AA in the form of provision of related building products and appropriately skilled labour. It invoiced AA and AA for these products and services for arm's length consideration. In turn, the AAA would reduce the deposit amount by the equivalent of each invoice.

1.6. Further, a determination AA to whether a receipt is income is found by reference to its character in the hands of the recipient and not by reference to the payer or some other person. In McLaurin v FC of T (1961) 104 CLR, the court said that

      '...in point of law it would plainly be unsound to allow a determination of the character of a receipt in the hands of the recipient to be affected by a consideration of the uncommunicated reasoning which led the payer to agree to pay it...

1.7. The fact that the AAA, AA and AA are associates is irrelevant to whether receipts derived by the AAA have the character of ordinary income. So long as AAA's receipts have the character of income, they will be income for the purposes of the tax law.

1.8. Accordingly, receipts derived by the AAA from AA and AA are income for the purposes of section 6-5 of the ITAA97.


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