Edited version of your private ruling

Authorisation Number: 1012519680758

Ruling

Subject: Assessable income

Question 1

Are the payments made to you by a company for constructing a facility assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Are the payments considered assessable income under section 15-10 of the ITAA 1997?

Answer

Yes

Question 3

Will the payments constitute 'assessable primary production income' of the partners for the purposes of Division 392 of the ITAA 1997?

Answer

No

This ruling applies for the following periods

Year ending 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

o your application for private ruling; and

o the agreement .

You carry on a primary production business in partnership.

A company has treated water to dispose of. They are not permitted to release it in natural watercourses.

The company is offering this water to primary producers to be used in their irrigation schemes.

You have entered into an agreement with the company whereby it has agreed to provide, and you have agreed to take, specific water under the terms of the agreement.

The agreement will require you to take a scheduled volume of water (up to the contracted maximum volume) at an agreed charge per megalitre (ML). You will be charged an agreed fee per ML for unused water.

As part of the agreement, the company will pay you an amount to establish a facility for the taking of water.

Establishment payments will be made on completion of construction of certain stages of the facility.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Section 15-10

Income Tax Assessment Act 1997 Subsection 392-80(2)

Reasons for decision

Summary

We have determined that, as there is a fundamental connection between the receipt of the payments and the carrying on of your business, the payment is considered to be a subsidy and is required to be brought to account as assessable income.

As the payments are not characterised as ordinary income derived from or resulting from your primary production activities, the payments will not be 'assessable primary production income'.

Detailed reasoning

A payment or other benefit received by a taxpayer is included in assessable income if:

· it is income according to ordinary concepts under section 6-5 of the ITAA 1997, or

· it is 'statutory income' under section 6-10 of the ITAA 1997.

Ordinary Income

Some guidance in determining whether a payment is ordinary income is set out in Taxation Ruling TR 2006/3 Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business. At paragraph 84, it provides that ordinary income generally falls within three categories:

· Income from providing personal services,

· Income from property, or

· Income from carrying on a business.

In your case, the payment does not constitute ordinary income as it is not income from the provision of personal services, is not sourced from property, and has not been derived directly from any existing business activity. It also does not possess the necessary elements of periodicity, recurrence or regularity that are common to receipts of ordinary income.

Statutory Income - a Bounty or Subsidy

Under section 6-10 of the ITAA 1997 some amounts that are not 'ordinary income' are included in your assessable income due to another provision of the tax law. One of the statutory income provisions listed in section 10-5 of the ITAA 1997 is section 15-10 of the ITAA 1997, which deals with the treatment of bounties and subsidies.

Section 15-10 of the ITAA 1997 provides that 'assessable income includes a bounty or subsidy that:

(a) is received in relation to carrying on a business; and

(b) is not assessable as ordinary income under section 6-5.'

'In relation to' carrying on a business

Generally, credits, grants, rebates, bounties and subsidies are assessable under section 15-10 of the ITAA 1997 in the hands of the recipient if they are received in, or in relation to, the carrying on of a business. This generally includes amounts of a capital nature.

Amounts relating to the commencement or cessation of a business may not be assessable income but may give rise to a capital gain.

A payment 'will be "in relation to" carrying on a business when there is a real connection between the payment and the business. The term "in relation to" includes within its scope payments that have a direct or indirect connection to the business…' (Paragraph 100 of TR 2006/3)

Application to your circumstances

You carry on a business of primary production, which requires water facilities. As there is a fundamental connection between the receipt of the payments for the water infrastructure facility and the carrying on of your business, the payment is considered to be a subsidy and is required to be brought to account as assessable income under section 15-10 of the ITAA 1997.

Whether assessable primary production income (of the partners)

Subsection 392-80(2) of the ITAA 1997 provides that, in determining 'assessable primary production income', regard is to be had to 'assessable income ... that was derived from, or resulted from, ... carrying on a primary production business'.

In Watson v. Deputy Commissioner of Taxation (2010) 182 FCR 104; [2010] FCAFC 17; 2010 ATC 20-167; (2010) 75 ATR 224 (Watson), the Full Federal Court considered the phrase 'assessable income from the business activity' for the purposes of subsection 35-10(2) of the ITAA 1997. The court noted that the primary question was the meaning of the word 'from' in the expression. In that regard, the court referred to Beaumont J in BHP Petroleum (Timor Sea) Pty Ltd v. Minister for Resources (1994) 49 FCR 155 at 170-171 who stated:

In my opinion, ... 'from' is intended to have its dictionary meaning, that is to say, to indicate the starting point, source or origin ...

and held that a similar meaning should be given to the word 'from' for the purposes of subsection 35-10(2) of the ITAA 1997.

In considering the words before them, Dowsett, Stone and Bennett JJ noted in Watson that the taxpayer's 'income will be from his business activity... if it can be related in some way to the business which he has conducted ...'.

The court also noted:

If the starting point or source of the assessable income must be the business activity carried on in that year, the extent and nature of that business activity must be identified before one can determine whether or not particular income is 'from' it... that such activity was the origin of that income.

On this basis, it is only ordinary income derived from or resulting from the particular primary production business being carried on that can constitute 'assessable primary production income' for the purposes of subsection 392-80(2) of the ITAA 1997.

The source of the income received from the company is not their ordinary primary production activities. Therefore, such income is not 'assessable primary production income' for the purposes of Division 392 of the ITAA 1997.