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Edited version of your written advice
Authorisation Number: 1013037942863
Date of advice: 22 June 2016
Ruling
Subject: Assessability of profits from an investment
Question
Does your share of the profit from your investment form part of your assessable income?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
You are an Australian citizen for tax purposes.
You entered into a Private Investor's Deed ('the Deed') with a company.
Under the Deed, you:
• invested a specific amount
• will receive a profit from the investment's gross receipts.
• will recoup your initial investment amount from the gross receipts.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Section 15-15
Reasons for decision
Summary
The profits you receive from your investment form part of your assessable income.
Detailed reasoning
Ordinary income
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources whether in or out of Australia, during the income year.
Taxation Ruling TR 92/3 examines the situations where profits on an isolated transaction are income. Based on the ruling, a profit arising on the termination of an investment will be income according to ordinary concepts where;
a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and
b) the transaction was entered into, the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction (FCT v The Myer Emporium Ltd 87 ATC 4363).
In your case, it is considered that you had the intention or purpose of making a profit or gain when you entered into the Deed with the company. This is inferred from the entitlement to profit clause of the Deed.
Whilst you were not carrying on a business of investment, it is considered that this was a transaction with a commercial character. Thus, the second requirement has been met.
As both requirements have been met, it is considered that the profits you receive from the investment are ordinary income and assessable under section 6-5 of the ITAA 1997.
Statutory income
Section 15-15 of the ITAA 1997 operates to include in a taxpayer's income any profit arising from the carrying on or carrying out of a profit-making undertaking or plan. It does not apply to profit that is assessable as ordinary income under section 6-5 of the ITAA 1997.
Should the Commissioner have erred in characterising the profit as ordinary income, the payment would be included in your assessable income under section 15-15 of the ITAA 1997. This is because you have entered into the investment with the intention of making a profit (as discussed above).
Thus, the profit received from your investment forms part of your assessable income.