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Edited version of your written advice
Authorisation Number: 1051324727327
Date of advice: 8 January 2018
Ruling
Subject: Film investment income
Question 1
Will the return on investment be capital proceeds under the capital gains tax provisions?
Answer
Yes.
Question 2
Will the share of profits form part of your ordinary assessable income?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2018
Year ended 30 June 2019
Year ended 30 June 2020
The scheme commenced on
1 July 2017
Relevant facts
You have an opportunity to invest.
The terms of the investment are an amount is paid as an initial investment. Payback of the investment is 16 months from the date of contract. The return on investment is set at a fixed amount of the initial investment plus 100%.
You will receive a share of the profits. These will be paid annually or each six months.
You are not in the business of investing.
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 102-5.
Income Tax Assessment Act 1997 Section 102-20.
Income Tax Assessment Act 1997 Section 108-5.
Income Tax Assessment Act 1997 Section 104-25.
Reasons for decision
Return on investment
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.
Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.
Other characteristics of income that have evolved from case law include receipts that:
● are earned,
● are expected,
● are relied upon, and
● have an element of periodicity, recurrence or regularity.
In your case, you will receive a payment under an investment contract. Although the payment is expected and will provide you with income which can be relied on for your day to day living expenses, the payment is a one off lump sum and not regular. The repayment of capital or a return of capital is not regarded as ordinary income and is not assessable under section 6-5 of the ITAA 1997.
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997.
Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens. The gain or loss is made at the time of the CGT event.
When you enter into an investment contract, you acquire contractual rights. These contractual rights are CGT assets (section 108-5 of the ITAA 1997).
Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being abandoned, surrendered or forfeited or being released, discharged or satisfied.
When you receive the lump sum payment, a CGT event C2 happens. The amount is regarded as the capital proceeds for your CGT event.
You make a capital gain if your capital proceeds from the event are more than the asset's cost base.
In your case the money invested is the cost base.
Where the CGT asset is held for 12 months or more, you may also be entitled to a 50% CGT discount.
Share of profits
Interest income is considered to be ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997 and is therefore assessable income.
Other payments relating to investments such as dividends are also assessable income.
In your case, you will receive a share of the profits. Such payments are akin to interest income and are regarded as ordinary assessable income. Therefore the amount of profits received from the investment is assessable as ordinary income under section 6-5 of ITAA 1997.