Edited version of private advice

Authorisation Number: 1051959786898

Date of advice: 11 March 2022

Ruling

Subject: Income vs capital

Question

Is the Applicant's income or gains on the sale of a certain metal income according to ordinary concepts and accordingly assessable pursuant to sub-section 6-5(1) of the Income Tax Assessment Act 1997 (ITAA)?

Answer

No, the income or gains on the sale of a certain metal is not ordinary income pursuant to sub-section 6-5(1) of the ITAA. However, it is income pursuant to section 102-20 of the ITAA and capital gains tax (CGT) applies to gains or losses made when an event occurs.

This ruling applies for the following period or periods:

1 July 20XX - 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trustee for Xxxx Discretionary Trust (XDT) is considering disposing of its long-term holding in a certain metal.

On 1 November 19XX, XDT acquired from TX (in their own right) a quantity of a certain metal at its then market value of A$x.xm.

TX had acquired a certain metal in November 19XX and August 19XX.

Both TX and XDT acquired a certain metal as an investment, being of the view that it was undervalued at the time, the strategy being to invest in metals that were rare, relatively unknown in investment circles and priced at levels relatively lower than other metals.

During the period December 20XX to October 20XX, XDT leased a certain metal to unrelated parties located overseas, deriving lease income totalling A$x.xm over this period.

Originally, the metal leasing to overseas unrelated parties, was arranged by the Perth Mint. Subsequently the relationships with the overseas unrelated parties have been maintained in-house.

The leasing income has been declared in XDT income tax returns for the relevant years as 'Gross interest income'.

XDT has made prior sales of a certain metal such that there is a reduced holding:

•         26 June and 16 September 19XX

•         25 August 19XX

•         7 July, 8 September, 24 and 30 November 20XX

•         23 August 20XX.

The gains on these sales were declared in XDT income tax returns for the relevant years as 'Other income' or 'Other business income'. It should be noted, in this regard that notwithstanding this disclosure, XDT does not carry on a business as such, its activities being described in the tax returns lodged as 'Investment operation'.

On 3 June 20XX XDT disposed (through an international precious metals' dealer), a further amount of a certain metal for US$xx.xm, being based on the UK spot and forward price on that day.

This has reduced XDT's holding of a certain metal to its current level being 64.88% of the original quantity acquired.

This recent and prior sales occurred for the following reasons:

•         XDT changing its focus on the mix of metals held for investment purposes, actively contemplating alternative metals

•         to crystallise gains made over the period of ownership

•         to fund the repayment of loans and beneficiary entitlements.

With the exception of a once-off A$xxk gain on the sale of a precious metal disclosed as income in the 20XX-XX financial year, XDT has no history in asset trading, profit-making by sale of assets or holding assets on revenue account.

In addition to a certain metal, XDT holds another metal and other precious metal, both of which have been held over considerable periods of time. It has also derived significant amounts of income from another metal investment in the form of lease income (around A$x.xm to date), but no income has been derived from the investment in the other precious metal.

XDT holds various investment assets including:

•         A certain metal product, acquired in 20XX at a cost of A$xxxk, being its carrying value at 30 June 20XX;

•         A precious metal acquired in the 20XX and 20XX years, with a carrying balance at 30 June 20XX amounting to a cost of A$xxxk;

•         Other metals with a cost of $x.xm, being the carrying value at 30 June 20XX comprising:

­   another metal, held since 19XX

­   quantity of a certain metal, being the balance held after the sale, the subject of this Application, and

­   quantity of other precious metal, acquired in 19XX.

•         A precious metal purchased from the Perth Mint, with a carrying value at 30 June 20XX, reflecting its A$x.xm cost.

All these assets are disclosed as non-current assets in the financial statements for XDT, this disclosure being consistent over the period of their ownership.

Any profit made on disposal of a certain metal will not be income according to ordinary concepts as it represents the sale of an investment asset, the transaction not occurring in the course of carrying on a business or in carrying on a business operation or commercial transaction.

Relevant legislative provisions

Sections 6-5 and 102-20 of the ITAA.

Taxation Ruling (TR) 92/3 Income tax: whether profits on isolated transactions are income.

TR 97/11 Income tax: am I carrying on a business of primary production?