Edited version of private advice

Authorisation Number: 1052047237283

Date of advice: 25 October 2022

Ruling

Subject: Assessability of income

Question

Is the gift card received from a third-party assessable income of the club in accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

30 June 20XX

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1. The club is a not for profit organisation.

2. The club does not fund raise outside its membership, it's main source of income are annual membership fees and meeting fees from its members.

3. The club entered into an arrangement with a third party.

4. The arrangement involves a club bringing members to the third-party premises for a morning tea, a talk by one of the sales' staff and a tour. In return the club receives a pre-paid gift card.

5. The club entered discussions with the third party to arrange a visit by its members to the premises.

6. The club was aware that they would receive a gift card if members visited the third-party premises as the receipt of the gift card is conditional on the members attending.

7. During the year, the club sent members to attend the third-party premises to complete the tour where all members provided their contact details.

8. The attendees of the tour were provided with advertising material about the third party and a frequently asked questions brochure.

9. Essentially the attendees provided an audience for the talk and the tour.

10. No further payments will be received in the relevant financial year by the club in respect of this particular visit, but future subsequent visits could take place and further gift cards may then be received.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Division 30

Reasons for decision

Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift (TR 2005/13) explains the meaning of a gift for the purposes of Division 30 of the ITAA 1997.

Paragraph 12 of TR 2005/13 states that the term 'gift' is not defined in the ITAA 1997. For the purposes of Division 30 of the ITAA 1997 the word 'gift' takes its ordinary meaning.

Paragraph 13 of TR 2005/13 states that the courts have described a gift as having the following characteristics and features:

•                    There is a transfer of the beneficial interest in property;

•                    The transfer is made voluntarily;

•                    The transfer arises by way of benefaction, and

•                    No material benefit or advantage is received by the giver by way of return.

Paragraph 23 of TR 2005/13 states that in order for a transfer of property to be a gift, it must be made voluntarily, that is, it must be the act and will of the giver, and there must be nothing to interfere with or control the exercise of that will. However, a transfer made under a sense of moral obligation is still made voluntarily.

In order to constitute a gift, the giver must not receive a benefit or advantage of a material nature by way of return.

Whether a gift is assessable income depends on the scope of the transaction by reason of which the money or property was received and the purpose. In this case, the club has received a gift card in return for participating in a program where members were required to participate in a talk and tour of a third-party premises.

Although the gift card was given to the club voluntarily, receiving the gift card was dependant on the club members attending the third party's premises and participating in the talk and tour. That is, a benefit or advantage of a material nature by way of return for the gift card. Therefore, the gift card cannot be classified as a gift or donation.

Section 6-5(2) of ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include 3 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, or have an element of periodicity, recurrence, or regularity. Profits from isolated transactions may also be treated as ordinary income.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) explains the Commissioner's view on whether profits from isolated transactions are income and therefore assessable.

Paragraph 6 of TR 92/3 states that whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present:

(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, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Paragraph 16 of TR 92/3 states that if a taxpayer not carrying on a business makes a profit, that profit is income if:

(a)  The intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

(b)  the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

In this case, the club has received a gift card after its members participated in attending a talk and a tour.

The club agreed to participate in the transaction knowing that they would receive a gift card in respect of their actions by attending the talk and tour. This indicates that there was a profit-making intention when agreeing to participate in this transaction.

Conclusion

As the club has fulfilled an obligation of attending the talk and tour of the third-party premises, the gift card received cannot be classified as a gift or donation.

As confirmed by TR 92/3 profits from isolated transactions can be classified as income when there was a profit-making intention when entering into the transaction.

As the club has entered into the isolated transaction which is commercial in character knowing they would receive a gift card, this amount will be assessable income under s6-5 ITAA 1997. Any subsequent amounts received in the same income year or later income years will also be assessable on this basis under s6-5 ITAA 1997.