Edited version of private advice

Authorisation Number: 1052098431160

Date of advice: 16 March 2023

Ruling

Subject: Assessable income

Question 1:

Are the Gratuitous Donations received by the Company considered to be assessable income for the financial years ending on DD MM 20XX and DD MM 20YY?

Answer:

No

Question 2:

Is the product revenue received by the Company considered to be assessable income for the financial year ending DD MM 20YY?

Answer:

No

This ruling applies for the following periods:

DD MM 20ZZ to DD MM 20XX

DD MM 20XX to DD MM 20YY

The Scheme commences on:

DD MM 20ZZ

RELEVANT FACTS AND CIRCUMSTANCES

Background

1.      The Company is an Australian tax resident incorporated association (or body) and is a not-for-profit entity.

2.      The Company is incorporated under the XYZ Act 20XY and was incorporated in MM 20ZZ. It is a member based association.

3.      In accordance with Clause X.X of its Constitution, the income and assets of the Company wherever derived, may only be applied solely towards promoting its Purpose and no portion may be paid or transferred to the Members directly or indirectly in accordance with Clause Y.Y.

4.      The purpose of the Company per Clause x of the Constitution is to implement the Petition. The Petition is noted within the Constitution.

5.      Details of the reasoning behind the Petition can be found at Clause X.Y of the Constitution.

6.      Upon the winding up or dissolution of the Company in accordance with Clause XX.Y of the Constitution, any surplus assets remaining must go to another entity of similar purpose and which also prohibits the distribution of any surplus, income and assets to its members to at least as great an extent as the Company.

7.      In the course of its operations, the Company receives voluntary donations from the Public. It is in respect of these donations that the Company are seeking the private binding ruling on behalf of the Company.

8.      The Company does not provide anything to donors in return for the monies donated to it.

9.      The Company derived funding in the DD MM 20XX and current DD MM 20YY financial year from the following sources:

10.   The Company currently has x full-time employees.

11.   The full-time employees effectively operate the Company with a reporting structure for the employees to report directly to its Board.

12.   The Company has not yet lodged a 20XX income tax return.

Information provided

13.   You have provided a number of documents containing detailed information in relation to the Company's application for a private ruling, including:

•           Private Binding Ruling ('PBR') Application, dated DD MM 20YY

14.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

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 995-1

ATO view documents

TR IT 2674

TR 97 / 11

TR 2005 / 13

Other references (non ATO view)

Scott v FCT [1935] SR 35

White v FCT [1968] CLR 120

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

SUMMARY - Question 1:

The Gratuitous Donations received by the Company are not considered to be assessable income for the financial years ending on DD MM 20XX and DD MM 20YY.

SUMMARY - Question 2:

The product revenue received by the Company is not considered to be assessable income for the financial year ending DD MM 20YY.

DETAILED REASONING

Assessable Income

15.   Broadly, the income tax treatment of a receipt is governed by the provisions of sections 6-5 and 6-10 of the ITAA 1997, which include ordinary income and statutory income in the assessable income of an Australian tax resident.

Ordinary Income

16.   Section 6-5 of the ITAA 1997 describes 'Income according to Ordinary Concepts (Ordinary Income)' as follows:

(1)          Your assessable income includes income according to ordinary concepts, which is called ordinary income.

Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.

17.   Subsection 6-5(1) of the ITAA states that assessable income includes income according to ordinary concepts, which is called ordinary income. It does not otherwise define the term. The phrase "income according to ordinary concepts" appears to have been inspired by Jordan CJ's statement in Scott v FCT (NSW) (1935) 35 SR (NSW) 215 at 219:

"The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts."

18.   Although Jordan CJ was talking about a different statute (the Income Tax (Management) Act 1928), this passage is commonly cited by judges and the Commissioner in interpreting section 6-5 of the ITAA 1997and its predecessor section 25(1) of the Income Tax Assessment Act 1936.

19.   Legislatures and courts have consistently declined to define the limits of the term "income", although there is a large body of case law, which expresses principles and provides examples of what may be treated as income according to ordinary concepts.

20.   According to case law, the Courts accept that ordinary income arises in one of three core ways:

•                     as a reward for rendering personal services (eg. salary and wages and professional fees);

•                     as profits from carrying on a business, including profits from unusual or isolated business transactions; and

•                     as a return on an investment (eg. rent, interest and dividends).

Statutory Income

21.   Section 6-10 of the ITAA 1997 describes 'Other Assessable Income (Statutory Income)' as follows:

(1)          Your assessable income also includes some amounts that are not ordinary income.

Note: These are included by provisions about assessable income.

For a summary list of these provisions, see section 10-5.

(2)          Amounts that are not ordinary income but are included in your assessable income by provisions about assessable income, are called statutory income.

Note 1: Although an amount is statutory income because it has been included in assessable income under a provision of this Act, it may be made exempt income or non-assessable non-exempt income under another provision: see sections 6-20 and 6-23.

22.   Statutory income is income, other than ordinary income, specifically included in assessable income by a provision of the ITAA 1997. Section 10-5 provides an extensive list of provisions about assessable income and for completeness, neither gifts nor donations are listed therein. Accordingly, they are not statutory income.

Carrying on a Business

23.   In considering whether amounts received by organisations should be considered business income (which is assessable), it is first important to determine whether that organisation is carrying on a business.

24.   The term "business" is defined in subsection 995-1(1) of the ITAA 1997 as including "any profession, trade, employment, vocation or calling, but does not include occupation as an employee." While this definition is helpful, it is very broad, and ultimately the determination of whether a business is being carried on becomes a question of fact.

25.   In this regard, the facts need to be objectively weighed up having reference to the various indices identified by the courts. Such indices identified by the courts include:

•                     The existence of a profit-making and commercial purpose;

•                     The size and scale of the activities;

•                     Repetition and regularity of the activities; and

•                     The activities are carried on in a systematic and organised (i.e. business-like) manner.

26.   Consideration must be given to whether the Company is carrying on a business in relation to the Gratuitous Donations and should ultimately turn on whether its activities are carried out with a purpose of a profit.

27.   In the decision in White v FCT (1968) 120 CLR 191 it is stated that a profit-making intention is a key indicator of a business being carried on. Further, in Taxation Ruling TR 97 / 11 - "Income tax: am I carrying on a business of primary production?" ('TR 97/11'), the Commissioner stated the following with regard to 'prospect of profit':

47. We consider this to be a very important indicator. In Hope at CLR 8-9; ATC 4390; ATR 236, Mason J indicated that the carrying on of a business is usually such that the activities are:

'... engaged in for the purpose of profit on a continuous and repetitive basis.'

In Smith v. Anderson (1880) 15 Ch D 247 at 258, Jessell MR said that:

'... anything which occupies the time and attention and labour of a man for the purpose of profit is business.'

In Case H11 76 ATC 59 at 61; 20 CTBR (NS) Case 65 at 603, the Chairman of Board of Review No 1 said:

'In determining whether a business is being carried on it is, in my view, proper to consider, as one of the elements, whether the activities under consideration could ever result in a profit...'

Gratuitous Donations

28.   To determine whether the Gratuitous Donations received by the Company are assessable as ordinary income it is relevant to consider whether the donation is considered a gift, and if so, what the quality or character is in the hands of the Company.

29.   Taxation Ruling TR 2005 / 13 - "Income tax: tax deductible gifts - what is a gift?" ('TR 2005/13') provides principles relevant to the determination of whether a transfer of money constitutes a gift.

30.   The term gift is not defined in the ITAA 1997 and accordingly it takes on its ordinary meaning.

31.   Rather than attempting to define a gift, 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.

32.   It is then necessary to consider whether donations are assessable income. Taxation Ruling IT 2674 provides a framework for this consideration that has been used by the ATO in subsequent rulings.

33.   Taxation Ruling TR IT 2674 - "Income tax: gifts to missionaries, ministers of religion and other church workers - are the gifts income?" ('TR IT 2674') examines whether gifts received by church workers are assessable income. The ruling contains principles relevant for entities receiving gifts and states at paragraph 11:

"Whether a gift is assessable income depends on the quality or the character of the gift in the hands of the recipient. Consideration is necessary of the whole of the circumstances in which the gift is received.

34.   Paragraph 20 of IT 2674 outlines the general principle that gifts given voluntarily and which are not related to any income producing activity on the part of the recipient are not assessable income of the recipient.

APPLICATION TO YOUR CIRCUMSTANCES

Question 1:

35.   The Gratuitous Donations would be assessable income under subsection 6-1(1) of the ITAA 1997 if they were either ordinary income under s 6-5 or statutory income under s 6-10.

36.   Income from rendering personal services, from property and from carrying on trading activities is ordinary income. To determine whether a donation is assessable as ordinary income, it is necessary to establish whether it is a gift, and what the character of the gift is in the hands of the recipient.

37.   If the donation is not ordinary income, it is also necessary to consider whether it is included as statutory income by way of one of the provisions as listed in section 10-5 of the ITAA 1997.

38.   Guidance on what constitutes a gift is provided in Taxation Ruling TR 2005/13 as noted previously.

39.   Guidance on when a gift may constitute income is provided in Taxation Ruling IT 2674 Income tax: gifts to missionaries, ministers of religion and other church workers - are the gifts income?

40.   The Gratuitous Donations received by the Company were not related to any income producing activity, they were related to the expenditure that the Company would incur in respect of pursuing its Objects.

41.   There was no profit making purpose, nor any form of business or trade for which the donations were received, and for the donations that have been treated as nonassessable, no supplies were made by the Company as a result of the donations to the donors.

42.   The Gratuitous Donations received by the Company do not fall into one of the categories of ordinary income for income tax purposes and are not assessable income.

43.   It is noted that the Company's income and property shall be applied solely towards their Objects with no portion of this income or property being permitted to be paid or transferred to Members or Directors (except for a limited number of permitted transactions listed under clause Y.Y of the Constitution).

44.   It is noted that the Gratuitous Donation receipts are all, directly or indirectly, applied towards expenditure in furtherance of the Company's Objects. There is no profit because the receipts are always intended to be expended in furtherance of its Objects, and over time receipts will equal outgoings with no surplus arising. There is no profit inherent with the model by which they operate, donation receipts will ultimately be expended with no surplus ultimately held.

Question 2:

45.   With regards to the product revenue, given that there is no real business activity being undertaken and, on the basis, any possible surplus from the activity would be directed towards the Objects of the Company (solely) the product revenue is not assessable income to the Company. The activity itself, which has ceased, was undertaken for a very short amount of time.

46.   From the financial figures provided, it is noted that the surplus from the sale of the products makes up X% of the total income in FY 20XX and Y% of the Company's funding in 20YY year-to-date and is minor in comparison to Gratuitous Donations.

47.   Aside from the minor and incidental sale of the products, the surplus of which makes up just X% of the total funds received by the company in the DD MM 20YY financial year to date, the Company is not considered to be carrying on a business. As such, we do not consider that the revenue from sales is income from the carrying on of a business or trading activity or have been derived for a profit making purpose.

48.   With respect to the sale of the Products, for the year-to-date of FY 20YY, a minor surplus has been made of just under $XY based on financial information available. Whilst there was no intention to create a surplus from the product sales, any surplus would be applied directly or indirectly back towards the Object of the Company such that it would be fully disbursed or expended. As a result, there is no actual profit making intention with respect to the sale of the products. It is noted that this activity has now ceased.

CONCLUSION

The Gratuitous Donations received by the Company are not considered to be assessable income for the financial years ending on DD MM 20XX and DD MM 20YY.

The product revenue received by the Company is not considered to be assessable income for the financial year ending DD MM 20YY.