Edited version of private advice

Authorisation Number: 1052140507037

Date of advice: 11 July 2023

Ruling

Subject:Income tax - assessable income

Question 1

Will an amount received from a friend constitute ordinary income in accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will an amount received from a friend constitute assessable income in accordance with section 15-2 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commences on:

1 July 2022

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1.      Since 19XX, you have been a resident of Australia for taxation purposes.

2.      Since 19YY, you and your spouse have been friends with the ABC Family, Person 1 and Person 2, Person 3 and Person 4 - the children of Person 1 and Person 2, and Person 5 and Person 6, the life partners of Person 3 and Person 4.

3.      You first met the ABC Family through a forum in which you were involved in for many years.

4.      Over the years your relationship with the ABC Family became stronger through interacting at multiple events including community social activities.

5.      During the course of your relationship with the ABC Family, they owned and controlled a company called ABC Pty Ltd. This company has now been sold.

6.      In 20WW, you were employed by the ABC Family as an executive in ABC Pty Ltd. You held this position until 20JJ.

7.      From 20JJ until recently, when ABC Pty Ltd was sold, you held a position on the company's Board.

8.      The ABC Family (and their various entities) had majority ownership and control over ABC Pty Ltd until it was recently sold. The ABC Family received both cash and scrip as consideration for the sale.

9.      In addition to your role with ABC Pty Ltd, you were employed in a part time capacity by the ABC Family, overseeing the ABC Property Trust and assisting in the family office.

10.   From 20WW to the present day your relationship with the ABC Family strengthened as you became more intertwined with the family.

a.    Together with members of the ABC Family, you joined the board of a number of charities.

b.    Your family moved to a residence near Person 3 and Person 5 and within 10 mins of the rest of the ABC Family.

c.     You assisted and supported Person 2 and Person 1 through Person 1's declining health. You continue to support Person 2, acting as a sounding board for them on business and personal decisions.

d.    As you are trusted by the ABC Family, you are the nominated Expert in the event of a deadlock in decision making between Person 2, Person 3 or Person 4 over the family trust.

11.   The ABC Family see these gifts as a way to say thank you for the decades of support and friendship you have provided for their family.

Remuneration from ABC Pty Ltd and ABC Family

12.   From 20JJ until recently, your annual fixed remuneration was $XXX,XXX per annum plus a car allowance of $XX,XXX.

13.   Variable incentives were also paid from 20WW to 20YY.

14.   Since 20WW, up to the sale of ABC Pty Ltd, your fixed remuneration is $XXX,XXX per annum, reflecting the significant reduction in your duties and workload. Your remuneration is paid from the ABC Property Trust.

15.   You are the director of the ABC Property Trust and two small-related entities.

Gifts from the ABC Family

16.   The ABC Family wish to make substantial gifts to you due to your longstanding friendship. The gifts of cash are given in a personal capacity, from the personal wealth of the ABC family.

17.   The ABC Family has advised that they are gifting the money on the basis of natural love and affection and there is no expectation from you that they will receive something in return.

18.   The amounts received are as follows:

a.    $X,XXX,XXX received from Person 2

b.    $X,XXX,XXX received from Person 3 and Person 5

c.     $X,XXX,XXX received from Person 4 and Person 6

19.   The payments are premised on many years of friendship and are unrelated to and unaffected by your professional relationship (past, present or future) or the ending of such relationship.

20.   There is no service rendered or employment provided that created the payment, or that the payment is connected to. It is a gift based solely on goodwill, generosity and affection.

21.   Deeds of Gift have been prepared in relation to each gift identified above.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 6-5.

Income Tax Assessment Act 1997, subsection 6-5(1)

Income Tax Assessment Act 1997, subsection 6-5(2)

Income Tax Assessment Act 1997, section 15-2

Income Tax Assessment Act 1997, subsection 15-2(1)

Reasons for decision

Question 1

Will an amount received from a friend constitute ordinary income in accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

No, the amount received from a friend will not constitute ordinary income in accordance with section 6-5 of the ITAA 1997.

Detailed reasoning

1.    Under subsection 6-5(1), assessable income includes income according to ordinary concepts, otherwise known as ordinary income.

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

3.    There is no single test to determine whether an amount is 'income according to ordinary concepts', however there are three principal categories in which income is considered to be 'ordinary income':

•         income from rendering personal services, including employment income

•         income from property, such as rent, interest and dividends, and

•         income from carrying on a business.

4.    The following factors have been developed by the Courts to help determine whether a receipt has the characteristics of income:

•         the receipt is earned

•         the receipt is expected

•         the receipt is relied upon

•         the receipt has an element of periodicity, recurrence or regularity

•         the receipt is for the replacement of income.

5.    The term 'gift' is not defined in either of the Income Tax Assessment Acts nor does it fit within the three principal categories listed above, therefore the word 'gift' takes its ordinary meaning.

6.    Generally, a gift is regarded as a personal windfall gain and not ordinary income unless the taxpayer has received the gift because of, in respect of, or in relation to any income-producing activity of the taxpayer.

7.    In Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 11 ATD 82; (1956) 4 AITR 248 (Hayes), which dealt with a gift to Hayes from a friend who was also a former employer, the High Court considered two factors as relevant in determining whether an amount is the product of a taxpayer's services (that is, paid in consideration for the performance of the services):

•         whether there was an expectation to receive the amount by the taxpayer, and

•         the motive of the payer in paying the amount.

8.    Taxation Ruling IT 2674 Income tax: gifts to missionaries, ministers of religion and other church workers - are the gifts income? (IT 2674) provides guidelines for determining whether gifts received by church workers (including missionaries and ministers of religion) are assessable income. The principles contained within this ruling can be applied to your situation.

9.    Whether a gift is assessable income depends on the quality or character of the gift in the hands of the recipient. Paragraph 11 of IT 2674 sets out the following factors that need to be taken into account in determining whether a gift is assessable income:

(a)  how, in what capacity and for what reason the recipient received the gift

(b)  whether the gift is of a kind which is a common incident of the recipient's calling or occupation

(c)   whether the gift is made voluntarily

(d)  whether the gift is solicited

(e)  if the gift can be traded to gratitude engendered by some service rendered by the recipient to the donor, whether the recipient had already been remunerated fully for the service

(f)    the motive of the donor (but it is seldom, if ever, decisive), and

(g)  whether the recipient relies on the gift for regular maintenance of himself or herself and any dependents.

10.  Paragraph 28 of IT 2674 states that gifts received by a church worker are assessable income if:

(a)  they are received because of, in respect of, for, or in relation to any income-producing activity of the church worker...;

(b)  it is possible to relate the receipt of the gift to any income-producing activity on the part of the church worker...;

(c)   it is possible to point to any employment, personal exertion or other income-earning activity by the church worker of which the receipt of the gift is in a relevant sense a product or incident....

11.  A personal gift received for personal reasons, where there is no connection between the receipt of the gift and any income-producing activity by the taxpayer, is not assessable income. Nor is a gift assessable income if it is referable exclusively to the attitude of the donor personally to the taxpayer.[1]

Application to your circumstances

12.  The terms of the payment contained in the draft Deed of Gift stipulate, at clause 3, that the gifts are absolute, unconditional and irrevocable.

13.  As with the case in Hayes, there is no expectation by you that you were entitled to receive the gift, nor was it solicited. The motive of the ABC Family in paying the amounts to you is one of friendship as a token of appreciation for your support provided to the family.

14.  You have been, and continue to be, well remunerated for your employment services to ABC Pty Ltd, until recently, and the ABC Family.

15.  The gift is not of a kind which is a common incident of your occupation.

16.  The factors listed at paragraph 11 of IT 2674 indicate that the amounts totalling $X,XXX,XXX received from the ABC Family should not be included in your assessable income.

17.  Although you have been employed by the ABC Family and previously ABC Pty Ltd since 20WW, the Deed of Gifts specify the amounts to be gifts with the amounts gifted being absolute, unconditional and irrevocable on the payment on the gift dates.

18.  The amounts are voluntarily given to you and are not linked to your employment or any services rendered or to be rendered.

19.  The amounts are not payment for your role as nominated Expert for the family trust.

20.  The amount of $X,XXX,XXX received from the ABC Family will not be included in your assessable income as ordinary income under subsection 6-5(1).

Question 2

Will an amount received from a friend constitute assessable income in accordance with section 15-2 of the ITAA 1997?

Summary

No, the amount received will not constitute assessable income in accordance with section 15-2 of the ITAA 1997.

Detailed reasoning

21.  Subsection 15-2(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes the value of all allowances, gratuities, compensations, benefits, bonuses and premiums provided to the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer.

22.  As discussed above, the gifts are unrelated to and unaffected by employment or any services rendered by you.

23.  The amount of $X,XXX,XXX received from the ABC Family will not be included in your assessable income under section 15-2 of the ITAA 1997.

[1] IT 2674 paragraph 20.