Edited version of private advice

Authorisation Number: 1052181736892

Date of advice: 9 November 2023

Ruling

Subject: Gifts

Question 1

Will cash payments provided by X to the ABC Investment Trust give rise to assessable income under either section 6-5 or section 15-2 of the ITAA 1997 to either ABC Investment Trust or ABC for the income years ended 30 June 20XX and ending 30 June 20XY?

Answer

No.

Question 2

Will the cash payments provided by X to the ABC Investment Trust result in CGT event C2 happening pursuant to section 104-25 of the ITAA 1997 such that an amount is included in either ABC Investment Trust or ABC's assessable income under section 102-5 for the years ended 30 June 20XX and ending 30 June 20XY?

Answer

No.

This ruling applies for the following periods:

30 June 20XX

30 June 20XY

The scheme commenced on:

30 June 20XW

Relevant facts and circumstances

Family background

Y established Company Z, which owns an extensive investment portfolio. Y married his wife X. None of the relatives have been actively involved in the management of Company Z and each has their own career, source of income and/or commercial interests independent of the Company Z. X has considerable net worth.

To date, there have been no distributions of income or capital from Company Z, and no significant gifts or funds provided to the relatives by either X or Y.

Proposal to transfer capital to the relatives

As part of intergenerational succession planning for the family, senior family members have considered the provision of a pool of capital funds for the benefit of X's relatives, with the intention that the pool of capital be invested for the benefit of her relatives and future dependants of her relatives.

Proposed timing and tranches of capital

During X's lifetime, it is proposed that X would provide funds for the benefit of each of her relative, via various voluntary payments to the trustee of a discretionary trust established for the benefit of each relative and the relative's family. X would draw down the Loan and would gift the relevant amount to the trustee of the discretionary trust.

Protective mechanisms and contingencies

Before any gifts or capital distributions are provided for the benefit of a specific relative, it is the family expectation that the relevant relative:

1. if married or in a de-facto relationship, would have entered into a Binding Financial Agreement that satisfies all relevant statutory requirements and is regarded as satisfactory to the relevant provider of capital (being X).
2. will have agreed to, executed and have acted at all times in accordance with the overarching Family Constitution and individual family constitutions established for the relevant family, and
3. will have appointed a suitably qualified investment adviser to assist the relative in managing and investing the pool of capital provided.

The taxpayers

ABC is a relative of X. ABC is sole director and shareholder of the trustee of the ABC Investment Trust. ABC Investment Trust is a discretionary trust.

The proposed capital amounts earmarked for ABC Investment Trust and ABC are the following:

•         $W (indexed) to be provided by X to the trustee of ABC Investment Trust to be held under the terms of the Deed for the benefit of ABC and her lineal descendants, upon ABC reaching a certain age.

•         a further payment of $W (indexed) be made by X on, or around, the time at which ABC turns a certain age.

The recipient of this gift would be ABC Investment Trust, although should circumstances arise prior to this time under which ABC is not regarded as being capable of responsibly managing further amounts of money, alternative arrangements would be expected to be made. These alternative arrangements would be expected to involve a separate discretionary trust established for the benefit of ABC and her lineal descendants that is managed and controlled completely independently of ABC.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 15-2

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5(1)

Reasons for decision

Question 1:

Will cash payments provided by X to the ABC Investment Trust give rise to assessable income under either section 6-5 or section 15-2 of the ITAA 1997 to either ABC Investment Trust or ABC for the income years ended 30 June 20XX and ending 30 June 20XY?

Summary

The cash payments provided by X to the ABC Investment Trust will not give rise to assessable income under either section 6-5 or section 15-2 of the ITAA 1997 to either ABC Investment Trust or ABC for the income years ended 30 June 20XX and ending 30 June 20XY.

Detailed reasoning

Under subsection 6-5(1) of the ITAA 1997, assessable income includes income according to ordinary concepts, otherwise known as 'ordinary income'.

Subsection 6-5(2) of the ITAA 1997 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.

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.

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.

Section 6-10 of the ITAA 1997 includes statutory income in assessable income; statutory income includes other amounts that are not ordinary income and are included by provisions about assessable income. For example, a net capital gain is statutory income.

Section 10-5 of the ITAA 1997 lists certain statutory amounts that are included in assessable income but are not ordinary income, including certain payments by trusts.

Subsection 15-2(1) of the ITAA 1997 states that:

15-2(1) Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you...

Gifts

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

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.

Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift explains what a "Gift" is, for the purposes of the gift deduction provisions (Division 30 of the ITAA 1997). The same principles for identifying when an amount is a gift for deduction purposes are relevant for identifying whether an amount is a gift for income purposes.

Rather than attempting a definition of 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.

Conclusion

Based on the facts in this case, the proposed payments to be made by X to ABC Investment Trust or ABC, are gifts, they do not have the character of income, they are not in relation to any employment or services rendered by the individual or ABC Investment Trust and do not represent the derivation of income under ordinary concepts. Therefore, the payments would not be included in the assessable income of ABC Investment Trust or ABC under section 6-5 or section 15-2 of the ITAA 1997.

Question 2:

Will the cash payments provided by X to the ABC Investment Trust result in CGT event C2 happening pursuant to section 104-25 of the ITAA 1997 such that an amount is included in either ABC Investment Trust or ABC's assessable income under section 102-5 for the years ended 30 June 20XX and ending 30 June 20XY?

Summary

The cash payments provided by X to the ABC Investment Trust will not result in CGT event C2 happening pursuant to section 104-25 of the ITAA 1997. Therefore, no amount in respect of these payments, will be included in either ABC Investment Trust or ABC's assessable income under section 102-5 for the years ending 30 June 20XX or 30 June 20XY.

Detailed reasoning

Capital gains provisions

Subsection 102-5(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes any net capital gains made during the income year.

Section 102-20 of the ITAA 1997 provides that a taxpayer may make a capital gain or loss when a CGT event occurs to a CGT asset. A CGT asset is defined in subsection 108-5(1) of the ITAA 1997 as being any kind of property or a legal or equitable right that is not property.

Cancellation, surrender and similar endings: CGT event C2

Section 104-25 provides that CGT event C2 occurs when an intangible asset ceases to be owned as a result of:

1. being redeemed or cancelled
2. being released, discharged or satisfied
3. expiring
4. being abandoned, surrendered or forfeited
5. if the asset is an option, being exercised, or
6. if the asset is a convertible interest, being converted.

In order for section 104-25 of the ITAA 1997 to apply to this arrangement, ABC or ABC Investment Trust would need to cease to own an intangible asset due to the asset being redeemed or cancelled, released, discharged or satisfied, expiring, abandoned, surrendered or forfeited.

The provision of each payment remains dependent on a discretionary act, being a voluntary gift made at the relevant time by X. The discretions relating to each gift and capital distribution will only be exercised immediately prior to the provision of the relevant capital amounts. Based on these facts, neither ABC or ABC Investment Trust have any legal entitlement or equitable right to the cash payment until the gift is made or discretion is exercised, that constitutes an intangible asset, capable of being redeemed or cancelled, released, discharged or satisfied, expiring, abandoned, surrendered or forfeited.

ABC and ABC Investment Trust will not cease to own an intangible asset when X makes the cash payments. Therefore, CGT event C2 will not occur.