Edited version of private advice

Authorisation Number: 1052206648639

Date of advice: 30 January 2024

Ruling

Subject: Assessable income

Question 1

Is the sum received from Entity B assessable income for Entity A under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the sum received from Entity B assessable as statutory income under section 6-10 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Entity A is a Non For Profit association incorporated pursuant to the Associations Incorporation Act 2015 in the state they operate.

The Objects of Entity A are listed as follows:

•         To promote mutual understanding between the people of Country A and Australia

•         To stimulate among Australians and in particular the people of XXXX an informed interest in the Country A people and in Country A political, economic, business, social and cultural matters

•         To encourage among Country A people an informed interest in the Australian people and, in particular the people of XXXX and in the Australian political, economic, business, social and cultural matters

•         To provide opportunities and facilities for contact between Australians having a common interest in Country A, and between Australians and people of Country A

•         To co-operate with other organisations in Australia and Country A with similar objectives

Another incorporated association, now deregistered, called Entity B distributed an amount to Entity A.

Entity B ceased operations soon after making the distribution.

Entity B had operated for over 40 years.

Entity B made this distribution as part of its winding up process.

A document between the two organisations was signed in anticipation of the transfer of the amount.

Entity A is currently working on its ambition to open the Cultural Centre with the intention that it will also be a Country A language and cultural centre operation from the same premises. It is not taking over the operation of the former Entity B Centre.

Entity A has received donations from members of the public supporting its plans to establish the Cultural Centre, via crowdfunding platform.

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 104-35

Income Tax Assessment Act 1997 subsection 104-35(5)

Reasons for decision

Question 1

Is the sum received from Entity B assessable income for Entity A under section 6-5 of the ITAA 1997?

Summary

No. The amount received by Entity A was not income according to ordinary concepts as it was a one off sum received as a result of Entity B distributing its assets during the process of winding up. The amount is not assessable income under section 6-5 of the ITAA 1997.

Detailed reasoning

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes the 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 three 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, and have an element of periodicity, recurrence, or regularity.

In this case, the amount was not earned, expected or relied upon and did not have an element of periodicity, recurrence or regularity. The amount was agreed to by both parties and was a one-off distribution of funds made in the winding up process by Entity B. The payment of the amount does not hold the characteristics of a payment of income according to ordinary concepts.

Question 2

Is the sum received from Entity B assessable as statutory income under section 6-10 of the ITAA 1997?

Summary

No. The amount is not assessable as statutory income under section 6-10 of the ITAA 1997.

The promise of acceptance of the sum does not give rise to a right to enforce the making of the gift and is not therefore creating a right that enlivens CGT event D1 under section 104-35 of the ITAA 1997.

Detailed reasoning

Section 6-10 of the ITAA 1997 provides that assessable income of an Australian resident includes statutory income derived directly and indirectly from all sources, whether in or out of Australia during the income year.

The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997 and included in this list is section 102-5 of the ITAA 1997, which states that assessable income includes the net capital gain for the income year.

CGT event D1 (section 104-35 of the ITAA 1997) happens when a contractual right or other legal or equitable right in another entity is created. However, not all things often referred to as 'rights' will be assets for CGT purposes. To be an asset, a right must be recognised and protected by law.

The explanatory memorandum to the Taxation Laws Amendment Bill (No.4) 1992 confirms that:

Not all things often referred to as "rights" will be assets for CGT purposes. To be an asset, a right must be recognised and protected by law - a court of law or equity will assist in enforcing it.

There is sufficient doubt here as to whether Entity A acquired any legal or equitable right to enforce the making of the gift. Importantly, Entity A does not act to its detriment in anticipation of receipt but merely promises to apply the gift to its legal purposes. The hope is for the establishment of the Cultural Centre but otherwise the gift will be applied to other purposes within Entity A's powers to apply funds.

It is difficult on these facts to identify anything that a Court exercising equitable jurisdiction would see as warranting equitable relief as Entity A had not suffered any loss in reliance on the promise made by Entity B. Similarly, it is difficult to see a Court exercising legal jurisdiction finding anything sufficient to warrant enforcing Entity B making the gift. Importantly, Entity A suffered no detriment in the making its promise of acceptance.

It is well settled that a mere gift between a donor and donee does not give rise to any legal right of enforcement by the prospective donee (Federal Commissioner of Taxation v. McPhail (1968) 117 CLR 111 at 116; Leary v. Federal Commissioner of Taxation (1980) 11 ATR 145 at 147; 80 ATC 4438.)

For these reasons, and on these particular facts, the Commissioner considers there is not a right to which CGT event D1 applies.