Edited version of private advice

Authorisation Number: 1052253608618

Date of advice: 24 May 2024

Ruling

Subject: Public funding - taxable not-for-profit organisation

Question 1

Is the funding you receive from the XXXXXXXX Administration Fund included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are you entitled to a deduction for your administrative and operating expenses under section 8-1 of the ITAA 1997?

Answer

No.

This private ruling applies for the following periods:

Year ended 30 June 2023

Year ending 30 June 2024

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You are a taxable not-for-profit organisation.

Your Constitution sets out your objectives.

You incur administration and operating expenses in the pursuit of your objectives.

You receive public funding to reimburse you for your eligible administrative and operating expenditure.

Any funding received in excess of your eligible administrative and operating expenditure must be repaid.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Question 1

Summary

The public funding you receive is not ordinary income or statutory income. As such, the funding is not included in your assessable income.

Detailed reasoning

Your assessable income includes income according to ordinary concepts, which is called ordinary income (section 6-5 of the ITAA 1997).

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.

In addition, characteristics of ordinary 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.

The public funding does not exhibit the characteristics of ordinary income for it to be characterised as income according to ordinary concepts. The administration funding also does not relate to, or result from the performance of any personal services rendered, nor is it income from property.

In addition, your activities have no element of gain, profit or commerciality. While you may derive assessable income from investments or activities of a business nature, viewed in light of your overall purpose and objectives, these activities lack the commercial character and profit-making purpose for it to be considered that the funding is income from any business activity carried on by you.

Accordingly, the public funding is not assessable as ordinary income under section 6-5 of the ITAA 1997. In addition, we do not consider that the public funding is assessable under any of the statutory income provisions of the ITAA 1997.

Question 2

Summary

You are not entitled to claim deductions for your administrative or operating expenditure as they were not incurred in gaining or producing assessable income.

Detailed reasoning

You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income, or it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (subsection 8-1(1) of the ITAA 1997). However, no deduction is allowed where the losses or outgoings are of a capital, private or domestic nature, or are incurred in gaining or producing exempt income, or another provision of the ITAA 1997 prevents you from deducting them (subsection 8-1(2) of the ITAA 1997).

Expenditure will generally be deductible under section 8-1 of the ITAA 1997 if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce your assessable income. This is provided that the expenditure is not of a capital, private or domestic nature. The essential character of an expense is a question of fact to be determined by reference to all the circumstances.

Where an outgoing produces no assessable income, or the amount of assessable income is less than the amount of the outgoing, it may be necessary to examine all the circumstances surrounding the expenditure to determine whether the outgoing is deductible. This may, depending on the circumstances of the particular case, include an examination of the taxpayer's subjective purpose, motive or intention in making the outgoing.

When considering the subjective purpose, motive or intention in incurring a loss or outgoing, regard must be had to the purpose or motive that the taxpayer had in mind when the loss or outgoing was incurred.

In your case, your administrative and operational expenses are not incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. Rather, they are incurred for a non-income producing purpose, being the pursuit of your main objectives.

As such, your administrative and operational expenses are not deductible under section 8-1 of the ITAA 1997.