Private ruling: Assessability of payments received
Date of advice: 26 February 2021
Published: April 2021
Ruling period: Year ending XX XXXX 20XX | Year ending XX XXXX 20XA
Date scheme commenced: X XXXX 20XX

Ruling: Q1: Is the one-off amount paid by the Benefactor to the Foundation assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is the one-off amount paid by the Benefactor to the Foundation assessable as statutory income under section 6-10 of the ITAA 1997? | A2: No | Q3: Is the interest income received on the money donated to the Foundation assessable under section 6-5 of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: The Foundation is an association under the Associations Incorporations 2015 (WA) (the Associations Act) and was established to support a school (the School). The School is registered with the Australian Charities and Not For Profits Commission (ACNC). The Constitution of the Foundation states that it is established for charitable objects and purposes only, including the promotion of education and religion. The Foundation's winding up clause provides that on winding up any surplus must duly be distributed to one of the persons referred to in section 24(1) of the Associations Incorporation Act (which includes other associations incorporated under that Act and companies limited by guarantee), which have similar purposes to the Foundation, whose objects are charitable and whose constitution prohibits the distribution of assets to its members. During XXXX 20XX, individuals associated with the yet to be incorporated Foundation, prepared a summary which was presented to a benefactor organisation (the Benefactor). This summary and its contents form part of these facts. The summary outlined the goals, strategies and mission of the Foundation. It also directly invited the Benefactor to consider supporting this work through the provision of a donation of $XXX,XXX. The Foundation was incorporated on XX XXXX 20XX. On X XXXX 20XX, the Foundation received a "one-off" payment from the Benefactor of the sum of $XXX,XXX (the Donation). The Foundation is not a registered charity with the ACNC but has unsuccessful applications. The Foundation now wishes to finalise its affairs by disbursing the remaining balance of the funds to a number of approved School projects and applying for deregistration under the Associations Act. Since the receipt of the once-off payment, the Foundation has received a small amount of interest income from holding the donation on deposit in a bank.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-1(1) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10

Reasons for decision: Summary: It is considered the amount paid by the Benefactor to the Foundation will not constitute assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed Reasoning: Assessable income is defined in subsection 6-1(1) of the ITAA 1997 as consisting of ordinary income and statutory income. Section 6-5 of the ITAA 1997 states that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources. "Ordinary income" is defined to mean income according to ordinary concepts. Section 6-10 of the ITAA 1997 defines statutory income as amounts that are not ordinary income but are included by some provision of the ITAA 1997. Although the legislation does not provide specific guidance of what is meant by "ordinary income", substantial case law has evolved to indicate whether an amount is income according to ordinary concepts. In GP International Pipecoaters Pty Ltd v FC of T 90 ATC 4413 at p 4420 the High Court stated that: To determine whether a receipt is of an income or a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right disposed of in exchange for the receipt; sometimes by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. 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 or property constitutes a gift. The term 'gift' is not defined in the ITAA 1997. Therefore, the word 'gift' takes its ordinary meaning. 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. Generally, a gift is regarded as a personal windfall gain and not as 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 IT 2674Income 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. While you are not a church worker, the principles contained within the ruling can be applied to your situation. IT 2674 explains that the following factors need to be taken into account in determining if a gift is assessable income: • how, in what capacity and for what reason the recipient received the gift; • whether the gift is of a kind which is a common incident of the recipient's calling or occupation; • whether the gift is made voluntarily; • whether the gift is solicited; • 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; • the motive of the donor (but it is seldom, if ever, decisive); and • whether the recipient relies on the gift for regular maintenance of himself or herself and any dependents. Whether moneys from donors are assessable income depends on the scope of the transaction by reason of which the money was received and the Foundation's purpose in requesting the money. The donation made by the Benefactor can be characterised as a voluntary payment or gift not related in any way to any business activities of the Foundation. In fact, the Foundation only exists to assist the School, its students and the community and has no other business activities. The donation made by the Benefactor is not made in respect of any services provided by the Foundation. In order to characterise the donations as a business receipt there must be a service provided by the Foundation or a fulfilment of a contract obligation by the Foundation for its members. These attributes are not apparent in the manner and purpose in which the donation was collected and its subsequent disbursement. The donation was made by the Benefactor upon the summary provided by members of the Foundation. There is no material benefit to the Foundation or its members. Additionally, the Foundation's purpose in raising the money is aligned to its charitable objects. Based upon the above arguments the moneys received from the Benefactor will not constitute ordinary income of the Foundation. The payment made by the Benefactor was voluntary and made out of a desire to gift. | Summary: It is considered the amount paid by the Benefactor to the Foundation will not constitute statutory income in the hands of the Foundation. There are no provisions in the ITAA 1997 that make such receipts constitute statutory income under section 6-10 of the ITAA 1997. | Detailed Reasoning - Detailed Reasoning: There are no provisions in the tax law that make such receipts assessable income under section 6-10 of the ITAA 1997. | Summary: It is considered any interest received on the money donated to the Foundation on deposit in its bank account will constitute assessable income of the Foundation under section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed Reasoning: Interest income received on deposit at the bank will constitute assessable income of the Foundation under section 6-5 of the ITAA 1997. The Foundation is a not-for-profit entity but has not received registration as a charity by the ACNC. Accordingly, the Foundation will need to lodge a taxation return where its taxable income, including interest income exceeds the not for profit taxation threshold of $416.