ACC30005 Taxation

Topic one: Assessable Income - part one

Tutorial questions - solutions

Question one

i) A$5000 prize in a literary competition

Prizes or award won as an incident of the taxpayers income producing or business
activities will be ordinary income and assessable within ITAA97 s6-5.they are similar
to a payment for services rendered. Kelly v FCT

ii) Tips
Personal earnings from the performance of a service whether as an employee or
otherwise are ordinary income even if the service is performed irregularly and the fact
that they didn’t come from the employer is irrelevant. ITAA97 s 6-5 Brent’s case and
Moorhouse v Dooland

iii) Shift allowance

This would be assessed as an allowance and comes within s6-5, it is ordinary
income. There is sufficient nexus or connection between the benefit and the
taxpayer’s employment or services rendered.

iv) Concreting a friends driveway

Personal earnings from the performance of a service whether as an employee or
otherwise are ordinary income even if the service is performed irregularly. ITAA97 s
6-5 Brent’s case

v) A car allowance
A car allowance is assessable under ITAA97 s6-5.

vi) A gift
A voluntary payment that is not in way related to personal exertion will not be
assessable. Hayes v FCT

vii) A payment not to sue former employer

A payment received as in consideration not to sue would be a capital receipt in the
hands of the ex employee. It is not a payment for personal exertion but for an
agreement not to do something. It is not ordinary income but it may be a capital gain
which we will discuss in lecture 5.

vii) The legacy.

Receipt of lump sum legacy is unrelated to any personal services or business
activity. It is not regular or recurrent thus is not income and is a capital receipt.

ix) The advice by the engineer

This would be ordinary income as the engineer was performing work related duties.
It was a payment for services rendered and assessable under ITAA97s 6-5 Brent’s
case

x) Frequent flyer points

The frequent flyer points would not be ordinary income as they are not periodic in
nature and also are not money or money’s worth. Additionally, the points would not

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 be income under s 15-2 ITAA97 in accordance with the case of Payne v FCT 96
ATC 4407.

Question two

1. All income received by Borondara Council is exempt as it's a local government

body. ITAA 97 s50-25 item 5.1
2. As the over 80’s sporting club is a registered sporting body all its income is exempt
ITAA97 s50-45 item 9.1
3. As the home for the retired staff is a registered charity its income is exempt.
ITAA97 s50-5 Item 1.1
4. Swinburne University is a public educational institution therefore its income is
exempt ITAA97 s50-5 item1.4

3.6 Which of the following are assessable as ordinary income.

(a) Rambo is an army whistleblower and he receives a lump sum of
$10 000 for the exclusive rights to his story from a television
station.
The assessability of this sum depends on whether the payment is
income for services or a capital sum for disposing of an asset – namely
the exclusive rights to his story. Rambo’s situation is broadly similar to
the case of Brent v FCT [1971] FCA 48. In that case, the taxpayer also
entered into an agreement with a TV station to sell her story. The sum
was paid in three parts — part upon signing the agreement, the bulk
upon signing a copy of the manuscript of her story, and the balance
was payable 30 days after expiry of the agreement. The Court
characterised the payment as income for services in the form of
agreeing to be interviewed and to disclose the story of her life. The
payment was not a capital payment for disposing of an asset as she
possessed no exclusive right to her story, assigned no copyright in her
story to the journalist as part of her agreement, nor was it the disposal
of an asset acquired as part of a business.

(b) Southern Biscuits receives a lump sum of $50 000 for termination
of the exclusive rights to distribute ‘Oateez’ biscuits in Australia.
This was its entire business. As a result of the termination of the
contract, Southern Biscuits closed down.

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 Compensation received by a taxpayer for breach of trading contracts or
loss of trading stock is assessable as ordinary income. Compensation
for breaches of contract that harm the business structure are usually
capital receipts rather than ordinary income. In this case, as the loss of
the business contract resulted in the closure of the business (because it
was the only contract of the business) the payment would be
considered a capital receipt. This is consistent with the reasoning in
Californian Oil Products v FCT [1934] HCA 35. This situation is also
distinguishable from the otherwise broadly factually similar situation
in Allied Mills Industries Pty Ltd v FCT [1989] FCA 110, a case in
which the payment for loss of a major distribution contract concerning
a range of biscuits that did not result in the complete demise of the
taxpayer’s business was considered assessable income.

(c) Eddie is director of a company. His directorship is terminated a

year early, and he receives a lump sum amount equal to what he
would have received if the contract had not been terminated early.
This is similar to FCT v Phillips [1936] HCA 11. In that case payments
made as compensation for termination of the taxpayer’s contract as a
managing director of a theatre company were deemed by the High
Court to be assessable income. However, in Phillips, the payments
were paid periodically in the same amounts and the same times as the
income that would have been payable to the taxpayer had the contract
not been terminated. In these circumstances, the High Court applied
the replacement principle — the payments were a direct replacement
for the salary that would have been payable under the terminated
contract — and the payments ‘must…be regarded as of the same
nature as the payments which they replace’. In this case, although the
payment is an amount equal to what he would have received if the
contract had not been terminated early, it is made to the taxpayer as a
lump sum. As such, the taxpayer would argue that this situation is
more like Scott v FC of T (1935) 35 SR (NSW) 215. In that case, the
taxpayer was paid compensation for early cancellation of his
appointment as chair of the Metropolitan Meat Industry Board after the
board was abolished by legislation. The sum paid was equivalent to the
amount payable for services had the contract continued for its full
term. The taxpayer argued the payment was a capital payment for loss
of opportunity to earn income. The Court agreed, characterising the
payment as a price for being prevented from continuing in
employment. The amount paid was calculated to be an amount equal to
that which would have been payable had the taxpayer brought a claim
for wrongful dismissal. See further [3.8.1]

(d) Sakiya is a star basketball player. She is so good, one of the leading
Victorian basketball teams pays her $100 000 in return for her
agreeing not to play in the Victorian A-grade basketball
competition.
This payment is likely to be considered a capital receipt. The payments
is for Sakiya agreeing to enter into a restrictive covenant broadly
resembling the case of FCT v Woite (1982) 31 SASR 223. In Woite, a

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 footballer entered into a contract with a Victorian football club from
which he received a $10 000 payment in return for which he agreed not
to play for any other football club in Victoria. He was not bound to
play for the club and was free to play for any other club outside
Victoria. In fact, the taxpayer chose not to play football in Victoria.
The Commissioner sought to assess the $10 000 as income from the
taxpayer’s professional football activities. The taxpayer argued that the
$10 000 was a capital receipt. The Court concluded that in these
circumstances the payment was not income as it was not sufficiently
related to the provision of any footballing services as it did not require
the taxpayer to play for the Victorian club and was simply an
agreement in return for giving up the right to play for any other
Victorian club.
3.11 Explain, giving reasons, whether any of the following amounts are
assessable and, if so, the amount to be included in assessable income.
Indicate what, if any, additional information would assist in deciding.

(a) John works as a grocery delivery driver. At Christmas time, John

received a case of wine from his employer. The wine has a retail
value of $250. However, his employer was able to obtain it through
his suppliers for $100.

The gift may be either a gift or mere gift. If it is in relation to

employment or services rendered it is of an income nature and
assessable under s 15-2 (However it could be FBT as a non money
benefit in respect of employment … this will be covered in chapter 5).
If it is a gift it is the value of the benefit to the recipient which is
brought to account. This may or may not equate to the amount spent
on the benefit.

(b) Ali works at a restaurant as a waiter on a part-time basis while he

completes his university accounting degree. In addition to his
salary, Ali receives about $50 per week in tips from customers.

The amount received as a waiter as salary would normally be

assessable as ordinary income S 6-5. As to the gifts they are likely to
be received for the services rendered to the customers and assessable
under s 6-5 ( It is not liable to come under s 15-2 as it is in a money
form)

(c) Vismi is a fulltime student. She can afford to go to university

because she receives a scholarship of $3000 a year from a company
in her hometown. The terms of the scholarship require Vismi to
work for the company for a minimum of three years after
graduation.

The scholarship would be exempt under s51-10 and/or s51-35.

(d) Walter is a drug dealer. This year has been a particularly good
year and his drug sales bring in $100 000.

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 This amount would be assessable - proceeds of illegal business
activities such as drug dealing are assessable. This was confirmed in
Australia in La Rosa v FCT (2003) 53 ATR.
(e) Sonaldo Rent-a-Car receives $20 000 from the sales of cars from
their car hire business at the end of their useful life as rental
vehicles.
The assessability of these proceeds depends on whether the sale of cars
at the end of their useful life as rental vehicle is a ‘regular, ordinary
and expected incident of the taxpayer’s business activities’. If so, the
amounts will be assessable as business income rather than capital
receipts. This principle was affirmed in GKN Kwikform Services
(1991) 21 ATR 1532. The taxpayer ran a scaffolding hire business.
Sometimes scaffolding was sold to customers at the end of a hiring
contract as compensation for not returning it. The receipts from these
sales were determined to be assessable income because the receipts
were a regular, ordinary and expected incident of the taxpayer’s
business. Repetition and regularity are key factors that courts will often
use to determine whether a receipt should be treated as a capital receipt
from sale of a business asset or income within the scope of the
business. That will be the determining factor in Sonaldo’s case. See
further [3.6.2.1].

3.12 Giuseppe, a resident Australian employee, received the following amounts

for the year ended
30 June 2020.
(a) $35 000 salary and wages from sources in Australia.
(b) $1500 from tips as a part-time waiter.
(c) A bonus of $2500 from his employer paid into his bank account on
2 July 2020.
(d) $1000 bank interest.
(e) $10 000 prize from a lottery.
(f) A $5000 gold watch from the sponsor of his local soccer club for
winning the Club’s best player award.
Calculate Giuseppe’s assessable income for the year ended 30 June 2020.

A: Assessable income:

Salary $ 35 000 S 6-5

Tips $ 1500 S 6-5
Interest $ 1000 Ordinary income s 6-5

Total $ 37 500

The $5,000 gold watch may be considered ordinary income if it was given as a
reward for Giuseppe’s services as a soccer player. The issue is whether
Giuseppe is a professional soccer player in which case the watch is likely to be
considered a bonus or benefit with a sufficient nexus to the employment or
services provided by the taxpayer as a professional soccer player. See Kelly v
FCT 85 ATC 4283.

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The bonus is not included, as it is not derived (see Carden’s case) during the
relevant income period ending 30 June 2020.
The $10,000 lottery prize is a chance gambling winning which would not
normally be considered ordinary income. This is because the winning would
usually be purely due to luck rather than as a result of an element of skill.