Principles of Taxation Law – 2024

Answers to Questions

CHAPTER 6 – INCOME FROM PERSONAL SERVICES AND EMPLOYMENT

Question 6.1
During the current tax year Erin received the following amounts:
 Salary and wages income of $98,000.
 $4,200 interest from a bank term deposit of $50,000.
 $500 per week for 50 weeks of the year from a rental property she owns.
 Winnings of $10,000 on the poker machines.
 $500 from selling eggs that her chickens laid to friends.
 A holiday bonus of $1,000 from her employer.
 A watch worth $200 from a happy client.
What is Erin’s ordinary income for the current tax year?

Answer
 Salary and wage income are ordinary income as they are a reward for services: see [6.20].

 Interest on a bank deposit is clearly ordinary income: see [9.20].

 Rent received is clearly ordinary income: see [9.160].

 Chance gambling winnings are typically not ordinary income, especially when the gambling
does not involve any element of skill and is purely due to luck: see [6.110].

 Whether the $500 would be regarded as ordinary income would depend on whether Erin’s
activities involving the eggs constitute a business or a hobby (see Chapter 8). If these activities
had sufficient indicia of a business then they would be ordinary income: Ferguson v FCT (1979)
9 ATR 873. Although the facts lack detail, if the egg activities do not involve a material
commitment of capital and/or time, if the taxpayer does not have a genuine profit intention
and only involves the occasional sale, then it is likely to constitute a hobby: see [8.30].

 The holiday bonus would be regarded as a reward for services and so would be ordinary
income: Laidler v Perry [1965] 2 All ER 121; see [6.30].

 If the watch was given as a reward for Erin’s services then it would be ordinary income, but if
it was given as a personal gift then it would not be ordinary income: Hayes v FCT (1956) 96
CLR 47; Scott v FCT (1966) 117 CLR 514; see [6.90].

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Question 6.2
Jane and Sally are employed school teachers who have a very wide general knowledge. Both decide
to enter a television quiz program called “Lease of the Decade”. Under the rules, contestants receive
$100 for each appearance, but if questions are answered correctly, they receive substantial cash prizes
and other prizes, such as household items and holiday packages. The holiday packages cannot be
transferred or redeemed, but the organisers of the program allow them to be converted into
alternative venues and accommodation.

Jane and Sally go on the show but Jane is eliminated in the first contest and receives her $100. Sally,
however, makes 10 appearances. She wins cash prizes of $50,000, household appliances worth
$20,000 and a trip to Europe with her family valued at $30,000.

Discuss the assessability of these prizes.

Answer
In Tax Ruling IT 167, the ATO is of the view that prizes won from casually appearing on a game show
will not constitute ordinary income. Consequently, it is unlikely that Sally’s prizes will constitute
ordinary income. However, there is an argument that the fact that Sally appeared on 10 shows
indicates sufficient regularity and skill for the cash and household appliance prizes to be classified as
ordinary income: see [6.110]–[6.120]. The overseas trip is not cash convertible and so would not be
ordinary income: FCT v Cooke & Sherden (1980) 10 ATR 696; see [6.130]. None of the prizes would be
assessable under capital gains tax under any circumstances because of s 118-37(1)(c) of ITAA 1997:
see Chapter 11.
It is possible that s 15-2 of ITAA 1997 would apply to the prizes if they were not ordinary income.
However, the application of s 15-2 in situations analogous to this remains untested by case law: see
[6.190]–[6.220].
The $100 appearance money for both Jan and Sally is likely to be regarded as ordinary income due to
being a reward for services: see [6.30].

Question 6.3
Hilary is a well-known mountain climber. The Daily Terror newspaper offers her $10,000 for her life
story, if she will write it. Without the assistance of a ghost writer, she writes a story and assigns all her
right, title and interest in the copyright for $10,000 to the Daily Terror. The story is published and she
is paid. She has never written a story before. She also sells the manuscript to the Mitchell Library for
$5,000 and several photographs that she took while mountain climbing for which she receives $2,000.
Discuss whether or not the three payments are income from personal services. Would your answer
differ if she wrote the story for her own satisfaction and only decided to sell it later?

Answer
If the terms of the contract with the Daily Terror were constructed as meaning that Hilary would own
the copyright to the story upon writing it and would subsequently sell the copyright to the story for
$10,000, then the payment would not be regarded as a reward for services. Unlike the case of Brent v
FCT (1971) 125 CLR 418, the payment would be regarded as a payment for sale of copyright: see
[6.140]. The payment could still be regarded as ordinary income if Hilary was considered to be running
a business of selling articles (see Chapter 8), but this would be unlikely as she has not written a story

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before. Under these assumptions, the $10,000 would not be regarded as ordinary income. It would
also not be assessable under s 15-2 of ITAA 1997 as it is not a reward for services but a payment for
the giving up of the copyright: see [6.220]. However, it would be assessable under capital gains tax:
see Chapter 11.
On the other hand, if the contract is construed as meaning that Hilary never owned the copyright to
the article and that it will immediately vest with the Daily Terror, then the case would be similar to the
case of Brent and the payment would be regarded as ordinary income due to being a reward for
services: see [6.140]. It would not be assessable under s 15-2 of ITAA 1997 because gains that are
ordinary income are excluded from that section: s 15-2(3)(d) of ITAA 1997; see [6.190].
The sale of the manuscript and photos are sales of property and will not be regarded as a reward for
services. This again means that the receipts from these sales will only constitute ordinary income if
the sales are regarded as being part of a business operation. Hilary is unlikely to be running a business
operation, especially if this is the first time she has profited from her mountain climbing: see Chapter
8. However, capital gains tax would apply to the sale proceeds: see Chapter 11.

Question 6.4
George is manager of Newcastle Steel Ltd. His contract is for 10 years. In the third year George enters
into a restrictive covenant which provides that during the remainder of his contract he must not reveal
to another party the confidential information of his employer. It further provides that he must not
work for a competitor during the remainder of the employment agreement. Consideration for
entering into the agreement is $40,000. Is this capital or income in George’s hands?

Answer
The amount of $40,000 is likely to be considered ordinary income rather than capital. In cases such as
FCT v Woite (1982) 13 ATR 579 and Higgs v Olivier [1952] Ch 311, the court indicated that restraint of
trade payments that occur during the length of the employment contract are typically ordinary
income: see [6.160]–[6.170].

Question 6.5
A well-known television personality was paid a lump sum of $400,000 to encourage her to join a new
television network. She accepted the offer and received an annual salary of $100,000 in addition to
the lump sum payment.
Discuss whether both the $400,000 and the $100,000 receipts are assessable income.

Answer
The main issue is whether the receipts show a nexus to work performed and are therefore ordinary
income under s 6-5 of ITAA 1997 or whether any part of the receipts is capital for giving up the right
to income as in FCT v Woite (1982) 13 ATR 579.
The annual salary of $100,000 is clearly assessable as ordinary income as there is a clear nexus with
the services provided and this receipt shows many of the indicia of income – ie regular, relied on,
nexus with personal services etc: see [6.30].
The $400,000 receipt is not as obvious and should be compared with decisions such as Woite and
Jarrold v Boustead (1963) 41 TC 701. If there is a nexus with some service, then it is ordinary income

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as in Brent v FCT (1971) 125 CLR 418. However, if the payment is to give up the right to income then
it is capital, as in Woite. The conclusion therefore depends on the facts but it appears that the taxpayer
is paid as an inducement to enter a contract. As a result, they are being paid to provide a service in
the future, thus establishing the nexus and making it ordinary income: see [6.30]. The taxpayer has
not given up any valuable right by accepting this contract and therefore it is likely they have been paid
to do something which is ordinary income under s 6-5: see [6.180]. Section 15-2 is also relevant if
there are sufficient facts to deny the $400,000 being ordinary income. The $400,000 receipts will be
statutory income under s 15-2 if they constitute a benefit etc, provided it is in respect of employment
or services. From Smith v FCT (1987) 19 ATR 274 there is the suggestion that the nexus test required
for s 15-2 is easier to meet than for s 6-5, and the fact that this payment is an inducement to enter an
employment contract would show it as arising out of future services: see [6.220].

Question 6.6
Frederick has been out of work for the past five years, and he has been using the Findjobs Ltd
employment agency for the past twelve months to find employment. In April of this year a new case
manager, Albert, was given the task of finding Frederick a job. In a matter of ten days Albert had found
Frederick a permanent job. In gratitude Frederick bought a $1,000 gold watch (it was a very good job
he landed) and gave it to Albert as a mark of his appreciation.
Advise Albert as to whether this gift is assessable income.

Answer
The issue that arises from these facts is whether the receipt is ordinary income under s 6-5 because
there is a nexus with the work performed or whether the receipt is a mere gift (Scott v FCT (1966) 117
CLR 514) that does not flow from those services. From the decision in Scott (Case Study 6.4) the factors
considered by the court should be applied to these facts in forming a conclusion. The receipt of the
watch by Albert was unexpected and it would also appear that Albert is fully paid for the services he
provided to Frederick. These facts would support the case that the receipt has no nexus with the
service provided and therefore is not ordinary income. However, in Scott’s case emphasis was also
placed on the fact there existed a personal relationship between Scott and Mrs Freestone prior to the
receipt of the gift, and this is not the case with Albert. It can also be seen from Scott that the nature
of the receipt is to be judged in the hands of the recipient and the motives of the giver, although may
be considered, are less important. However, this would also support that case that the receipt was
motivated by the service provided and there does not appear to be any other reason for Frederick to
make such a generous gift. Although either conclusion could be supported the decisions in Brown v
FCT (2002) 49 ATR 301 and Laidler v Perry [1965] 2 All ER 121 would support that the receipt is ordinary
income as it arose from the service provided by Albert and there was no personal or other reason for
the gift.

Question 6.7
Nadia is an accountant in a large accounting firm. She is on a three-year contract, which still has two
years to go. Her official job title is “Manager” and under her contract she is entitled to her own private
office.
Nadia is offered $6,000 if she changes her job title to “Senior Accountant”, with no change in pay or

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length of the contract. She is also offered $4,000 by her employer if she agrees to give up her private
office. She agrees to this.
Advise Nadia as to her income tax liability with respect to the $6,000 and $4,000 payments.

Answer
The issue arises with these receipts as to whether they show a nexus with the employment income
and whether or not they are capital in nature. If the receipts are compensation for a capital right of
Nadia then it would be capital (Bennett v FCT (1947) 75 CLR 480). Otherwise it could be a reward for
services and so ordinary income (Brent). Both receipts show a nexus with Nadia’s employment and
therefore the main issue is whether or not they are capital and therefore not ordinary income.
The $6,000 received for agreeing to the change of title does not appear to be a significant change
provided the new title carries no less prestige than her old one. This would make the payment likely
to be ordinary income as the payment would not be for the giving up of any capital right. This is
supported by the fact that there is no change in pay. If the new title also resulted in a change in
position and pay, then there would be a case to argue that Nadia had given up a valuable right make
the receipt capital in nature.
Receipt of $4,000 for giving up the private office needs to be considered in a similar manner to the
$6,000. In this case the facts support the argument that Nadia is giving up a capital right as the
provision of the private office was part of the original agreement.

Question 6.8
Dan is made redundant from his job that he has been working for four years and receives $50,000 as
a genuine redundancy termination payment. Before the redundancy, Dan had earned $120,000 for
the tax year.
Advise Dan as to the tax implication of receiving the $50,000.

Answer
The $50 000 is clearly an ETP (Employment Termination Payment) and none of it constitutes a tax-free
component. The $120,000 would be treated as a salary. As the ETP is a genuine redundancy
termination payment, it is not subject to the $180,000 whole-of-income cap, but only the $235,000
cap amount (s 82-10(6) of ITAA 1997). As the ETP is below $235,000, it would be capped at either 15%
plus Medicare levy (if Dan was at least of preservation age) or 30% plus Medicare levy (if Dan was
under preservation age) (s 82-10 of ITAA 1997) (see [6.370]).

Question 6.9
Bev is dismissed from her job and receives a $80,000 redundancy amount (not a genuine redundancy
termination payment). She then sues her ex-employer for unfair dismissal and settles for $150,000.
As the dismissal was early on in the tax year, she had only received $20,000 in salary for the year.
Advise Bev as to the tax implications of the receipts of the $80,000 and $150,000 amounts.

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Answer
Both the $80,000 and $150,000 amounts would be regarded as ETPs.
The $150,000 would be excluded from the “whole of income cap” given that it is compensation for
unfair dismissal (s 82-10(6) of ITAA 1997). Consequently, the legislation deems it to be received first
(s 83-10(7) of ITAA 1997). As a result, it only needs to be applied against the $235,000 ETP cap. Because
this is the case, the amount of tax on this amount is capped at either 15% plus Medicare levy (if Bev
was at least of preservation age) or 30% plus Medicare levy (if Bev was under preservation age) (s 82-
10 of ITAA 1997).
The $80,000 amount would on the other hand be subject to the lower of the two thresholds (including
the whole of income cap). The “whole of income” cap would be reduced from $180,000 to $160,000
due to the $20,000 salary. The $235,000 ETP threshold would be reduced by the $150,000 ETP
payment to $85,000. This means that the $85,000 threshold is the lower of the two, so that is the one
that will apply. As a result, as all of the $80,000 is under this $85,000 threshold, then this amount will
be capped at the 15% or 30% tax rate (depending on the age of Bev) plus Medicare levy (see [6.370]).

Question 6.10

Karen has been working in the same place for 15 years and made redundant. She receives a genuine
redundancy payment of $200,000, after earning a salary of $90,000 in the current year. Upon her
redundancy, she also receives accrued unpaid leave of $80,000.

Advise Karen as to the tax implications of the $200,000 and $80,000 amounts.

Answer
The $200,000, due to being a genuine redundancy payment, is only subject to the $235,000 ETP cap
and not the whole of income cap (s 82-10(6) of ITAA 1997). As the full amount falls below the $235,000
threshold, it is capped at a tax rate of 15% or 30% (depending on the age of Karen).
The leave payment would also be capped at a tax rate of 30%, because it was paid in connection with
a payment that was a genuine redundancy payment.

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