Income from Personal Services & Employment (Ordinary income as a…
Income from Personal Services & Employment
Ordinary income as a reward for services 6.10-6.20 :
Nexus with service 6.30-6.60
Scott V FCT(166) 117 CR 514
& Hayes V FCT (1956) 96 CLR 47
There is a nexus between the amount received and the work performance is an essential element for determining whether the receipt is ordinary income under s6-5 of IATT 1997.
Is was held that a receipt is not ordinary income if it is not a product of employment or a reward for services.
Nexus is uncertain
clear nexus with activity
No nexus with activity
Not ordinary income
2 steps to determine whether an amount is an ordinary income from personal services:
a nexus between activity & benefit
identifying the activity undertaken
determining whether the receipt : is a reward for performing that particular activity
Brown V FCT (2002)
1) Salary/wages received by an employee are clearly ordinary income
2) Amounts earned directly or indirectly as a consequence of a taxpayer's personal services/exertion will be ordinary income
Laidler V Perry  2ALL ER 121
A negative approach by asking whether the receipt arose for some reason other than employment/ the provision of a service
FCT V Harris (1980) 10 ATR 869
The Full Federal Court by the majority held that the receipt was not a product of Harris's past employment and therefore was not ordinary income.
Additionally, Bowen CJ conceded that Harris would not be received the payment had he not been a past employee of the bank, but went on to conclude that the payment was in no way related to the length or quality of his past service.
The payment was related to his pension and was therefore not a product of his employment.
Effective salary sacrifice arrangements divert remuneration before it is derived and therefore it is not assessable to the employee: Ruling TR 2001/10.
3.Non-cash benefits 6.130
Cash or cash convertible as one of the characteristics of an ordinary income and is relevant in relation to receipts from personal services as payments in kind e.g. free holiday- common in service arrangements and employment.
Prizes, voluntary payments & unexpected payments 6.70-6.120
Voluntary payments received
Laidler V Perry  2ALL ER 121
Unexpected or voluntary payments received as a reward for services are ordinary income as the benefit is an incident of employment.
No connection with any personal services e.g.:
personal quality-the receipt is a personal gift ≠ ordinary income
It was held that the voucher was income as it arose out of employment, even though it was a voluntary payment on behalf of the employer.
Note that benefit received in kind rather than as cash are often subject to fringe benefits tax rather than income tax.
Penn V Spiers & Pond Ltd  1 KB 766 (TIPS received by a railway dining car waiter)
Calvert V Wainwright (1947) 27 TC 475 (TIPS received by a taxi driver)
TIPS: are made voluntarily but are made beacause of the level of service provided, and not for any other reason, therefore establishing the nexus with the service and making them assessable as ordinary income.
FCT V Dixon (1952)
Additional periodic payments as a substitute for wages that were relied on upon by the taxpayer
1) Unexpected or voluntary payments received as an incidence of employment (nexus)=Ordinary income
2) Unexpected or voluntary payments that are periodic, regular & relied upon=Ordinary income
4) Gifts=tax free if :true gifts"
b. Additionally, where the payment is made by an entity with which the taxpayer has an employment or commercial connection
To ascertain whether any service provided is seperately and fully paid for.
To determine the nexus is strong enough to make a voluntary payment ordinary income (not determinative and only assist to make this decision ) :
whether the gift was expected
Scott V FCT
whether the gift consists of a lump sum or regular payments
FCT V Blake
regularly payments=ordinary income
the motive of the donor
Scott V FCT
intends the gifts to be a reward for services the gift is more likely= ordinary income
whether the recipient has already been remuerated for his or her services
Hayes V FCT
Scott V FCT
if yes, less likely to be ordinary income
whether there was a personal relationship between the donor and recipient
Hayes V FCT
Scott V FCT
Existence relationship: less likely to be ordinary income
Scott V FCT (1966) 117 CLR 514
Characteristics of a personal gift
The High Court held that the gift of 10,000 paid by a client to a solicitor was a personal gift and not ordinary income.
Importance of a personal relationship between the parties and whether or not the services have otherwise been paid for.
a. the importance of the personal relationship of the parties in distinguishing between receipts that are a product of personal services or a personal gift.
Capital receipt /personal exertion 6.140-6,180
Brent V FCT (1971) 125 CLR 418
Payment for service of giving up valuable right:
1) The High Court held that nothing of a capital nature was given up and therefore the payments were for the service of telling her story.
2) In addition then,"exclusive rights" clause as this could not restrict any other author from collecting information on Brent and publishing its own version of her life's story.
3) Payments for changes to entitlement underemployment and service contracts may give rise to capital receipts for the giving up of valuable capital rights and therefore not fall into the category of ordinary income.
Kelly V FCT (1985)
It is irrelevant who pays or when it is paid
Capital receipt /gain OR
Income from personal services?
A. Changes to entitlements
Brennett V FCT (1947) 75 CLR 480
Relinquishing employment rights 放弃就业权利
The High Court held that the payments were not for loss of income, but were capital in nature for the removal of those rights that Bennett possessed under the original agreement.
B. Receipts for entering a restrictive covenant
Depends on whether it is a separate agreement to give up valubale rights (capital/ordinary)
Payments made at the termination of a service agreement that restricts the activities of the taxpayer are seen as capital as they do not arise out of the employment or serivce contract and do not show a nexus with earnign activiting
Hepples V FCT (1991) 22 ATR 465
Genuine capital payment
Agreement about not to disclose the secrets of his employer. High Court held that the receipts was not a substitute for income and was a capital payment for earning restrictive covenant on termination of employment.
Higgs v Olivier  Ch 311
The Court held that the agreement to pay was separate to his contract to perform in the film and was made after the completion of the film, it was not paid for his performance as an actor but for his giving up the right to earn income which capital in nature.
( the restrictive covenant to be capital )
FCT V Woite (1982) 13 ATR 579
Restrictive covenant on entering a contract
1) The Supreme Court of South Australia held that the $10,000 was capital in nature and was not ordinary income from his profession as a footballer. The payments in contracted were not for service but a capital payment.
2) Although not part of the decision, the Mitchell J implied that it was highly likely that the $10,000 could be ordinary income if Woite had followed the signing of the restraint of trade and played football for them.
Suggest that restrictive covenant payments made as part of an ongoing contract are more likely to be income.
Reuter V FCT (1993) 27 ATR 256
Restrictive covenant-ordinary income:
The Federal Court held that the receipt of $8 m was closely connected to the services provided by the taxpayer to Rothwells Ltd and was, therefore, ordinary income.
C. Sign on fees
e.g.: sports contracts & higher level professional employment contracts
Whether a capital for giving up some valuable right OR
Whether are ordinary income for future services
Jarrold V Boustead (1963) 41 TC 701
Sign-on fee-capital in nature:
(give up his amateur and turn professional)
The Court of Appeal held that this receipt was capital in nature as it was a payment for giving up the right to play amateur football, rather than a payment for future services.
Pickford V FCT (1998) 40 ATR 1078
Sign-in fees-ordinary income:
The Court held that the $200 was ordianry income as it was an incident of the taxpayer's income-earning activities and employment.
(one-off payment for future services)
The distinction between a receipt that is a reward for services and a receipt that is capital in nature is primarily connected with whether the taxpayer has given up a valuable right.
1) is not affected by whether the amount is regularly received/ a lump-sum payment.
2) Not relevant whether the payments are from an ongoing regular employment contract or a one-off receipt contractually required to be paid for the performance of a given task.
-->Salary & wages
-->Fees charged for services rendered
-->Anicllary payments that are an incident of labour
Statutory income from services &employment
Section 15-2's relationship with other tax provisions 6.240
1). Gains are fringe benefit ≠ assessable for income tax purposes= not be assessed as ordinary income or under any income tax provisions
2). Some limited circumstances cash payments by an employer to an employee would also be regarded as a fringe benefit.
Under s15-2 example
not ordinary income as well as not fringe benefits:
b. Third-party not pay in cash convertible for employment or services e.g. a free non-transferrable holiday by an employee lawyer from a client of the law firm
c. Third-party do not have a strong nexus (not sufficient nexus)with employment or services to constitute ordinary income
a. The receipts of non-cash convertible itmes as a reward for volunteer work
Compensation receipts = assessable under s15-2?
FCT V Inkster (1898) 20 ATR 1516
Receipts of compensation payment under mandated under legislation not assessable under predecessor of s15-2
The Court held that the compensation was not assessable under the predecessor of s15-2 because the compensation payment was a mandatory payment made by the ex-employer to compensate the taxpayer for their loss of earning ability
A discretionary payment for services = ordinary income
=not be covered by s 15-2 due to it excluding amounts that are ordinary income
what has been received by the taxpayer is " in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by the "taxpayer".
Scott V FCT (1966) 117 CLR 514
FCT V Dixon (1952) 86 CLR 540
Hayes V FCT (1956) 96 CLR 47
A nexu test for determining a receipt is ordinary income
CASE: Smith V FCT (1987) 19 ATR 274
FCT V Holmoes (1995) 31 ATR 71
Under a 15-2 's nexus test
The taxpayer was legally entitled to the receipt compared to when the taxpayer has received a gift .
Smith V FCT (1987) ATR 274
Employee receipt from employer as reward for studying assessable
To consider whether the amount received under the scheme was assessable under the s 15-2 and s26(e) of ITAA 1936
a. The High Court held that the taxpayers were assessable and addressed the nexus issue, and said there was a sufficient nexus with employment in this case.
b. This was due to a combination of factors, the most important being the scheme existed to increase employee productivity by encouraging them to be more highly educated
The allowance, benefit etc is provided to you (ie the taxpayer)
Payne V FCT (1996) 32 ATR 516
Free ticker due to frequent flyer points earned from work-related travel not assessable
The Court held that free tickets were was not assessable under s26 (e). One of the reasons for this was that equivalent of the second requirement of s 15-2 had not been met, because the benefit was due to a "crystallising of contractual entitlements" under the Frequent Flyer program agreement.
An allowance, gratuity, compensation, benefit,bonus or premium
include gifts (gratuties)
not directly provided a service
e.g. free hotel accomodation
wider than ordinary income in 2 ways
could include services provided by a business taxpayer & amounts received from providing services under an independent contract for services.
Will not apply to gains made from holding property or from business operations that do not involve the supply of services
Is it a Fringe Benefit?
1) Ordinary income
& other allowances
2) Return-to-work payment
3) Payment upon termination of employment