(1) Income according to ordinary concepts

ITAA97 s6-5

The general principle here is that a gain from a person’s labour, in employment or for personal services, is income under ordinary concepts.  Incomes from personal services generally have the following indicia:
1. Payment is linked to the provision of employment or services;
2. The payment is often recurrent
3. Services are provided for the purposes of obtaining a gain.
The nature of those types of payments will be income under s6-5.

An amount is ordinary income and included under s6-5, if there is sufficient nexus between the amount and an earning activity. Where the earning activity is employment or the rendering of services, the nexus test is satisfied if the amount is characterised as a “product or incident of employment or reward for services rendered”  this is the “income from personal exertion” principle. An amount may satisfy the nexus test even though it is consideration for past or future services, is paid by a third party, or is the product of an isolated act of service.

In characterizing an amount, the court will not confine itself to the form of the supporting documentation, but rather will look at the whole of the circumstances surrounding the receipt. 

The fact that an amount is voluntary (i.e. not earned, given for free) will not necessarily preclude it from being ordinary income.  If the amount is a product or incident of employment or a reward for services rendered, it is ordinary income.  An amount must be characterized objectively in the hands of the donee. You have to determine exactly what it was given for and the motive is relevant but not decisive. Often the goodwill is generated by the relationship.  If it was not for the services, the goodwill would never have been granted.  It is important to look at the nature of the payment. 

- If payment is as a consequence of goodwill - it will not be assessable.  
- If it is a result of the services - it is income. 
A true gift is not assessable even if the gift was given as a result of the services; it is not given for the services.

FCT v Dixon (1952)

Facts: the taxpayer’s employer had sent a circular to staff during World War II advising that it would endeavour to pay to staff who enlisted amounts to “make up the difference between their present rate of wages and the amounts they will receive from the naval or military authorities.”  The taxpayer subsequently enlisted and received a series of such payments from his former employer. 

Held: The High Court in a 3:2 decision held it to be income – two said it was a true gift.
DIXON, WILLIAMS & FULLAGER said it was income.

FULLAGER said it was income because the payments were periodical.  The payments were substituted for or added to what was income and therefore took the character of income.

DIXON and WILLIAMS said They were periodical receipts and the taxpayer depended on it for his and his dependants’ maintenance (on that basis, if you were rich and did not depend on it, it would not be income?  This argument has been confused in later cases.  This analysis is looking at what it is being used for, not what it is being received for.
The better reason, the payments were incidental to the taxpayer’s employment as a soldier, it being unimportant whether the payment came from the employer or from someone else, and was obtained as of right or merely as a recognised incident of employment or work.

Hayes v FCT (1956)

Facts: the taxpayer had formed a company, the management of which was taken over by Richardson.  Richardson made several large gifts of shares in the public company, including 12,000 shares to the taxpayer.  It was held that the taxpayer had been fully remunerated for the work done while in Richardson’s direct employ and while employed by the companies controlled by him.  The shares were a mere gift. The taxpayer was an accountant and financial adviser to Mr Richardson, and had worked for Richardson for a number of years.  Richardson floated the company, made heaps, and gives the taxpayer some shares in the company.  Shares can be sold.  The Commissioner sought to include the value of the shares as the income of the employee.

Held: High Court, single judge Fullager, said that an employer/employee relationship the presumption is that it is generally income, unless you can show otherwise.  Stating point is that employers do not give gifts. The Court said that although the services rendered in the past may have given rise to goodwill and generous feelings towards the taxpayer, it was only the generosity that had given rise to the shares.  The Court said the shares were not in any sense a product of the labour or services provided.

The facts which led the court to its conclusion:

They said the motive of the employer is important but not decisive - the taxpayer might not have been adequately rewarded in the past, and this could be a type of “catch-up” payment.  On the facts here, the Court said the taxpayer had been fully remunerated in the past, no suggestion of a “catch-up” payment.

Facts showed that Richardson had done particularly well out of the float, and had made gifts to a number of institutions and other persons other than the taxpayer.  He had a habit of giving, and not necessarily only to employees.

Scott v FCT (1966)

Facts: Taxpayer was a solicitor.  He performed professional services for a widow, whose husband had been killed in the war.  Scott assisted her in realising a block of land for a greatly enhanced value in his professional capacity.  He had also assisted her in creating a monument for her husband (in Longueville Park). He had been paid fully for his professional services.  At the end of it all he was given an unsolicited amount of £10,000 by the widow.

Issue: What was the nature of the receipt? 

Held: High Court held it was not income, it was an unsolicited gift.  Court said an unsolicited gift does not become part of the income of recipient, merely because generosity was inspired by goodwill, and goodwill can be traced to gratitude engendered by some service rendered. The money was not given for the services; it was a product of the goodwill.

The facts that led the court to the conclusion that the payment was not for services:
- The solicitor had been fully remunerated for his professional services
- The widow had made cash gifts to other friends and relatives
- Also relevant but court did not mention, the sheer size of the payment.  It was way in excess of the value of the services.

The above cases are where the payment was received from the employer, and where it was received from the client. In both situations the recipient had provided services to the giver. What if payment was received from a third party? Is this payment assessable?

E.g. a waiter who gets a tip – it is not money given to the waiter by his employer; a footballer who wins the “best and fairest” award in a match, wins a car.

Where the receipt is incidental to an activity carried on for gain, i.e. it is the sort of receipt you could expect for carrying on that activity, it will be classed as income.

E.g. a footballer who receives a prize of most valued player.  A professional is playing for gain.  An amateur does not.

In Kelly v FCT the taxpayer was a professional footballer who got a prize for best and fairest. He was assessed. Income from personal services is distinguished from capital receipts. Distinguished between ordinary income in the context of ordinary income compared to capital.

Similarly in personal injury cases, damages are also calculated by reference to what you would have earned if you had not been injured. It is where you are paid for loss of future income, it would take the nature of or character of the income it replaced, and would be taxable BUT it is in fact paid for loss of income earning capacity, not loss of income itself, and is therefore a capital receipt. But if you settled eg on basis of loss of future income, you run the risk of it being taxed.  Have to be very careful how you describe what the money is paid for.