ATO Interpretative Decision

ATO ID 2002/644

Income Tax

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Issue

Is a prize awarded to the taxpayer assessable income under either section 6-5 or section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The prize is not ordinary or statutory income and therefore is not assessable income under either section 6-5 or section 6-10 of the ITAA 1997. Rather, it is a non assessable windfall gain.

Facts

The taxpayer is employed as a researcher.

The taxpayers research was published in scientific journals and discussed at conferences.

It was not the type of research that leads to products that can be patented.

A scientific organisation nominated the taxpayer for a research prize. Nominations of candidates for this award are only accepted from approved nominating organisations active in the specific fields.

The purpose of the prize was to recognise, encourage and stimulate achievements that contribute significantly to broadening knowledge and technical development within specific fields.

The prize also aims to entice young people to seek a career in particular industries.

Candidates are not allowed to nominate themselves for this prize.

The taxpayer won the research prize and as a result received a significant cash lump sum.

Reasons for Decision

A prize or gift will be assessable income if it is :

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income in the ordinary sense of the word (ordinary income) ; or

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an amount or benefit that through the operation of the provisions of the tax law is included in assessable income (statutory income).

Under subsection 6-5(1) of the ITAA 1997 an amount is assessable income if it is income according to ordinary concepts (ordinary income).

Generally, a gift or prize is regarded as a personal windfall gain and not as ordinary income unless the taxpayer has received the prize or gift because of, in respect of, or in relation to any income-producing activity of the taxpayer.

In determining whether a prize or gift is ordinary income, the courts have established that consideration of the whole of the circumstances is necessary and that the following factors need to be taken into account :

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how, in what capacity, and for what reason the recipient received the prize or gift (Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570, (1953) 5 AITR 496; (1953) 10 ATD 126 (Squatting Investment Case)

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whether the prize or gift is of a kind which is a common incident of the recipient's calling or occupation (Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 10 AITR 367; (1966) 14 ATD 286 (Scott's Case)

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whether the prize or gift is made voluntarily

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whether the prize or gift is solicited (Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 6 AITR 248; (1956) 11 ATD 68 (Hayes' Case) and Scott's Case)

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whether the prize or gift can be traced to gratitude engendered by some service rendered by the recipient to the prize of gift donor (Squatting Investment Case)

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the motive of the prize or gift donor (though this factor is rarely decisive in itself) (Hayes' Case); and

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whether the recipient relies on the prize or gift for regular maintenance of themselves and any dependants (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; (1952) 10 ATD 82 (Dixon's Case) and FC of T v. Blake (1984) 75 FLR 315; (1984) 15 ATR 1006; 84 ATC 4661).

Taxation Ruling IT 2145 deals with the question of the 'BHP Awards for the Pursuit of Excellence' (BHP Awards). These BHP Awards are made to Australians who have made outstanding contributions to the pursuit of excellence in their particular fields. IT 2145 provides that although these awards will sometimes be made with regard to achievements directly related to a winner's vocation the nature of the award is that of a personal windfall or gain not having the qualities of income.

The taxpayer's prize winning research was undertaken during the course of their employment as a researcher. In addition to any employer use of the research, the research was published in various scientific journals and discussed at conferences. The publication and discussion of the research was in addition and separate to any employment obligations/responsibilities. It was the dissemination of the research through the mediums of journals and conferences that gave rise to the nomination for the prize.

When the above factors are applied to the conditions under which the prize was awarded and the taxpayer's individual circumstances, the prize money does not take on the character of ordinary income as receipt of the prize is one step removed from the taxpayer's employment. That is, it was not received because of or in relation to their duties as an employee.

In particular:

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the prize is not a common incident of the taxpayer's occupation

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it was made voluntarily by the prize giver

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the prize was not solicited (by the taxpayer)

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it cannot be traced to any services rendered to the prize giver

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the motive of the prize giver was altruistic ; and

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the taxpayer does rely on the prize money for general living expenses.

Furthermore, the taxpayer's circumstances can be distinguished from those court or tribunal decisions where prize money has been considered to constitute ordinary income. In Case V6 88 ATC 140; (1987) 19 ATR 3044 a partner in a newsagency business won a prize in a newspaper sales competition. The Administrative Appeals Tribunal held that the taxpayer was in the newspaper business and the prize was attracted as a result of that business activity and therefore the taxpayer received the prize because of, or in relation to the business or income-producing activity.

In Kelly v. FC of T (1985) 80 FLR 155; (1985)16 ATR 478; 85 ATC 4283 an employee footballer won a cash award for being the best and fairest player. The court held that the prize was clearly incidental to the taxpayer's employment as a footballer and that he was eligible to receive the payment by virtue of that employment. This sort of prize was a normal incident of that employment.

The circumstances outlined in the above cases can be contrasted with those of the recipient of this prize, as the taxpayer is not carrying on a business, nor was the prize in relation to their employment or a normal incident of that employment. The prize arose out of the publication of the taxpayer's research, rather than being attributable to their role as an employee.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is paragraph 26(e) of the Income Tax Assessment Act 1936 (ITAA 1936).

Paragraph 26(e) of the ITAA 1936 provides that the value to the taxpayer of all gratuities and benefits given or granted to them in respect to, or for or in relation directly or indirectly to, any employment will be included in their assessable income.

The issue in this case is whether the prize was granted 'in relation directly to or indirectly to, employment ....' In particular, whether the prize was granted 'indirectly' in relation to the taxpayer's employment.

The leading cases in connection with this question are Dixon's Case and Scott's Case. In both cases it was decided that the phrase 'an indirect consequence of employment' was not an open ended concept. Rather, there must still be a connection between the payment and the employment such that the receipt 'is in a relevant sense a product' of the employment.

It cannot be said that the prize was a product of the taxpayer's employment. Rather it was a reward to the taxpayer for their intellectual ability and the introduction of new research findings in the relevant field. The value of the prize is therefore not caught by paragraph 26(e) of the ITAA 1936.

As the prize received by the taxpayer does not constitute either ordinary or statutory income, it is not assessable income under either section 6-5 or section 6-10 of the ITAA 1997.

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   subsection 6-5(1)
   section 6-10
   section 10-5

Case References:
Squatting Investment Co Ltd v. Federal Commissioner of Taxation
   (1953) 86 CLR 570
   (1953) 5 AITR 496
   (1953) 10 ATD 126

Related Public Rulings (including Determinations)
Taxation Ruling IT 2145

Keywords
Prizes & awards
Assessable income test
Ex gratia payments
Ex gratia payment income
Windfall gains

Siebel/TDMS Reference Number:  DW259418

Business Line:  Small Business/Individual Taxpayers

Date of publication:  15 June 2002

ISSN: 1445-2782