Edited version of private ruling

Authorisation Number: 1011491430580

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: lump sum payment for future employment and assessable income

Question

Is the lump sum payment for future employment assessable income?

Answer

Yes.

This ruling applies for the following period:

1 July 2008 to 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You received and signed a contract for employment to commence work.

Your obligations under the contract included successfully completing an approved degree prior to commencing your employment.

Prior to commencing employment you were advised by phone from your future employer that due to difficult financial times the commencement date of your employment was deferred and you were offered a lump sum payment in 'goodwill'.

You understood the payment was in good faith and was an attempt to provide some financial assistance in order to keep a positive relationship.

You considered the payment was not for consideration for the amendment to the contract as it was unconditional.

You accepted the payment after being satisfied it was unconditional.

You later received a letter confirming your telephone conversation regarding commencement of employment had been deferred from the original commencement date and payment was by way of a cheque.

You were not working for the company when the payment was received and the payment was not to replace your income and the company was under no contractual obligation to make the payment.

You later received a new copy of the contract for employment with an amended start date. You commenced employment with the company the next year.

You have provided a copy of your contract for employment and a new contract to commence at a later date.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Summary of decision

The lump sum payment received from your future employment is assessable as ordinary income.

Reasons for decision

Under subsection 6-5(1) of the Income Tax Assessment Act of 1997 (ITAA 1997), an amount is assessable income if it is income according to ordinary concepts which is called ordinary income.

Ordinary income is described in Taxation Ruling TR 1999/17 'Income tax: sports people - receipts and other benefits from involvement in sport. It is explained in paragraph 16 of the Ruling that in determining whether an amount is ordinary income, the courts have established the following principles:

- what receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as a statute dictates otherwise;

- whether the payment received is income depends upon a close examination of all relevant circumstances; and

- it is an objective test.

Paragraph 17 of TR 1999/17 describes the relevant factors in determining whether an amount is ordinary income:

- whether the payment is the product of an employment, services rendered, or any business;

- the quality or character of the payment in the hands of the recipient;

- the form of the receipt, that is, whether it is received as a lump sum or periodically; and

- the motive of the person making the payment.

In addition, Taxation Ruling IT 2674 'Income tax: gifts to missionaries, ministers of religion and other workers- are the gifts income?' considers in paragraphs 4 and 5 the relevance of the following general guidance in respect of gifts:

4. The principles that apply in determining whether gifts received by church workers are assessable income are no different from those which apply in determining whether gifts received by taxpayers in other callings or occupations are assessable income. However, the practical application of the principles to the particular circumstances in which church workers receive gifts is often different from its application to taxpayers in other callings or occupations who receive gifts. The Ruling therefore deals with gifts received by church workers.

5. A gift received by a church worker is assessable income under subsection 25(10) of the ITAA 1936 if it is 'income' in the ordinary sense of that word.

Whether the payment is the product of any employment

In Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47 at CLR 55 it was discussed whether a single voluntary payment was income, quoted with approval the following passage from the judgement of Kitto J in the Squatting Investment Case (1953) 86 CLR 570 at 633:

The distinction those decisions have drawn between taxable and non-taxable gifts is the distinction between, on the one hand, gifts made in relation to some activity or occupation of the donee of an income-producing character...and, on the other hand, gifts referable to the attitude of the donor personally to the donee personally.

In Federal Commissioner of Taxation v. Harris 80 ATC 4238 Bowen CJ said:

A generally decisive consideration is whether the receipt is the product in a real sense of any employment of, or services rendered by the recipient, or of any business, or, indeed, any revenue producing activity carried on by him

From this it is clear that a voluntary payment may still be income according to ordinary concepts even though the recipient has ceased the income producing activity.

In Pickford v Federal Commissioner of Taxation of 1998 AAT 2268 held that a lump sum inducement to enter into employment was ordinary income as the source of the payment was to be found in the service to be rendered.

In your case, the payment was received prior to any services being rendered by you.

In Cameron v. Prendergast (1940) 2 All ER 35 9 (Cameron's case) the House of Lords unanimously held that a voluntary ex gratia lump sum payment to a director as an inducement to continue in their office was a payment arising from the office of director and therefore assessable income. In Case M86 80 ATC 620 the Board of Review accepted on the authority of Cameron's case that a lump sum paid to an employee to ensure they do not resign was assessable income.

In Reuter v Federal Commissioner of Taxation 1993 ATC 4037 (Reuter's case) Hill J (ATC at 4047) after noting that the word 'income' is not a technical concept but is to be construed in accordance with the ordinary usages of mankind, observed that there will also be cases where the casual nexus between the payment made and the services may be remote or uncertain, but the payment will necessarily have the character of income'.

In that case it was held that a payment was a product of the taxpayer's services notwithstanding ' it was contractually made for his services, nor reduced in law the remuneration payable to him, nevertheless there was a sufficient relationship, not being a merely temporal relationship, between the payment and Mr Reuter's services to give the payment the character of income'

In your case, at the time of payment you had not commenced employment but there was a valid contract of employment (Walker v. Salmon Smith Barney Securities Pty Ltd (2003) FCA 1099). The payment related to, was because of, or in respect of future employment as you received the amount with the understanding at the time and thereafter that there was on hand a valid contract of employment in which the commencement date had merely been deferred.

The quality or character of the payment in the hands of the recipient

IT 2674 provides that whether a gift is assessable income depends on the quality or the character of the gift in the hands of the recipient and that consideration is necessary of the whole circumstances in which the gift is received and lists certain factors to be taken into account.

These factors being:

how, in what capacity, and for what reason the recipient received the gift.

The original contract and letter accompanying the payment suggest it was received by you in your capacity as a party to an existing legally enforceable contract of service the performance of which the payer as the other party to the contract sought to postpone for their benefit only to an approximate time in the future.

whether the gift is of kind which is common incident of the recipient's calling or occupation

The receipt of the same amount by at least nine other persons who commenced employment in March 2010 together with you clearly suggest the payment was at the time not an unusual incident for someone in your position.

the motive of the donor

The existence at the time of payment of a legally enforceable contract between the payer and yourself and a reference in the letter accompanying the payment to a deferral of commencement of employment, together with your commencement of employment in 2010, suggests that a substantial motive for the payment was to induce you to defer their start date to a time more suitable for the payer.

It is reasonable to conclude that commercially the best outcome for a future employer under an executed contract of service, where it made no business sense to commence performance at the appointed time, would be for persons already established as suitable in that year to make themselves available to commence service in a later year without alteration to the existing terms of employment.

The receipt of the same amount by a significant number of other persons in similar circumstances who commenced employment together with you confirms that the motivation of the payer was to induce recipients to be available to merely commence employment in a later year under the terms and conditions of the existing contract.

The receipt of the same amount by a number of other persons under similar circumstances can only suggest that the payment was not referable to the attitude of the payer personally to you personally.

Whether the recipient relies on the gift for regular maintenance of himself or herself and any dependants

In your case, you looked upon the payment as an attempt to provide some financial assistance. It is reasonable to conclude that the payment in fact maintained you for some time as you sought alternative employment in the interim, particularly as it is expected similar employment and remuneration would be most difficult to find at that time or for another 12 months.

The form of the receipt, that is, whether it is received as a lumps sum

In TR 1999/17 paragraph 44 discusses that subsequent court decisions have confirmed that 'the form of receipt on its own will seldom determine the issue. In Reuter's case Hill J (ATC of 4047) was of the opinion that 'it will also be generally immaterial whether the amount paid is paid periodically or in a lump sum'.

In your case, similar to where a payment is made after a taxpayer finishes employment, the form of the payment was dictated merely by the fact that at the time of the payment you were an employee on the payroll of the payer. In all the circumstances therefore the lump sum nature of the payment is not a decisive matter.

Conclusion

Notwithstanding the payment was unexpected, voluntary and unsolicited, the whole of the circumstances viewed objectively indicated that the payment was not gifted because of some personal quality or relationship or in consideration of a capital asset.

Rather, by virtue of the valid contract of employment on hand at the time of the payment, together with invitation to commence that employment in a later year under the same terms and conditions, the payment was altogether a product of that employment. Your commencement of that employment in the later year and the payment of the same amount to others commencing employment in the same circumstances confirms the character of the receipt.

Accordingly, it is considered that the payment received is ordinary income for the purposes of section 6-5 of the ITAA 1997 and is therefore included in your assessable income.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).