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Edited version of your written advice
Authorisation Number: 1013013092851
Date of advice: 13 May 2016
Ruling
Subject: Assessability of gift of money
Question
Is the money you received as a gift for the hard work and support over the years from a previous Executive Director of a Company for whom you were employed considered assessable income?
Answer
Yes
This ruling applies for the following periods:
Year ending 30 June 2016
The scheme commenced on:
1 July 2015
Relevant facts and circumstances
You are a resident of Australia for taxation purposes.
You are the Managing Director of The Company ('the Company). Parent Company is the parent company of The Company. Executive Chairman was the founder and Executive Chairman of parent Company
Executive Chairman sold The Company as part of the parent Company to Purchaser in 20XX. Your role has not changed and you are now accountable to the management of Purchaser. You have an employment contract and receive remuneration directly related to your job functions from Purchaser.
Your responsibility when employed by the Company with Executive Chairman as Executive Chairman was to grow the business and for the completion of these responsibilities you were compensated by way of a salary and commission plan.
By way of gratitude for the work and loyalty that you provided to Executive Chairman over the years he has gifted you $xxx xxx as a one-off personal gift.
Executive Chairman has advised that there is no obligation on you to themselves or to the Company for the voluntary payment.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10 and
Income Tax Assessment Act 1997 Section 15-2
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
A gift will be assessable income if it is:
• Income in the ordinary sense of the word (ordinary income), or
• the provisions of the tax law include it as assessable income (statutory income).
Under subsection 6-5(1) of the ITAA 1997, ordinary income means income 'according to ordinary concepts'.
Generally, a gift is regarded as a personal windfall gain and not as ordinary income unless the taxpayer has received the gift because of, in respect of, or in relation to any income-producing activity of the taxpayer.
Taxation Ruling IT 2674 provides guidelines for determining whether gifts received by church workers (including missionaries and ministers of religion) are assessable income. Whilst you are not a church worker, the principles contained within the ruling can be applied to your situation.
IT 2674 explains that the following factors need to be taken into account in determining if a gift is assessable income:
• how, in what capacity and for what reason the recipient received the gift; and
• whether the gift is of a kind which is a common incident of the recipient's calling or occupation; and
• whether the gift is made voluntarily; and
• whether the gift is solicited; and
• if the gift can be traced to gratitude engendered by some service rendered by the recipient to the donor, whether the recipient had already been remunerated fully for that service; and
• the motive of the donor (but it is seldom, if ever, decisive); and
• whether the recipient relies on the gift for regular maintenance of himself or herself and any dependents.
Paragraph 28 of IT 2674 states gifts received by a church worker are assessable income if:
(a) they are received because of, in respect of, for or in relation to any income-producing activity of the church worker
(b) it is possible to relate the receipt of the gift to any income-producing activity on the part of the church worker, or
(c) it is possible to point to any employment, personal exertion or other income-producing activity by the church worker of which the receipt of the gift is in a relevant sense a product or incident.
A gift received in the above circumstances is assessable income even if the donor is not under a legal obligation to make the gift or the gift comes, not from the employer, but from somebody else.
Under section 6-10 of the ITAA 1997 assessable income also includes statutory income. Statutory income is amounts that are not ordinary income but are included as assessable income by provisions of the tax law.
Subsection 15-2(1) of the ITAA 1997 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.
There must be a connection between the payment and the employment. The receipt must be a product of the employment.
Taxation Ruling TR 2005/16 deals with the question of whether a payment of salary, wages, commission, bonuses or allowances has been made to an individual as an employee, of that or another entity. In particular, paragraph 64 states:
The employment relationship does not necessarily have to be between the entity making the payment and the individual. … The essential element is the nature of any connection between the payment and the individual's employment with the payer or any other entity.
Paragraph 66 TR 2005/16 states:
Where the payment is a reward for services provided by the employee to the employer in the capacity of employee, the payment would be incidental to the employment regardless of whether the payment is made by the employer or another entity.
In your case the relevant payment is being made to you as a consequence of the relationship that has developed over a number of years as an employee of the Company founded by Executive Chairman. In their email to you Executive Chairman has stated that the gift to you is by way of gratitude for the work and loyalty you have provided to them over the years.
Applying the principles contained in IT 2674 and TR 2005/6 it is considered that you received the payment as a result of your employment relationship with The Company and its founder, Executive Chairman. The fact that Xxx indicated that the payment is a gift and their motive behind the gift is based on gratitude does not alter this conclusion. Consequently the payment is assessable income under s6-5 of the ITAA97.
ATO view documents
Taxation ruling IT2674.
Taxation ruling 2005/16
Other references (non ATO view, such as court cases)
Federal Commissioner of Taxation v Dixon 55 (1952) 86 CLR 540; 26 ALJ 505; 10 ATD 82
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