Edited version of private ruling

Authorisation Number: 1011494839185

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Ruling

Subject: Lump sum payment

Question and Answer

Is the lump sum payment you received for introducing and facilitating a meeting between two business owners, which resulted in the sale of the business, non assessable income?

No.

This ruling applies for the following period

1 July 2008 to 30 June 2009

Relevant facts and circumstances

You were an employee of a company (the company)

Part of your responsibilities was to attend meetings to present reports.

You attended a meeting where it was discussed that there was an interest in an exit from the current owners of the company.

You were aware of an entity, you believed, who may be interested in purchasing the company.

You set up a meeting between the entity (the potential purchaser), the CEO and yourself.

The outcome of the meeting was favourable and the accountant negotiated with the purchaser, on behalf of the owners of the company, the sale of the business.

Your role through out the process was to provide relevant information and address any queries from the purchasers.

In recognition for you bringing forward the purchaser's name before the owners of the company they agreed to pay you a discretionary amount of money. The amount would only be payable if the deal went through and at the discretion of the owners.

The deal settled and you received a cheque.

You did not have any previous connection with purchaser.

You are still employed under the new owners.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5(2)

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Section 15-2

Reasons for decision

Ordinary income

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 during the income year.

In determining whether an amount is ordinary income, the courts have established the following principles:

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

- whether the payment is expected;

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

- whether the payment is received as a lump sum or periodically; and

- the motive of the person making the payment, although this is rarely decisive by itself.

To determine the character of the payment in the hands of the recipient it is necessary to consider to whether a payment is a gift (rather than income). A gift is regarded as a personal windfall gain and not assessable. To determine the character of the payment, the courts have established that the following should be considered:

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

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

- whether the gift is made voluntarily,

- 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

- whether the recipient relies on the gift for regular maintenance of himself or herself and any dependants.

Taxation Ruling IT 2674 states gifts are assessable income if it is received because of, in respect of, for, or in relation to any income-producing activity. The income-producing activity can arise from the office or occupation or some service rendered or to be rendered. In other words, a gift (even if it is a receipt of a one-off nature) is assessable income if it is possible to:

(a) relate the receipt of the gift to any income-producing activity, or

(b) point to any employment, personal exertion or other income-earning activity by which the receipt of the gift is in a relevant sense a product or incident.

Therefore, the lump sum payment you received is not a gift as it can be related to your employment with the company.

Statutory Income

Section 6-10 of the ITAA 1997 provides that assessable income also includes statutory income that is not ordinary income but is included in assessable income by another provision. Section 10-5 of the ITAA 1997 lists those provisions. Included in this list is section 15-2 of the ITAA 1997. Section 15-2 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.

The issue is whether the lump sum payment was given to you in relation directly to or indirectly to your employment. The payment was a product of your employment, you had prior knowledge of the board's interest in a change of ownership and because of your employment you attended a conference where you were able to identify a possible buyer. The payment would fall under section 15-2 of the ITAA 1997.

Therefore, as the provisions of section 15-2 of the ITAA 1997 are satisfied, the payment you receive for introducing and facilitating the meeting between the two business owners will be treated as assessable income under section 6-10 of the ITAA 1997.