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Ruling

Subject: Assessable income

Question 1

Is the award payment assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

No

Question 2

Is the award payment assessable as statutory income under section 15-2 of the ITAA 1997?

Advice/Answers

No

Question 3

Is the award payment assessable under the capital gain tax provisions of the ITAA 1997?

Advice/Answers

Yes

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You are a qualified professional.

Your duties include seeing clients, as well as teaching and researching at a university.

You have received an award for research. The prize for winning the award is a one-off cash payment.

You are not an employee of the award giver, although have in recent years undertaken paid work with them in relation to examinations (one or two times a year).

The award is in recognition of research you have performed whilst a practising professional and also as a student over a number of years. None of the research undertaken was commissioned or solicited by the awarding body.

Documentation provided shows the aim of the award is to promote the role and status of research in respect of your professional field. The award recognises a professional who has shown interest in the development of research.

Qualified professionals self nominate for the award and it is open to all such professionals.

A condition of the award is that it must be used within 12 months of the award.

Further, as the successful recipient you are required to submit a written report detailing how the award contributed to the development of your research.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 15-2

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 subsection 104-25(2)

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 108-5(1)

Income Tax Assessment Act 1997 section 120-20

Reasons for decision

Question 1

Summary

The award is not assessable as ordinary income.

Detailed reasoning

Ordinary income

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts.

Generally, an award or prize is regarded as a personal windfall or 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 an award or gift is ordinary income, the courts have established that the following factors need to be taken into account:

§ how, in what capacity, and for what reason the recipient received the prize or gift

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

§ whether the prize or gift is made voluntarily

§ whether the prize or gift is solicited

§ whether the prize or gift can be traced to gratitude engendered by some service rendered by the recipient to the prize or gift donor  

§ the motive of the prize or gift donor (though this factor is rarely decisive in itself), and

§ whether the recipient relies on the prize or gift for regular maintenance of themselves and any dependants.

In your case, you received a prize that is awarded annually with the aim of promoting the role and status of research. It is awarded to a registered qualified professional working in general practice who has shown interest in developing such research.

The prize money you received was not income related to your regular employment as a general practitioner or as a recompense for services rendered to the prize donor. It is not considered that you are carrying on a business or engaged in employment as a researcher.

We do not consider that the prize is a common incident of your practice. Although you nominated for the prize, this did not mean you could have the expectation of winning the prize. It also follows that you would not expect to rely on the prize. This can be contrasted with, for example, sportspeople where there is an expectation that they will win prize money over their careers and their activities are usually structured to take advantage of the prize money on offer.

When we consider all of the above factors, on balance, the prize is more related to recognition of your personal qualities and interest in research than as a reward for your general practice activities. The payment does not have the characteristics of ordinary income and was not earned by you and did not relate to services performed. The payment is also a one-off payment and does not have an element of recurrence or regularity.

Therefore, the nature of the award is that of a personal windfall or gain and it is not considered to be ordinary income.

Question 2

Summary

The award is not assessable as statutory income under section 15-2 of the ITAA 1997.

Detailed reasoning

Statutory income

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. Included in this list and of relevance to this matter is section 15-2 of the ITAA 1997.

Section 15-2 includes in a taxpayer's assessable income the value of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to the taxpayer 'in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by' the taxpayer.

As the prize for the award is not ordinary income, and any recipients will be employed as a qualified professional at the time of receiving the award, it is necessary to consider whether the award is granted 'in respect of, or for or in relation directly or indirectly to, any employment of or services rendered', and therefore assessable as statutory income.

The leading cases on 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.

Having regard to the nature of the award, it cannot be regarded, in a real sense, as a product of any employment of the recipients.

Although the recipients will be expected to prepare a report detailing how the receipt of the award has contributed to the development of their research, this is not sufficient to amount to a requirement on the recipient of the award scholarship to perform work or render services to the payer.

Therefore, the award scholarship is not assessable as statutory income under section 15-2 of the ITAA 1997.

Question 3

Summary

The award is assessable under the capital gain provisions.

Detailed reasoning

Capital gain

Section 10-5 of the ITAA 1997 includes capital gains as statutory income.

In your case, the circumstances of the awarding of prize money is similar to the situation discussed in Class Ruling CR 2011/62. This ruling provides that a recipient's entitlement to receive an award/ prize money is a CGT asset under subsection 108-5(1) that is acquired when the award is granted. When the award was granted, CGT event D1 happened.

CGT event C2 happens under section 104-25 when a recipient's entitlement to receive the award is satisfied. The time of the CGT event under subsection 104-25(2) is when the payment is made.

Therefore, in your case, the receipt of the prize money is a CGT event C2. Section 104-35 of the ITAA 1997 provides that the cost base consists of the incidental costs you may have incurred in 'acquiring' the right.

ATO view documents

Class Ruling CR 2011/62

ATO Interpretative Decision ATO ID 2002/644

Other references (non ATO view, such as court cases)

Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; (1952) 10 ATD 82

Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 10 AITR 367; (1966) 14 ATD 286