Edited version of private advice

Authorisation Number: 1051529652783

Date of advice: 23 August 2019

Ruling

Subject: Assessability of gift payment

Question 1

Will the gift constitute your assessable income under section 6-5 of the ITAA 1997?

Answer

No

Question 1

Will the gift constitute your assessable income under section 15-2 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

Background

You currently work for a business that is in the process of being sold. After the sale you may receive a payment from your previous employers. You have asked the Commissioner to consider whether the payment you may receive from your previous employer would be characterised as a gift or as assessable income under section 6-5 or section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997).

Your employment with the business

You have provided over 30 years of employment service to the business.

Details of the owners and the structure of the business have been provided to the Commissioner. They have not been detailed here as while relevant to understanding the way that the payment will be made to you, they go beyond the consideration of the character of the payment received in your hands.

Over the years, a close personal friendship has been developed between you and your employers.

Your remuneration for your role

You are currently on a salary with a fringe benefit. You have supplied research and evidence that shows that this salary is within the range of benchmark salaries for your role.

You have supplied evidence of your salary for the previous years and this has been set in regard to the level of work being undertaken and tenure with the business.

Your entitlements when your role ends

You will not be employed in the business after the sale of the business. Your role will be terminated and you will receive a termination payment from your current employer of an amount that has been set with reference to your salary, years of service, and what could generally be expected.

The termination payment is not related to and is separate to the payment of any future gift.

The reasons for the gift and how the gift will be made

The Shareholders of the Company where you are an employee have decided to sell the business. They intend to make a gift to you out of the proceeds of the sale of the business. They want to make the gift to you because you are good friends and have been friends over a long period of time.

We have sought further clarification on the quantum of the gift and the timing. You have advised that the sale was slightly delayed so the gift has not yet been made.

However, it is likely that the gift to you would exceed your annual salary that you have received. The decision as to the quantum will be a personal decision of the owner following the settlement of the sale. The gift will not be quantified until the sale is complete and the resulting administrative matters are dealt with.

There is no obligation on the part of the employer to make the gift and it will be given as a 'one-off' amount. You have no ability to influence the amount of the payment being made or if it will be made. You will have no direct employment relationship at the time the payment is made, having already ceased employment for the business. You have supplied satisfactory evidence that you have already been renumerated for your previous employment.

The gift will be made by the owner's personally (and potentially their partners). The payment will be made out of an amount that will already be subject to tax in the payer's hands.

The gift is unsolicited and there is no consideration passing from the potential recipient (you) to the owners for the payment. That is the payment is a no strings attached payment and you are not required to do anything to receive it.

The payment you receive will not be the only payment and it is likely that the owners will also make a number of payments to other family and friends that have been supportive to them over a long period of time.

Conclusion

The Commissioner has considered the characterisation of the payment you may receive in your hands and the payment is more properly characterised as a gift. The payment will not be assessable income under section 6-5 or 15-2 of the ITAA 1997.

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

Question 1

Will the gift constitute your assessable income under section 6-5 of the ITAA 1997?

Summary

The amount you receive will be considered a gift and will not constitute assessable income for you under section 6-5 of the Income Tax Assessment Act 1997.

Detailed reasoning

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.

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.

Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift (TR 2005/13) provides principles relevant to the determination of whether a transfer of money or property constitutes a gift.

The term 'gift' is not defined in the ITAA 1997. Therefore, the word 'gift' takes its ordinary meaning.

Rather than attempting to define a 'gift', the courts have described a gift as having the following characteristics and features:

·   there is a transfer of the beneficial interest in property

·   the transfer is made voluntarily

·   the transfer arises by way of benefaction, and

·   no material benefit or advantage is received by the giver by way of return.

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 Income tax: gifts to missionaries, ministers of religion and other church workers - are the gifts income? (IT 2674) provides guidelines for determining whether gifts received by church workers (including missionaries and ministers of religion) are assessable income. While 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;

·   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;

·   if the gift can be traded to gratitude engendered by some service rendered by the recipient to the donor, whether the recipient had already been remunerated fully for the service;

·   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 is 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;

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

A personal gift received for personal reasons, where there is no connection between the receipt of the gift and any income-producing activity by you, is not assessable income. Nor is a gift assessable income if it is referable exclusively to the attitude of the donor personally to you

Application to your situation

In your situation, you have a previous employment relationship with potential gift grantors, your previous employers. There is no employment relationship between you and other potential gift grantors, that is, the partners of your previous employers.

You have been in an employment relationship with the owners for over 30 years, but it was stated that you have also built a close personal relationship with them during this time. You have been properly remunerated for your service in relation to your employment and supplied research to show the range of salary for the position. The payment will be made once the sale finalises and you will no longer be employed with the business. You will receive an employment termination payment equal to the amount that can be generally expected. The gift amount to be transferred will be decided on an arbitrary basis and is separate to the arms-length amounts of employment remuneration or termination payments you receive

The owners (and possibly their Partners) may transfer the gift amount to you out of the distributions of income that they will receive from the sale of the business. Details of the owners and the structure of the business have been provided to the Commissioner. They have not been detailed here as while relevant to understanding the way that the payment will be made to you, they go beyond the consideration of the character of the payment received in your hands.

The Commissioner has considered if it is possible to point to any employment, personal exertion or other income-earning activity by you of which the receipt of the gift is in a relevant sense a product or incident.

On balance due to the following factors the Commissioner believes that the payment will be given to you for personal reasons and is therefore a gift and is non-assessable:

·   the payment is not expected, relied upon or a common incident for your occupation.

·   the payment is totally at the discretion of the donor and may or may not be made by the donor.

·   the payment is being given voluntarily to you as well as others, it is reasonable to conclude from the facts that as the only previous employee receiving a payment it is being given because of the close personal relationship that has formed between you and the owners over the years.

·   it is unlikely given that you have already been adequately remunerated for your services at the industry rate that the payment has been engendered from and given for any previous work.

Conclusion

Although there is a previous employment relationship the overall circumstances in which you may receive the payment leads to a conclusion that this will be a gift made voluntarily to you.

You have been able to demonstrate that you have been properly remunerated for your services in relation to your employment. There is not a sufficient link to conclude that the amount to be paid is in relation to the employment relationship between you and the potential gift grantors.

The amount you receive will be considered a gift and will not constitute assessable income for you under section 6-5 of the Income Tax Assessment Act 1997.

Question 2

Will the gift constitute your assessable income under section 15-2 of the ITAA 1997?

Summary

The amount you receive will be considered a gift and will not constitute assessable income for you under section 15-2 of the Income Tax Assessment Act 1997.

Detailed reasoning

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.

The payment will also not be considered to be statutory income for the purposes of section 15-2 of the ITAA 1997. This is due to the same reasons as discussed in the answer to question 1, being that the payment was given outside the employment relationship for personal reasons. The Commissioner considers that any payment that may be made to you is not indirectly related to your previous employment.

Conclusion

Although there is a previous employment relationship the overall circumstances in which you may receive the payment leads to a conclusion that this will be a gift made voluntarily to you.

You have been able to demonstrate that you have been properly remunerated for your services in relation to your employment. There is not a sufficient link to conclude that the amount to be paid is in relation to the employment relationship between you and the potential gift grantors.

The amount you receive will be considered a gift and will not constitute assessable income for you under section 15-2 of the Income Tax Assessment Act 1997.