Edited version of private advice

Authorisation Number: 1051689068136

Date of advice: 28 May 2020

Ruling

Subject: Assessability of a gift

Question 1

Will an amount received from a friend constitute ordinary income in accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will an amount received from a friend constitute assessable income in accordance with section

15-2 of the ITAA 1997?

Answer

No

This ruling applies for the following periods

Income year ending 30 June 2020

Income year ending 30 June 2021

The scheme commences on

1 July 2019

Relevant facts and circumstances

1.            Since 2016, you have been a resident of Australia for taxation purposes and have been paid a salary in Australia.

2.            You are employed by a company within a group of companies.

3.            A friend of yours is the beneficiary of a trust. This trust has loaned money to the group of companies.

4.            Your friend is the controlling mind and decision maker behind the group of companies.

5.            You have known your friend for several decades.

6.            Your friend wishes to provide you a gift of money.

7.            The payment is premised on decades of friendship and is unrelated to and unaffected by employment (past, present or future) or the ending of such employment.

8.            There is no service rendered or employment provided that created the payment or that the payment is connected to. It is a gift being provided based solely on goodwill, generosity and affection.

9.            A draft Deed of Gift was prepared, naming yourself as the recipient and your friend as the donor. The unsigned Deed contains operative provisions outlining that the payment is unrelated to employment.

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, Subsection 6-5(2).

Income Tax Assessment Act 1997, Section 15-2.

Income Tax Assessment Act 1997, Subsection 15-2(1).

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Will an amount received from a friend constitute ordinary income in accordance with section 6-5?

Summary

The amount that you will receive will not be included in your assessable income as ordinary income under subsection 6-5(1).

Detailed reasoning

1.            Under subsection 6-5(1), assessable income includes income according to ordinary concepts, otherwise known as ordinary income.

2.            Subsection 6-5(2) provides that an Australian resident's assessable income includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

3.            There is no single test to determine whether an amount is 'income according to ordinary concepts', however there are three principle categories in which income is considered to be 'ordinary income':

·                     income from rendering personal services, including employment income

·                     income from property, such as rent, interest and dividends, and

·                     income from carrying on a business.

4.            The following factors have been developed by the Courts to help determine whether a receipt has the characteristics of income:

·                     the receipt is earned

·                     the receipt is expected

·                     the receipt is relied upon

·                     the receipt has an element of periodicity, recurrence or regularity

·                     the receipt is for the replacement of income.

5.            The term 'gift' is not defined in either of the Income Tax Assessment Acts nor does it fit within the three principle categories listed above, therefore the word 'gift' takes its ordinary meaning.

6.            Generally, a gift is regarded as a personal windfall gain and not 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.

7.            In Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 11 ATD 82; (1956) 4 AITR 248 (Hayes), which dealt with a gift to Hayes from a friend who was also a former employer, the High Court considered two factors as relevant in determining whether an amount is the product of a taxpayer's services (that is, paid in consideration for the performance of the services):

·                     whether there was an expectation to receive the amount by the taxpayer, and

·                     the motive of the payer in paying the amount.

8.            Taxation Ruling IT 2674Income 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. The principles contained within this ruling can be applied to your situation.

9.            Whether a gift is assessable income depends on the quality or character of the gift in the hands of the recipient. Paragraph 11 of IT 2674 sets out the following factors that need to be taken into account in determining whether a gift is assessable income:

(a)             how, in what capacity and for what reason the recipient received the gift

(b)             whether the gift is of a kind which is a common incident of the recipient's calling or occupation

(c)             whether the gift is made voluntarily

(d)             whether the gift is solicited

(e)             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

(f)              the motive of the donor (but it is seldom, if ever, decisive), and

(g)             whether the recipient relies on the gift for regular maintenance of himself or herself and any dependents.

10.          Paragraph 28 of IT 2674 states that 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...;

(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....

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

12.          You are employed by a group of companies. Your friend is the controlling mind and decision maker behind the group.

13.          Your friend wishes to give an amount to you due to your lifelong friendship.

14.          You have stated that the amount of money to be received is not related to your employment with the group or to services rendered. You have provided a draft Deed of Gift that you and your friend intend to execute on receipt of a favourable ruling.

15.          The draft Deed of Gift makes clear that the payment is not connected with your employment or services rendered and is made voluntarily by your friend.

16.          As with the case in Hayes, there is no expectation by you that you are entitled to receive the gift, nor has it been solicited. The motive of the donor is one of goodwill and generosity. It is premised on the notion of friends growing up together, one wishing to give an amount to a lifelong friend.

17.          Further, the gift is not of a kind which is a common incident of your occupation.

18.          The factors listed at paragraph 11 of IT 2674 indicate that the amount you will receive should not be included in your assessable income.

19.          Although you are employed by a company in the group of companies, where your friend is the controlling mind and decision maker, the draft Deed of Gift clearly stipulates that the payment is unrelated to and unaffected by employment. As decided in Hayes, the motive of the payer in paying the amount to you is to provide you a gift as a lifelong friend. The amount is to be voluntarily given to you and is not in any way linked to your employment or for any services rendered.

20.          The amount that you will receive will not be included in your assessable income as ordinary income under subsection 6-5(1).

Question 2

Will an amount received from a friend constitute assessable income in accordance with section

15-2?

Summary

The amount you will receive will be considered a gift and will not be included in your assessable income under subsection 15-2(1).

Detailed reasoning

21.          Subsection 15-2(1) provides that the assessable income of a taxpayer includes the value of all allowances, gratuities, compensations, 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.

22.          The draft Deed of Gift stipulates that the payment is unrelated to and unaffected by employment.

23.          The amount you will receive will not be included in your assessable income under subsection 15-2(1).