Edited version of private advice

Authorisation Number: 1052083893112

Date of advice: 14 February 2023

Ruling

Subject: Assessable income - prize or gift

Question 1

Does the prize you receive personally from winning the Contest form part of your assessable income?

Answer

Yes.

Question 2

Does the prize from winning the Contest form part of assessable income of the Family Trust?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You won a Contest by outlining the project.

You will receive prize money split across the completion of a number of milestones/phases.

The Contest Rules provides details of each of these phases.

You are receiving the prize money in your personal name.

The Family Trust (Trust) owns the assets and is the entity that had the original idea.

You are the director and shareholder of the trustee company of the Trust.

You are a beneficiary and the appointor of the Trust.

You may receive distributions of profit from the Trust in the future. No other benefits will be provided to you post the finalisation of the project.

You are the business developer and administrator of the business.

The Contest Rules states that Entrants must be individuals of legal age of majority in their jurisdictions of residence.

The sole purpose of the Prize is to enable each winner to carry out their plans.

Upon its completion, the winner agrees to make the space available on the contest organiser's website for a set period.

As part of the application process, all entrants are required to submit a high-level overview of their proposed budget.

You provided a template outlining all estimated costs associated with the project.

You have conducted various media interviews and written coverages about your winnings and the project.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

A prize or gift will be assessable income if it is:

•         income in the ordinary sense of the word (ordinary income); or

•         an amount or benefit that through the operation of the provisions of the tax law is included in assessable income (statutory income).

Section 6-5 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.

ATO Interpretative Decision ATO ID 2002/644 Income Tax Assessability of Prize provides that generally, a gift or prize is regarded as a personal windfall 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 a prize or gift is ordinary income, the courts have established that consideration of the whole of the circumstances is necessary and 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 (Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570, (1953) 5 AITR 496; (1953) 10 ATD 126 (Squatting Investment Case))

•         whether the prize or gift is of a kind which is a common incident of the recipient's calling or occupation (Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 10 AITR 367; (1966) 14 ATD 286 (Scott's Case))

•         whether the prize or gift is made voluntarily

•         whether the prize or gift is solicited (Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 6 AITR 248; (1956) 11 ATD 68 (Hayes' Case) and Scott's Case)

•         whether the prize or gift can be traced to gratitude engendered by some service rendered by the recipient to the prize of gift donor (Squatting Investment Case)

•         the motive of the prize or gift donor (though this factor is rarely decisive in itself) (Hayes' Case); and

•         whether the recipient relies on the prize or gift for regular maintenance of themselves and any dependants (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; (1952) 10 ATD 82 (Dixon's Case) and FC of T v. Blake (1984) 75 FLR 315; (1984) 15 ATR 1006; 84 ATC 4661).

Application to your circumstances

We have considered the factors listed above in relation to your situation as follows:

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

You won the Contest and are receiving the amount in your personal name.

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

The Trust owns the assets and is the entity that had the original idea.

You are the director and shareholder of the trustee company. You are a beneficiary and the appointor of the Trust.

You are the business developer and administrator of the business.

Whether the prize or gift is made voluntarily

The Contest Official Rules states the sole purpose of the Prize is to enable each winner to carry out their projects, with the intention that upon completion to make the project available on the contest organiser's website for a set period.

The prize is made voluntarily by the contest organiser.

Whether the prize or gift is solicited

You have actively sought the prize and completed (or will complete) the relevant phases.

You had to enter the competition, write the plan for the idea, and provide a breakdown of the cost of the materials required to do the project. After being notified as a winner, you will receive the amount in instalments after meeting certain phases, including submitting documentation showing partial construction and receipts for the expenses.

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

To receive the amounts, you had to submit a design brief and detail how much the project would cost (by providing a detailed breakdown of expected expenses incurred, for the completion of the project). You will only receive the payments in increments after meeting each of the phases.

The motive of the prize or gift donor

The Contest Rules state that upon its completion, you agree to make the project available on the contest organiser's website for a set period.

Whether the recipient relies on the prize or gift for regular maintenance of themselves and any dependants

Although you are required to show sufficient proof acceptable meet your continued eligibility, and compliance with the applicable requirement, you are receiving a one-off prize.

Conclusion

There have been services rendered by you to receive the amounts. The expectation is that the amounts given would be fully expended for the purpose of finalising your project.

These payments meet the characteristics of being ordinary income and therefore would be assessable to you. It is received as part of services rendered and acceptance of the prize ties you to the contest organiser.

This amount is assessable to you, rather than the Family Trust, as there is no indication that it was received in your capacity as trustee for the Trust.