Edited version of private advice

Authorisation Number: 1052212729878

Date of advice: 2 February 2024

Ruling

Subject: Lump sum payment - voluntary payment

Question 1

Is the lump sum payment you received assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Should GST be remitted to the Tax Office on receipt of a lump sum payment at the termination of a contract?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You own a truck and worked as subcontractor for Company A until you ceased your business on a specified date.

You were registered for GST and carried on your enterprise in Australia.

Company A were negotiating to sale its business to an international buyer immediately prior to your ceasing the business. On a specified date, an international buyer acquired 100% of Company A.

On a specified date, Company A approached you with an offer of a specified amount (which included GST) as a goodwill payment for your loyal service for a specified number of years on the condition that you signed a Separation Agreement.

You provided us with a copy of the separation agreement with Company A and Company B.

As a long-term sub-contractor you were party to the daily workings of the business. Company A did not want you sharing any of this information to other businesses.

You received funds into your account on a specified date.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 11-15

Income Tax Assessment Act 1997 section 53-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

Reasons for decision

Question 1

Summary

No, the lump sum payment you received is not assessable under subsection 6-5(2) of the ITAA 1997. The payment is capital as the payment received is consideration for the surrender of valuable rights and not by way of reward for services.

Detailed reasoning

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that are earned, are expected, are relied upon, and have an element of periodicity, recurrence, or regularity.

In Northland Development Co Pty Ltd vs FC of T Hill J expressed whether a voluntary payment received by a taxpayer was income or capital will depend on the nature of the payment or what it is for.

In FC of T v Co-operative Motors Pty Ltd the taxpayer was a motor car distributor and dealer of Toyota and the relationship with Toyota was regulated by 2 contracts terminable on certain terms. It was held that, despite the payment being voluntary, the payment was made in the context of the business that had been carried on and that would continue to be carried on. The continuation of the relationship was one of the reasons for the payment. In your case, your relationship with Company A had already ceased prior to the payment being offered and received therefore the payment is not considered to be a product of your income-earning activities.

In UK case, Chibbett (HM Inspector of Taxes) v Joseph Robinson & Sons ­where the taxpayers were employed by a ship company and received a part of the Company's annual net profits when the company went into liquidation. It was held that the payments were not a business receipt but a testimonial for work that had been done for the company in the past and therefore was non-taxable. In your case, the lump sum payment was a thank you for the work that you had done in the past and were therefore not a business receipt.

We consider that the principles on which the UK cases were decided are applicable in Australia.

In your circumstances, the lump sum payment you received was not earned by you as an income-earning activity as it does not relate to services performed. The payment is not considered to be a payment solely for lost income. The payment is a one-off payment and thus does not have an element of recurrence or regularity. Considering the full circumstances, the lump sum payment will not be regarded as ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997. The money received by you was a capital receipt, being received as consideration for the surrender of valuable rights and not by way of reward for services.

Question 2

Summary

You have made a taxable supply as you have satisfied all the requirements under section 9-5 of the GST Act.

Detailed reasoning

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity makes a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

Section 9-10 of the GST Act states the term 'supply' includes:

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of *real property

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a *financial supply; and

(g) an entry into, or release from, an obligation:

i. to do anything;

ii. or to refrain from an act;

iii or to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Subsection 9-10(2) makes it clear that things supplied need not only be goods and services, which are included as examples of the things that can be supplied. Rights, obligations, and information are supplies as is the entry into, or release from, an obligation to do anything or to refrain from an act.

In line with the agreement, you make the following supplies to Company A and Company B;

(1)  to surrender your right to claims, demands, actions and proceedings relating to the services you provided to Company B, including all present and future claims, whether known or unknown and however arising which you may have against Company B or Company A arising out of provision of the services (Clause 2.1 and 2.2 of the Agreement) and;

(2)  you have an obligation to refrain from making a statement or inducing anyone else to make a statement (whether written or oral) about Company B or Company A or their businesses or directors which is disparaging of Company B or Company A of their directors or is likely to harm Company B or Company A or any of the directors' reputations (Clause 7 of the agreement).

The GST Act defines consideration for a supply or acquisition, as any consideration within the meaning given by sections 9-15 and 9-17, in connection with the supply or acquisition.

Consideration in section 9-15 relevantly means:

(1) Consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

(2) It does not matter whether the payment, act or forbearance was voluntary...

In your circumstances, the payment is consideration for the supply of a surrender of a right and an obligation to refrain from an act, as you made the supplies, by virtue of signing the agreement, in exchange or in response to the payment. Moreover, had you not agreed to the terms of the agreement, Company A and Company B would not have released the payment.

Therefore, you meet paragraph 9-5(a) of the GST Act.

Carrying on an enterprise includes doing anything in the course of commencement or termination of the enterprise. As such, your supply was made in course of enterprise of you carried on, which was connected with Australia, and you are registered for GST. Therefore, you meet paragraphs 9-5 (b), (c) and (d) of the GST Act.