Edited version of private advice

Authorisation Number: 1052229252428

Date of advice: 7 March 2024

Ruling

Subject: Proposed cash payment - gift or remuneration

Question 1

Will the proposed cash payment constitute your ordinary income assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No. Subsection 6-5(2) of 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. The payment you will receive is not ordinary income as it considered a gift. You will receive the payment from Individual A as appreciation and gratitude for your friendship, and the personal support and assistance you provided to him. You and Individual A have built a close personal relationship since 20XX. It is not to remunerate you for past or future services/employment. The Deed of Gift does not bind you to give something in return to Individual A. You are not a beneficiary of the Trust and you were not a party to the Sale Deed. Therefore, it will not be included in your assessable income under section 6-5 of the ITAA 1997 when it is paid.

Question 2

Will the proposed cash payment constitute your statutory income assessable under section 6-10 and specifically under section 15-2 of the ITAA 1997?

Answer

No. 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. As described above, the amount you receive will be considered a gift, as it is paid for personal reasons not related to any employment. Therefore, it will not constitute your statutory income assessable under section 15-2 of the ITAA 1997.

This ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

You have been employed by Company A since 20xx. Company A was founded by Individual A and wholly owned by him via his Trust. You are not a beneficiary of the Trust.

The relationship between You and Individual A

You and Individual A (A) have been close friends since 20xx, when you met through mutual friends. Your personal relationship commenced before Company A started operating in 20xx and has extended over xx years. You meet up weekly after work and regularly on the weekend. Your wives and children also have a close friendship.

In the 20xx year when A approached you to join Company A as a salesman, Company A had already been established for nearly a year. From this point, you and A spent a lot of time together at work and this developed into a very close friendship. You and A have spent your one-hour work lunch together nearly every day for the last 10 years. You play a lot of golf together (twice weekly at its peak), video games (once a month), go to the same gyms (five times a week at its peak), countless dinners, birthday parties (for both couples and their children), and generally socialise at both of your homes (one to two times a month). You also regularly personally message each other over SMS and social media. You have helped each other renovate your respective homes and move homes. You regularly borrow each other's tools, clothing, and cars. You are both considered part of each other's families.

A was a groomsman at your wedding when you married your wife on XX November 20XX. You met your wife in January 20XX, and since then A's wife and your wife have also become friends. They socialize in the scenarios described above (dinners, birthday parties, at their homes). In addition, they regularly text each other directly and in groups with you and A. They often talk to each other about mothering advice. Your sons are also friends. Your wife and your son have been to all of A's son's birthday parties and vice-versa. Your sons have regular play dates (one per month) and are also going to the same school together.

The proposed cash payment

On XX May 20XX the Trust, sold Company B shares to a foreign based company for approximately $XXX (Share Sale).

You will receive a one off $X cash payment from the sale proceeds. The money will come from A after he received a distribution from the Trust. There is no obligation for A to make the payment and it will be paid from after tax dollars. The payment is for appreciation and gratitude for your friendship, and the personal support and assistance you have provided to him.

No deduction will be claimed for the $X proposed payment by A or any of his related entities.

A portion of the proposed $X payment will be used to reduce private residential debt and the allocation of the residual amount is yet to be decided.

Verbal conversations between you and A occurred regarding the provision of the payment.

A Deed of Gift in relation to the proposed payment will be executed showing you as the 'Recipient' and A as the 'Donor'. It includes in the 'Background':

•         As a gesture of good faith and due to the close friendship between the Donor and the Recipient, the Donor wishes to transfer the Monies ($X) by way of gift to the Recipient.

•         The parties acknowledge that the gift is not related to the income earning activities provided by the recipient to Company B, and that the recipient acknowledges that he has been properly remunerated through his employment and for any other services provided to Company B.

"Gifts" Made to Other Recipients by Individual A

Since the Share Sale, A has gifted $X to each of his sister and sister-in-law, and $X to his parents (who he also intends to make further gifts to in the future). No other ''gifts'' were made to employees of Company A.

Employment with Company A

You became employed with Company A in 20xx after A approached you. A was developing the software and selling it. A wanted to focus on the development aspect and have you run sales. Your employment is recognised as being continuous from xx/xx/xx for all service-based entitlements. The 20xx employment contract stated your remuneration was $X plus superannuation as a Business Development Manager and has increased over time. Your role progressed from Business Development Manager to National Sales Manager to Director of Sales and Marketing (Sales Director) in 20xx.

The Offer of employment with Company A dated xx/xx/xx provided your remuneration was $X plus superannuation.

Your current total remuneration package is $X based on the Executive Service Agreement (ESA) with Company A dated xx/xx/xx. There was no applicable Employee Share Scheme (ESS).

As per the Job Description on your original contract, you were originally the Business Development Manager, performing business development and some minor administrative tasks. At initial employment, Company B was a small company, turning over approximately $X annually. Over the following x years, the business grew significantly and, as such, your role also grew. At the time of the Share Sale, you were a Sales Director directly managing a team of over x staff and Company B generating over $X in revenue. Therefore, as the business and role progressively grew, so did your salary. Part of your remuneration has always been sales commissions and, as such, your salary has increased over time as sales increased.

Executive Service Agreement (ESA) with Company A

On the same day as the Share Sale, you signed an ESA with Company A to be the Head of Global Sales as an Executive. Your general duties as an Executive is to devote your time, attention and skill to the duties of office in a proper and efficient matter, to perform the duties and exercise the powers consistent with the position of Head of Global Sales Operations. At any time during the Employment, you may be directed to perform another role on a temporary or permanent basis, provided those duties are within the limits of your skill base, competency and training.

The total remuneration package of $X as an Executive comprises of salary, superannuation contributions, such other non-cash benefits including motor vehicles.

In accordance with the Share Sale Deed you have received an equity interest in the foreign company. You were not a party to the sale and did not have an equity interest in Company B prior to the Share Sale.

You will be assessable on the value of shares under the ESS provisions (Division 83A of ITAA 1997) in relation to an amount referred to in the Share Sale Deed. The discount, being the full value of the shares of X, will be taxed upfront under section 83A-25. You did not receive any other remuneration as part of the Sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-2