Edited version of private advice

Authorisation Number: 1052371992737

Date of advice: 11 April 2025

Ruling

Subject: Income tax - voluntary payments

Question

Is the amount that the taxpayer received from Entity A, (the Payment), assessable income in accordance with section 6-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

Year ending 30 June 20XX

Relevant facts and circumstances

1.  The taxpayer was previously employed by an Entity (Entity A) in the role of XX.

2.  The taxpayer's employment commenced on DDMMYY. The taxpayer had been approached to consider a role at Entity A by a senior staff member. The taxpayer underwent an interview process with one of the founders of Entity A and others. He was offered the role which he took.

3.  During their time working for Entity A, the taxpayer worked directly with both one of the founders of the Entity as well as other senior staff members. During this time friendships with those individuals were developed. While employed by Entity A the taxpayer had weekly direct face to face engagement with and undertook numerous international travel trips with one of the founders and worked directly face to face with other senior staff on an almost daily basis.

4.  The taxpayer's employment ended, and the taxpayer received an Employee Termination Payment (ETP) from Entity A on DDMMYY. There was no ongoing relationship between the taxpayer and Entity A after this date, however he continued ncli personal friendships that developed while working for Entity A, including social engagement with senior staff.

5.  In 20YY the taxpayer received correspondence from Entity A (The Letters).

6.  The Letters are not dated and are not personally addressed to the recipient.

7.  The Letters discuss a profit made by Entity A and a decision to share part of the profit with individuals who work, or had previously worked, at Entity A to thank them and show appreciation for their work to make Entity A as successful as it had become.

8. The subsequent pages of the letter discuss the terms of the offer made to the recipients of the letter. These pages are not personally addressed to the recipient and the content is not tailored to the recipient.

9.  The only personalised part of the letter was a single sentence that contained the dollar amount being offered to the taxpayer.

10.  The Letters stated that the offer amount is inclusive of any superannuation and taxes. Recipients are advised that applicable contributions and taxes will be deducted or withheld before the net payment is made to the recipient.

11.  The offer also states that the payment of the amount will be made by Entity A.

12.  The recipients were not obligated to accept the amount and were required to notify Entity A of their decision.

13.  The taxpayer opted to receive the offered Payment and completed the documentation to receive the Payment.

14.  After opting to receive the Payment, the taxpayer received further correspondence requesting their payment information, Superannuation details and TFN.

15.  The correspondence also advised that once payment is made, he would receive a payslip from Entity A's local payroll provider confirming that payment had been made and advising of the relevant contributions and taxes that have been withheld or deducted.

16.  The taxpayer signed the required acknowledgement and was paid an amount of AUD$X on DDMMYY.

17.  He received a payslip advising of the net payment, Superannuation and PAYG.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-2

Reasons for decision

Issue 1

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

Question 1

Is the amount that the taxpayer received from Entity A, (the Payment), assessable income in accordance with section 6-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The amount that the taxpayer received from Entity A, (the Payment), is assessable income in accordance with section 6-1 as it is ordinary income in accordance with section 6-5. The amount is not declared as non-assessable non-exempt income by any provision of the Act.

Detailed reasoning

Assessable income

Subsection 6-1(1) states that 'Assessable income consists of ordinary income and statutory income.'

Section 6-1 also states that some ordinary income and some statutory income is exempt income (subsection 6-1(2)); exempt income is not assessable income (subsection 6-1(3)); and some ordinary income and some statutory income is neither assessable income nor exempt income (subsection 6-1(4)). Division 59 sets out specific amounts that are non-assessable non-exempt income.

Ordinary income

Subsection 6-5(1) states that 'assessable income includes income according to ordinary concepts, which is called ordinary income'.

Ordinary income is not defined further in legislation, but has generally been held to include three categories: income from rendering personal services, income from property and income from carrying on a business. Court cases have provided further guidance about whether amounts are ordinary income.

Taxation Ruling TR 1999/17 Income Tax: sportspeople - receipts and other benefits obtained from involvement in sport (TR 1999/17) discusses whether benefits received by individuals from involvement in sport are assessable income under the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 and in doing so provides a summary of the concepts that court cases have developed about how to determine whether an amount received is ordinary income.

TR 1999/17 summarises:

Ordinary income

16. In determining whether an amount is ordinary income, the courts have established the following principles:

•                     what receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as a statute dictates otherwise;[1]

•                     whether the payment received is income depends upon a close examination of all relevant circumstances;[2] and

•                     it is an objective test.[3]

17. Relevant factors in determining whether an amount is ordinary income include:

•                     whether the payment is the product of any employment, services rendered, or any business;[4]

•                     the quality or character of the payment in the hands of the recipient;[5]

•                     the form of the receipt, that is, whether it is received as a lump sum or periodically;[6] and

•                     the motive of the person making the payment. Motive, however, is rarely decisive as in many cases a mixture of motives may exist.[7]

Statutory income

Amounts that are not ordinary income but are included in a taxpayer's assessable income by way of a specific legislative provision about assessable income are called statutory income (section 6-10). A summary list of statutory income provisions is contained in section 10-5. Specifically relevant to the taxpayer's circumstances, section 15-2 includes as statutory income, the value of allowances, gratuities, benefits and bonuses as assessable income provided to a taxpayer in respect of, or for or in relation directly or indirectly to the taxpayer's employment or services rendered by the taxpayer.

Section 15-2 states:

Allowances and other things provided in respect of employment or services

(1)           Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).

(2)           This is so whether the things were *provided in money or in any other form.

(3)           However, the value of the following are not included in your assessable income under this section:

(a)          a *superannuation lump sum or an *employment termination payment;

(b)          an *unused annual leave payment or an *unused long service leave payment;

(c)          a *dividend or *non-share dividend;

(d)          an amount that is assessable as *ordinary income under section 6-5;

(e)          *ESS interests to which Subdivision 83A - B or 83A -C (about employee share schemes) applies.

Note: 23L of the Income Tax Assessment Act 1936 provides that fringe benefits are non-assessable non-exempt income.

It is important to note that subsection 15-2(3) provides that an amount is only assessable under section 15-2 if it is not assessable as ordinary income under section 6-5. Thus, when considering the assessability of the amount received by the taxpayer it is appropriate to consider in the first instance whether the amount is assessable as ordinary income in accordance with section 6-5.

Gifts and voluntary payments

Taxation Determination TD 2006/22 Income tax: is disaster relief money received from charities, to which local, state or federal government or their agencies have made payments, assessable income of taxpayers carrying on a business? (TD 2006/22) considers whether voluntary payments are assessable income and explains that generally a 'gift' or a voluntary payment is not considered income unless, even though the payment was made without legal obligation, it is nevertheless so related to the recipient's employment or to services rendered that it is, in substance and reality, actually the product of an income earning activity:

5. The receipt of money or other property by way of a simple gift and nothing more is not a receipt of income. A receipt of a voluntary payment of money or a voluntary transfer of property is prima facie not income in the hands of the recipient. If nothing more appears than the receipt of some money or property, what is received is capital and not income. On the other hand, if the facts surrounding the transaction show that the payment or transfer was made without legal obligation, but is nevertheless so related to a recipient's employment, or to services rendered, or to a business carried on, that it is, in substance and in reality, not a mere gift but the product of an income earning activity, it is regarded as assessable income of the recipient.

The Commissioner's view in TD 2006/22 is consistent with the decision of Fullager J in his judgement in Hayes v. FC of T (1956) 96 CLR 47 at 55; (1956) 11 ATD 68 at 73 (Hayes). In setting out his judgement, Fullager J summarised how voluntary payments or gifts are generally not income, unless further facts show otherwise. He stated that a bonus provided to an employee in the absence of legal obligation at the end of a profitable year was an example of a voluntary payment that is income:

A voluntary payment of money or transfer of property by A to B is prima facie not income in B's hands. If nothing more appears than that A gave to B some money or a motor car or some shares, what B receives is capital and not income. But further facts may appear which show that, although the payment or transfer was a "gift" in the sense that it was made without legal obligation, it was nevertheless so related to an employment of B by A, or to services rendered by B to A, or to a business carried on by B, that it is, in substance and in reality, not a mere gift but the product of an income-earning activity on the part of B, and therefore to be regarded as income from B's personal exertion. A very simple case is the case where A employs B at a salary of PD1000 per annum, and at the end of a profitable year "gives" them a "bonus" of PD100. Obviously the bonus is income. It is paid without obligation, but it is clearly in truth part of what B has earned during the year.

In Hayes the taxpayer received a gift of shares from a friend who was also his previous employer. Fullager J discussed that in determining whether a gift or voluntary payment is assessable to the recipient, the motive of the donor may be relevant but will seldom be decisive, and in many cases a mixture of motivations of the donor will exist. He discussed that while personal goodwill may play a dominant part in motivating a voluntary payment, the payment may be so related to employment or business that it is income in the hands of the recipient. Conversely, there may be situations where no element of personal goodwill exists and the dominant motive from the donor may be purely selfish and commercial in nature, and yet it may be impossible to find any connection with anything that makes it income to the recipient. Fullager J stated that the question in each case is the character of the receipt in the hands of the recipient and the test to be applied is an objective, not a subjective test.

In regard to the motive of the donor in Hayes, Fullager J considered that the gift of shares was motivated in part by gratitude for services previously rendered, but this was not the sole or exclusive motive. The decision to gift the shares was largely motivated by a general feeling of goodwill arising from a close personal friendship and by the fact that the taxpayer had, three years prior to receiving the gift of the shares, parted against his will, with his shares in the company. The donor had told the taxpayer that he would 'make it up to them' and gifting them the shares was 'making it up to them'.

As stated above, Fullager J considered that the motive of the donor was relevant but not decisive. He considered that what was decisive in the Hayes case was the fact that he felt it was impossible to relate the receipt of the shares by the taxpayer to any income-producing activity on his part. He felt it was impossible in the circumstances of the receipt to point to any employment or personal exertion, of which the receipt of the shares was an incident of, or which could have been said to have produced that receipt.

Taxation Ruling IT 2674 Income tax: gifts to missionaries, ministers of religion and other church workers - are the gifts income? (IT 2674) provides guidance for determining whether gifts received by church workers are assessable income. The ruling states that the principles that apply in determining whether gifts received by church workers are assessable income are no different from those which apply in determining whether gifts received by taxpayers in other callings or occupations are assessable income, but that as the practical application of the principles can differ, the ruling deals with the particular class of taxpayers. As such, the principles discussed in IT 2674 can be considered broadly for all taxpayers. IT 2674 sets out the following general principles:

General principles

11. Whether a gift is assessable income depends on the quality or the character of the gift in the hands of the recipient. Consideration is necessary of the whole of the circumstances in which the gift is received. For example, the following factors need to be taken into account:

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

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

(c)          whether the gift is made voluntarily; and

(d)          whether the gift is solicited; and

(e)          if the gift can be traced to gratitude engendered by some service rendered by the recipient to the donor, whether the recipient had already been remunerated fully for that service; and

(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 dependants.

IT 2674 states that a personal gift received by a church worker, for personal reasons, not related to any income-producing activity on the part of the church worker, or a gift that is referable exclusively to the attitude of the doner personally, to the church worker personally, is not assessable income (paragraph 20). A gift received on an occasion such as a birthday or Christmas is considered to have been received for personal reasons if it is not linked to and motivated by income-producing activity on the part of the worker (however further factual circumstances may indicate the gifts are not in the ordinary category of Christmas or birthday gifts). A gift received from parents or other close relatives because of natural love and affection and a personal gift made purely as a mark of affection, esteem or respect is not assessable income (paragraph 21).

On the other hand, IT 2674 provides that when church workers receive a gift 'because of, in respect of, for, or in relation to any income producing activity of the church worker', even where the gift is a single incident, the gift is assessable income. Paragraph 12 of the ruling states:

12. ...In other words, a gift (even if it is a receipt of a one-off nature) is assessable income if it is possible to:

(a)          relate the receipt of the gift by the church worker to any income-producing activity on his or her part; or

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

Paragraph 13 of IT 2674 clarifies further that a gift received in the circumstances outlined in paragraph 12 will be assessable income even if the doner is not legally obligated to make the gift; the gift is made by a family member, friend or fellow worker; if the worker is an employee, the gift comes from somebody other than the employer; the gift is received on a special occasion such as a birthday (considering the qualifications contained in paragraph 21 of IT 2674 discussed above); or the church worker is not in any way motivated by the prospect of receiving the gift but is motivated only by a genuine commitment to religious beliefs.

In discussing circumstances where gifts are provided both as an expression of personal goodwill and as a reward for some income-producing activity of the church worker, or in recognition of the church worker's calling or occupation, IT 2674 states:

14. ... If a substantial reason - it does not have to be the dominant reason - a gift is received by a church worker is his or her occupation or some income-producing activity on his or her part, the gift is income, even though the gift is also received on personal grounds.

TR 1999/17 and Taxation Ruling TR 1999/10 Income tax and fringe benefits tax: Members of Parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupments (TR 1999/10) which discusses the assessability of allowances, benefits, gifts, donations and reimbursements received by members of parliament also provide guidance about whether occasional or one-off voluntary payments received are income. Although TR 1999/17 and TR 1999/10 are directed at specific classes of taxpayers, the principles discussed are not specific to them and the Commissioner's discussion of the principles that have arisen from case law is broadly relevant to amounts received by all taxpayers.

TR 1999/17 states:

'Occasional' voluntary payments

...

56. As well as the general principles and factors outlined in paragraphs 16 and 17, other relevant factors also need to be considered. These factors include:

•                    how and why it came about that the payment or gift was made;30

•                    whether the payment or gift is of a kind which is a common incident of the recipient's calling or occupation;31 and

•                    whether the payment or gift is solicited.32

57. In Hayes v. FC of T Fullagar J, when discussing whether a single voluntary payment was income, stated that:

'The question in each particular case is as to the character of the receipt in the hands of the recipient'.

58. In Hayes, Fullagar J quoted, with approval, the following passage from the judgement of Kitto J in the Squatting Investment Case:

'The distinction those decisions have drawn between taxable and non-taxable gifts is the distinction between, on the one hand, gifts made in relation to some activity or occupation of the donee of an income-producing character...and, on the other hand, gifts referable to the attitude of the donor personally to the donee personally.'

59. In FC of T v. Harris Bowen CJ said:

'A generally decisive consideration is whether the receipt is the product in a real sense of any employment of, or services rendered by the recipient, or of any business, or, indeed, any revenue producing activity carried on by them'.

TR 1999/17 also provides examples of when occasional voluntary payments are considered income:

'Occasional' voluntary payments that are considered income

60. It is considered that an 'occasional' voluntary payment received in respect of36 sporting activities is assessable income if the recipient is an employee, is engaged in the provision of services, or carries on a business in respect of those sporting activities.37 Such payments are assessable even though they are in respect of past or future employment, the past or future provision of services, or a past business (Example 4).

...

Example 4: 'Occasional' voluntary payment: Testimonial related to services

84. Peter is contracted to provide coaching services for the Winners basketball club. He has provided his services for reward to the Winners for the last 10 years. He is a colourful personality and his presence at a sporting event is guaranteed to generate a high level of excitement and interest.

85. A group of his supporters lobbied the management of the club to promote an event to recognise the contribution made and services rendered by Peter to the club over the years. The main source of revenue for the event is gate takings which are donated to Peter.

86. As the testimonial receipts are in recognition of Peter's past services, they form part of his assessable income. This would still be the case if Peter had retired.

In relation to donations and gifts, TR 1999/10 states that a donation or gift does not form part of a taxpayer's assessable income if it is given for personal reasons, such as out of natural love and affection. If a donation or gift is made because of, in respect of or in relation to their work-related activities, it is assessable income:

Donations and gifts

19. A donation or gift does not form part of a Member's assessable income where it is given for personal reasons unconnected with any work-related activities of the Member. However, if a donation or gift is made because of, in respect of, for, or in relation to, his or her work-related activities, the donation or gift forms part of the Member's assessable income (paragraphs 71 to 78).

...

Donations and gifts

71. If a Member receives a donation or gift of money because of, in respect of, for, or in relation to, his or her work-related activities, the amount received forms part of his or her assessable income under section 6-5 or 6-10. This view follows from the principles that have been established in cases such as: The Squatting Investment Co. Ltd v. FC of T (1953) 86 CLR 570; Scott v. FC of T (1966) 117 CLR 514; 40 ALJR 205; Kelly v. FC of T (1985) 80 FLR 155; (1985) 16 ATR 478; 85 ATC 4283; FC of T v. Dixon (1952) 86 CLR 540; Hayes v. FC of T (1956) 96 CLR 47; FC of T v. Blake (1984) 2 Qd R 303; 75 FLR 315; (1984) 15 ATR 1006; 84 ATC 4661; G v. Commr of IR (NZ) 12 ATD 378 and FC of T v. Cooke & Sherden (1980) 42 FLR 403; (1980) 29 ALR 202; (1980) 10 ATR 696; 80 ATC 4140.

...

73. If a donation or gift is in all other respects assessable income, the fact that it is paid to a Member by a relative, friend or colleague is not sufficient to alter its character as assessable income in the hands of the Member.

74. Example: A Member plans to seek re-election to the seat that he holds. To assist them to finance his campaign, friends and relatives arrange various fundraising activities and give the proceeds to the Member. These amounts form part of the Member's assessable income in the year in which the Member receives them.

75. A donation or gift does not form part of a Member's assessable income in circumstances where it is given for personal reasons, unconnected with any work-related activities of the Member.

76. Example: A Member relocates to the National Capital for a year due to the demands of her position. During the year she receives a number of gifts from her parents and other close relatives out of natural love and affection. There are no income tax consequences arising from the receipt of these gifts.

TR 1999/10 goes on to explain that where a donation or gift is given as an expression of personal goodwill and there is also a substantial, but not necessarily dominant, reason for the donation or gift being found in the work-related activities, the donation or gift is assessable income:

77. Donations and gifts may be made to Members both as an expression of goodwill towards them personally, and also in recognition of some work-related activity of the Member (perhaps a major funding boost for the electorate) or the Member's political convictions. Accordingly, where a donation or gift is given on personal grounds, and a substantial, but not necessarily dominant reason for the donation or gift being received by the Member is to be found in his or her work-related activities, the donation or gift forms part of the Member's assessable income in the year in which the member receives it.

78. Example: A Member receives unsolicited gifts of money when he addresses a meeting of party Members. These gifts are given because those attending are politically motivated to contribute to the work the Member is undertaking. Although the Member is not in any way motivated by the prospect of receiving the gifts when he sets out to address the meeting, these amounts form part of the Member's assessable income in the year in which the Member receives them.

As discussed above, the test in determining whether a voluntary payment is income is an objective test as to what is the character of the receipt in the hands of the recipient (FCT v Squatting Investment Co Ltd (1954) 88 CLR 413, Hayes and Scott v FCT (1966) 117 CLR 514).

The case of Hayes has been discussed above. In Scott v FCT (1966) 117 CLR 514 (Scott), the taxpayer was a solicitor who received a cash payment from the widow of one of his clients. The solicitor had acted for their client for years and had been remunerated for their services. The widow wished to distribute some of her wealth before her death and gifted amounts to many people including to the solicitor (who paid gift duty on the amount). The payment was held not to be ordinary income as it was made because of years of friendship and not in consequence of any services provided by the solicitor. Windeyer J stated that 'gifts of an exceptional kind, not such as are a common incident of a man's calling or occupation, do not ordinarily form part of his income - the relation between the gift and the taxpayer's activities must be such that the receipt relevantly, a product of the activity.

The case of Brown v FCT [2002] FCA 318 (2002) 49 ATR 301; 2002 ATC 4273 (Brown), differs from cases such as Scott and Hayes. In Brown, there was no close personal relationship (familial or friendship) between the donor and receiver of the gift and there was also not an employer/employee relationship. In Brown the taxpayer was a former federal Cabinet Minister who was gifted a beachfront property (amongst other benefits such as a furniture allowance and acquisition costs) by an Australian property development company. The taxpayer had previously introduced the principal of the Australian property development company to the principals of a foreign company which had later purchased $21million of property controlled by the Australian property developer and his associates. The taxpayer had also made representations on behalf of the foreign company to the Foreign Investment Review Board. The taxpayer had argued that the property was a mere gift, given 'out of the blue' and inspired by goodwill. It was held however that the value of the property and other benefits was assessable as they were not gifts but were a reward for introducing and assisting the foreign company. The Court noted that mere gratitude for what a person had done did not convert a mere gift to income, however this case involved more than mere gratitude and the taxpayer was being rewarded for services rendered. The provision of the benefits was directly related to the introduction of the foreign company to the Australian property developer and was a reward for doing so.

Application to the taxpayer's circumstances

Some years after the taxpayer's employment with Entity A ended he received unsolicited correspondence from Entity A. The Letters were not dated nor were they addressed to the taxpayer personally. With the exception of a specified offer amount, none of the correspondence is specific to the taxpayer in any way and appears to be generic correspondence sent to the whole group who were receiving the same offer.

The Letters discuss a profit made by Entity A and a decision to share part of the profit with individuals who work, or had previously worked, at Entity A to thank them and show appreciation for their work to make Entity A as successful as it had become. The amount offered to each potential recipient was determined by an objective system they developed to ensure fair distribution.

The correspondence continues to emphasise that the money is a way to convey thanks and appreciation for making Entity A successful and in recognition that the success of Entity A wouldn't have been possible without the hard work of all the staff and contractors.

The offer to the taxpayer explicitly states that the amount is inclusive of any superannuation (or other overseas equivalent) and states that any applicable superannuation contributions and taxes will be deducted or withheld before the net payment is made to the recipient.

The Letters also state that the Payment may be paid by Entity A or a subsidiary or any other local payroll providers. No option existed for the funds to be paid by any individual in their personal capacity to the recipients. The taxpayer received his payment from Entity A.

The taxpayer was not obligated to accept the Payment. The Letters made it clear that acceptance was optional and required the recipient to 'opt in' to receive the funds offered to them.

The taxpayer opted to receive the Payment. They completed the required paperwork which included providing their Tax File Number and Superannuation details. In completing the paperwork the taxpayer acknowledged that once payment was made to them, they would receive a payslip confirming that payment had been paid and the relevant contributions and taxes that have been withheld or deducted. Entity A paid the taxpayer AUD $X on DDMMYY. $Y was contributed to their Superannuation fund and $Z was withheld as PAYG.

As discussed above, the case of Hayes established that in determining whether a gift or voluntary payment is assessable income, the motive of the donor is relevant but not decisive. This concept was reiterated in the discussions in ATO view documents such as IT 2674. In TR 1999/10 and in IT 2674 the Commissioner held that where a gift is provided to a taxpayer on personal grounds, but a substantial, but not necessarily dominant reason for the gift being received is found in the taxpayer's work-related activities, occupation or income producing activity, the gift forms part of the taxpayer's assessable income, even though it is also received on personal grounds (paragraph 77 of TR 1999/10 and paragraph 14 of IT 2674). In the case of the amount the taxpayer received from Entity A, although the taxpayer had a friendship with certain senior staff members during his time working at Entity A, which continued following the cessation of his employment, there is nothing in The Letters that indicate that the offer made to the taxpayer had anything to do with a personal relationship between the taxpayer and those staff members or anyone else related to Entity A. The Letters included a generic offer made to a whole class of people (current and previous employees and contractors) where a set amount of the profit was set aside to be divided up according to a fair and objective system. This is indicative of a systematic, professional decision regarding the amounts offered to the class of people identified as potential recipients (where there were no personal qualifiers for individuals to be included within the group as long as they met the employment criteria). The donor was Entity A, not an individual person or persons acting in their personal capacity and the language in The Letters also does not indicate that the motive of the doner was one of personal goodwill made because of genuine love, affection or friendship. The wording of The Letters indicates that Entity A was motivated by the desire to professionally thank all the current or previous employees who had worked at Entity A during its existence and contributed to its success and the profit made. The Letters indicate a motive of professional thanks and appreciation for work previously done by the recipient, not any personal thanks or appreciation for personal support or friendship etc.

As set out in various cases discussed above and in TD 2006/22, the receipt of a voluntary payment of money is prima facie not income in the hands of the recipient. It is only when the facts surrounding the transaction show that the payment was made without legal obligation, but is nevertheless so related to a recipient's employment, or to services rendered, or to a business carried on, that it is, in substance and in reality not a mere gift but the product of an income earning activity. The motive of Entity A is a fact that indicates a connection with the taxpayer's past employment or services rendered, not containing any personal motivation, however, as discussed, the motive of the donor is only a relevant element in determining whether an amount is assessable and is not decisive.

The case of Hayes held that the question in determining whether a voluntary payment or gift is assessable is the character of the receipt in the hands of the recipient and the test to be applied is an objective, not a subjective test. As discussed above, in Hayes it was held that in the circumstances it was impossible to relate the receipt of the shares by the taxpayer to any income-producing activity on his part. It was similarly held in Scott (where there had been a close personal friendship between the taxpayer and the deceased husband of the donor)that the requisite connection between the payments and any income-producing activity of the taxpayer did not exist, the payments were considered capital and not made for any reasons related to employment or services provided by the recipient. In Brown however, where the former Federal Minister was gifted a property, the gift was given for more than mere gratitude and the taxpayer was being rewarded for services rendered.

The Letters received by the taxpayer provide context as to the circumstances in which the payment was received. Paragraph 11 of IT 2674 discussed above, sets out factors to take into account when considering the circumstances in which a gift is received in order to determine its character in the hands of the recipient. Consideration of those factors indicate that the amount received by the taxpayer is so related to their employment or services rendered by them that it is ordinary income in their hands. Specifically, the terms of the offer included in The Letters show that the payment was received by the taxpayer in their capacity as a previous employee of Entity A (and made by Entity A in their capacity as their previous employer). It was not received by the taxpayer in their personal capacity and the opportunity for the offer arose because of the profit made at the sale. An amount of the profit was to be shared between the people that had contributed to the production of those profits. The offer was only made to the taxpayer because of their previous employment with Entity A, and the decision to share the profit with the past and present workers was made in acknowledgement of their employment or services contributing to the production of that profit.

The offer and subsequent payment of the amount was entirely gratuitous and voluntary and the payment was not solicited by the taxpayer. However, in order to receive the amount the taxpayer was required to 'opt in' and agree to receive the payment in accordance with the terms of the offer contained in The Letters, which included requiring the recipients to provide their Superannuation fund details and Tax File Number with the advice that once payment was made by either Entity A, one of its subsidiaries or local payroll office, the recipient would receive a payslip from the local payroll provider confirming payment has been paid and the relevant contributions and taxes that have been withheld or deducted.

While the taxpayer had already been remunerated for the work he performed while employed at Entity A, The Letters indicate that the payment was essentially a sharing of the profits made. As discussed above The Letters state that the intention is to share the profit made with the people who had worked at Entity A during the time that profit was built, as a thank you and in appreciation (for their contribution to the production of the profit).

In Hayes, Fullagar J quoted, Kitto J in the Squatting Investment Case: 'The distinction those decisions have drawn between taxable and non-taxable gifts is the distinction between, on the one hand, gifts made in relation to some activity or occupation of the donee of an income-producing character...and, on the other hand, gifts referable to the attitude of the donor personally to the donee personally.' When considering the payment in the taxpayer's hands objectively, the payment is not referable to the attitude of Entity A to the taxpayer personally. All current and past employees were offered and a share of the profits. The Letters indicate that the specific amount offered to each individual was determined on an objective basis in accordance with a set system or policy. No specific details were provided about the system of division but The Letters indicate that this was an objective system and not a personal decision impacted by personal affection, goodwill or friendship. The only reason the taxpayer received the amount was because he fell into the class of people who were employed by Entity A during the relevant period, and that class of people were offered the payment as a professional thank you or acknowledgement of the work that they had done to contribute to the production of that profit that was being shared.

As such, it is considered that, objectively, the requisite connection between the voluntary payment and the taxpayer's previous employment exists to conclude that the receipt of the amount by the taxpayer (the Payment) is so related to the taxpayer's employment or to services rendered that it is, in substance and in reality, not a mere gift but the product of an income earning activity and is assessable as ordinary income in accordance with section 6-5.

Statutory income

As discussed above, section 15-2 states that a taxpayer's assessable income includes the value to them of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to them in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by the taxpayer, whether the things were provided in money or other form. As discussed above, subsection 15-2(3) restricts the scope of section 15-2 to not include the value of certain things as assessable income under that section, including amounts that are assessable as ordinary income under section 6-5.

That is, an amount is only assessable under section 15-2 if it is not assessable as ordinary income under section 6-5. As concluded above, the payment received by the taxpayer from Entity A, (the Payment) is assessable as ordinary income in accordance with section 6-5 and as such the application of section 15-2 does not need to be considered.

Summary

The amount that the taxpayer received from Entity A (the Payment), is assessable income in accordance with section 6-1, as it is ordinary income in accordance with section 6-5.

[1] Scott v. FC of T (1935) 35 SR (NSW) 215; (1935) 3 ATD 142 per Jordan CJ at SR 219; ATD 144.

[2] The Squatting Investment Co Ltd v. FC of T (1953) 86 CLR 570 at 627; (1953) 10 ATD 126 at 146.

[3] Hayes v. FC of T (1956) 96 CLR 47 at 55; (1956) 11 ATD 68 at 73.

[4] FC of T v. Harris (1980) 43 FLR 36; 80 ATC 4238; (1980) 10 ATR 869 at FLR 40; ATC 4241; ATR 872; Hayes v. FC of T (1956) 96 CLR 47 at 54; (1956) 11 ATD 68 at 72.

[5] 6 FC of T v. Blake 84 ATC 4661; (1984) 15 ATR 1006 - refer comments of Carter J (at ATC 4664; ATR 1010); Scott v. FC of T (1966) 117 CLR 514; (1966) 14 ATD 286 (at CLR 526; ATD 293); GP International Pipecoaters Pty Ltd v. FC of T (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 (at CLR 136; ATC 4419; ATR 6).

[6] FC of T v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82 (at CLR 557; ATD 86).

[7] Hayes v. FC of T (1956) 96 CLR 47; (1956) 11 ATD 68 (at CLR 55; ATD 72-73).

30 The Squatting Investment Co Ltd v. FC of T (1953) 86 CLR 570; (1953) 10 ATD 126 per Kitto J (at CLR 627-628; ATD 146)

31 Scott v. FC of T (1966) 117 CLR 514; (1966) 14 ATD 286 (at CLR 526; ATD 293).

32 Scott v. FC of T (1966) 117 CLR 514; (1966) 14 ATD 286 (at CLR 526; ATD 293); FC of T v. Harris (1980) 43 FLR 36; 80 ATC 4238; (1980) 10 ATR 869.

36 Smith v. FC of T (1987) 164 CLR 513; 87 ATC 4883 - refer comments of Brennan J (at CLR 526; ATC 4890). Also refer Taxation Ruling IT 2674.

37  The Squatting Investment Co Ltd v. FC of T (1953) 86 CLR 570; (1953) 10 ATD 126; Hayes v. FC of T (1956) 96 CLR 47; (1956) 11 ATD 68; Scott v. FC of T (1966) 117 CLR 514; (1966) 14 ATD 286; FC of T v. Harris (1980) 43 FLR 36; 80 ATC 4238; (1980) 10 ATR 869 - refer comments of Bowen CJ (at FLR 40; ATC 4241; ATR 872); Smith v. FC of T (1987) 164 CLR 513; 87 ATC 4883.