income from personal services and employment

7182019 Income From Personal Services and Employment

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Chapter 6

Income from personal services and

employment

983209

2015 Thomson Reuters (Professional) ustralia td ll Rihts Reserved$onathan Teoh amponash niversity



Introduction

receipt from employment and providin personal servicesmay e suect to income ta+ or frine enefits ta+

PoT 2015 pararaph -610



rdinary income reard for services

Nexus connection or ne+us ith a receipt resultin from a ta+payer3spersonal service constitutes ordinary income

Courts have used a to4step approach to determine if an amountis ordinary income from personal services

1 Identification of the activity undertaen and

2 7eterminin hether the receipt is a reard for performinthat particular activity

enuine salary sacrifice has no ne+us under ordinaryconcepts

PoT 2015 pararaphs -620 8 -690 -660




Nexus clearly established e+us clearly estalished for common items of personale+ertion includin

8 alary and aes

8 Commissions

8 ltonuses

8 =ees chared for services rendered

8 ncillary payments that are an incident of laour

e+us not impacted y lump4sum or one4off receipts for the

performance of a specific tas

8 ee Brent v FCT (1971)

It is irrelevant ho pays or hen it is paid Kelly v FCT (1gt5)

PoT 2015 pararaphs -60 8 -650




Nexus uncertain - voluntary payments ne+pected or voluntary payments received as an incidenceof employment constitutes ordinary income =or e+ample

8 Christmas onuses paid to employees paid in the form of

redeemale ift vouchers Laidler v Perry (1gt65)

8 Tips received y a ta+i driver Calvert v Wainwright (1gtA)

8 ote possile to characterise as ordinary income ased on the

nature of payment (income characteristics) rather than ne+us

8 dditional periodic payments as a sustitute for aes that

ere relied upon y the ta+payer FCT v Dixon (1gt52)

PoT 2015 pararaphs -6A0 8 -60




Nexus uncertain - gifts Bifts

8 =or personal ualities is not rearded as ordinary income

8 risin from the ta+payer3s aility to or andDor the

employment contract is ordinary income

ecessary to distinuish eteen the aove here a ift is

made and there is an employment or commercial connection

8 Importance of a personal relationship eteen the parties

Sott v FCT (1gt66)

PoT 2015 pararaph -6gt0




Nexus uncertain - gifts on4determinative factors to consider in orderline cases

8 E+pectation of the ift Sott v FCT (1gt66)

8 ump sum or reular payments FCT v Blae (1gt)

8 ampotive of the donor (note eiht placed on the nature of

receipt in the hands of the recipient) Sott v FCT (1gt66)

8 Fhether the recipient has een fully remunerated for

services provided Sott v FCT (1gt66) aye$ v FCT (1gt56)

8 Personal relationship Sott v FCT (1gt66) aye$ v FCT

(1gt56)





Nexus uncertain - prizes PriGes and chance innins are non4assessale if the indfallain is derived y luc

8 Finnins of a casual participant on a TH sho Ca$e 7

(1gt66) Rulin IT 16A

lternatively ordinary income if derived y e+ercisin deree ofsill (personal e+ertion) that sufficiently outeihs luc

8 Professional sportin people Kelly v FCT (1gt5)

8 Irrelevant that payment does not arise from employer





Nexus uncertain - prizes 7ifficulty ith determinin the sufficient deree of sill thatouteihs luc Consideration factors include





Non-cash benefits Prereuisites of ordinary income

non4cash enefit may have a ne+us ith personal e+ertion

hoever if not convertile to cash3 it is not ordinary income

8 Redemption of freuent flyer points that ere accrued from

or4related travel Payne v FCT (1gtgt6)

ote may hoever e assessale under s 1542 ITgtA or

suect to frine enefits ta+




rdinary income reard for servicesCapital receipt or personal exertion ecessary to distinuish eteen ordinary income receipts

and capital receipts (not ordinary income)




Capital receipt or personal e+ertionChanges to entitlements ain from a chane to entitlements under employment or

service contracts taes the character of hat it replaces

8 Relinuishin employment rihts (e rihts to control a

company as manain director) Bennett v FCT (1gtA)

8 oss of employee entitlements ampampT Ca$e 77




Capital receipt or personal e+ertionRestrictive covenants Restrictive covenant or restraint of trade may e formed

rdinary income if connected ith the current employmentareement (ie payment of future services)

Capital characterisation

8 eparate areement to ive up valuale rihts igg$ v

livier (1gt52) FCT v Woite (1gt2) 8 o ne+us ith earnin activity (e payment made at end of

contract) e++le$ v FCT (1gtgt1)

8 ote capital ains ta+ may apply (CBT event 71)

PoT 2015 pararaphs -6160 8 -61A0



Capital receipt or personal e+ertionSign-on fees in4on (enticement) fees as part of normal practices of

attractin people into a ne employment contract

8 Characterised as a payment for future services (ordinary

income) Piord v FCT (1gtgt) Rulin TR 1gtgtgtD1A




tatutory incomeServices and employment (s 1- ltroad provision that rins the value of certain ains from

laour into assessale income includin non4cash enefits

that are not convertile to cash under ordinary concepts

8 Consider application of s 1542 only if s 645 does not apply

pplies hen the folloin three reuirements are satisfied




tatutory incomeServices and employment (s 1- irst re$uirement

There is an alloance ratuity compensation enefit onus

or premium

Reuirement has a ide scope and ould include

8 Cash cash convertile or non4cash convertile receipts

8 Holuntary receipts (e ratuities)

8 E+ternal arranements (e an accountin firm3s employee

receives free hotel accommodation from a client)

Second re$uirement

Ta+payer is reuired to receive the first reuirement (ie

provided to you)

PoT 2015 pararaphs -6200 8 -6210



tatutory incomeServices and employment (s 1- hird re$uirement

e+us must e estalished The ain must e

8 J in respect of or for or in relation directly or indirectly toany employment or services rendered y the ta+payer

Easier to estalish ne+us under s 1542 than ordinary income

8 mounts paid y an employer to its employee on completionof relevant tertiary suects S-ith v FCT (1gtA)

8 Reard money for helpin to prevent disaster FCT v

ol-e$ (1gtgt5) Insufficient ne+us for redemption of freuent flyer points that

ere accrued from or4related travel Payne v FCT (1gtgt6)




tatutory incomeServices and employment (s 1- Relationship ampith other tax provisions

ection 1542 ill not apply under certain circumstances

Key e+clusions include




tatutory incomeReturn to ampor payments (s 1- Payments made to a ta+payer as an inducement to return to

or or to provide services constitutes statutory income

8 ame position under income from ordinary concepts

(ordinary income s 645)




Payments upon termination of employment

pecific provisions prescriin ta+ation treatment of paymentsmade in connection to the termination of employment

ampain termination payments include




Payments upon termination of employment)mployment termination payments To road su4types of ETPs

Reuirements for a payment to e an ETP under s 24190

8 Payment is in conseuence of the employment termination

8 There as in fact a enuine termination payment

8 The payment does not fall ithin an e+clusion esuperannuation payments pensions and annuities enuineredundancy payments or early retirement scheme payments




Payments upon termination of employment)mployment termination payments +n conse$uence of termination of employment

Employment termination needs to e one of the causes for the

ETP ut does not need e the dominant cause) e$e v FCT

(1gtA5) Le rand v FCT (2002)

=act that termination and payment occurs are similar times isinsufficient to estalish causation ltrennan $ in 0nto$h v FCT

(1gtAgt)

enuine termination

Termination includes cessation of employment due toretirement or death s 0410

8 =i+ed4term position made permanent not rearded as a

termination realy v FCT (1gtgt)

PoT 2015 pararaphs -62gt0 8 -6910



Payments upon termination of employment)mployment termination payments axation of )s

To components

PoT 2015 pararaph -69A0



Payments upon termination of employment)mployment termination payments Ta+ale component of a lie 2eneit ter-ination +ay-ent

ltroadly the threshold amount is the loer of (s 2410()) 8 L15000 (for 201D15) and

8 L10000 hole of income cap3 hich is reduced y anynon4ETP ta+ale income and suect to certain e+clusions

) taxablecomponentamount

axpayer is atpreservation age( years

axable is beloamppreservation age(0 years

0 8 threshold Ta+ed at normal marinal

rates ut capped at a rateof 15M plus 2M ampedicarelevy

Ta+ed at normal marinal

rates ut capped at a rateof 90M plus 2M ampedicareevy

mounts overthe threshold

Ta+ed at AM plus 2Mampedicare levy





Payments upon termination of employment)mployment termination payments Ta+ale component of a death 2eneit ter-ination +ay-ent

7ependent includes under s 90241gt5

8 pouse or e+4spouse 8 The deceased3s child ho is under 1

8 Interdependency relationships

8 nyone else dependent on the deceased efore death


Recipient is a dependent Recipient is not adependent

0 8 L15000 ot ta+ed e+cept for 2M

ampedicare levy (amp) hereapplicale


rates ut capped at a rate of90M plus 2M amp

L15000 N Ta+ed at AM plus 2M amp Ta+ed at AM plus 2M amp




Payments upon termination of employmentenuine redundancy and early retirements Benuine redundancy payment is a payment made to an

employee hose position is enuinely made redundant

Early retirement scheme satisfies the folloin conditions

8 cheme is open to all eliile employees

8 Employer3s purpose of havin the scheme is to reoranise

the operations of the orplace and

8 The Commissioner has approved the scheme as an early

retirement scheme

PoT 2015 pararaphs -6920 8 -690



Payments upon termination of employmentenuine redundancy and early retirements =urther conditions e+ist in ss 941A5 and 9410 for payments

to e considered redundancy payments and early retirement

scheme payments

8 The employee must e dismissed efore heDshe reaches 65

years of ae 8 The payment must represent hat ould e payale under a

normal commercial arranement

8 There must e no arranement at the time of dismissal that

the employee e re4employed y the employer




Payments upon termination of employmentenuine redundancy and early retirements axation treatment

ot ETPs and ta+4free to the e+tent they are elo the relevant

threshold

To the e+tent the payment is aove the relevant threshold it is

enerally an ETP




Payments upon termination of employmentnused annual and long service leave nnual leave and lon service leave payments are enerally

ta+ed at normal marinal ta+ rates

Concessional treatment (capped at the rate of 90M plus

ampedicare levy) under certain circumstances includin

8 Payment due to leave accruals in respect of servicesperformed efore 1 uust 1gtgt9 or

8 Payment as in connection ith a payment that consists of

a enuine redundancy payment or early retirement scheme

payment or an invalidity sement of an ETP




Introduction

receipt from employment and providin personal servicesmay e suect to income ta+ or frine enefits ta+










PoT 2015 pararaphs -620 8 -690 -660





8 alary and aes

8 Commissions

8 ltonuses






























Sott v FCT (1gt66)













(1gt56)






































































or premium






Second re$uirement


provided to you)

PoT 2015 pararaphs -6200 8 -6210














































(1gtAgt)

enuine termination








To components










































retirement scheme

PoT 2015 pararaphs -6920 8 -690





scheme payments











threshold


enerally an ETP





















PoT 2015 pararaphs -620 8 -690 -660





8 alary and aes

8 Commissions

8 ltonuses






























Sott v FCT (1gt66)













(1gt56)






































































or premium






Second re$uirement


provided to you)

PoT 2015 pararaphs -6200 8 -6210














































(1gtAgt)

enuine termination








To components










































retirement scheme

PoT 2015 pararaphs -6920 8 -690





scheme payments











threshold


enerally an ETP

















8 alary and aes

8 Commissions

8 ltonuses






























Sott v FCT (1gt66)













(1gt56)






































































or premium






Second re$uirement


provided to you)

PoT 2015 pararaphs -6200 8 -6210














































(1gtAgt)

enuine termination








To components










































retirement scheme

PoT 2015 pararaphs -6920 8 -690





scheme payments











threshold


enerally an ETP



































Sott v FCT (1gt66)













(1gt56)






































































or premium






Second re$uirement


provided to you)

PoT 2015 pararaphs -6200 8 -6210














































(1gtAgt)

enuine termination








To components










































retirement scheme

PoT 2015 pararaphs -6920 8 -690





scheme payments











threshold


enerally an ETP
























(1gt56)






































































or premium






Second re$uirement


provided to you)

PoT 2015 pararaphs -6200 8 -6210














































(1gtAgt)

enuine termination








To components










































retirement scheme

PoT 2015 pararaphs -6920 8 -690





scheme payments











threshold


enerally an ETP

















































































or premium






Second re$uirement


provided to you)

PoT 2015 pararaphs -6200 8 -6210














































(1gtAgt)

enuine termination








To components










































retirement scheme

PoT 2015 pararaphs -6920 8 -690





scheme payments











threshold


enerally an ETP


























































(1gtAgt)

enuine termination








To components










































retirement scheme

PoT 2015 pararaphs -6920 8 -690





scheme payments











threshold


enerally an ETP
















To components










































retirement scheme

PoT 2015 pararaphs -6920 8 -690





scheme payments











threshold


enerally an ETP





















































retirement scheme

PoT 2015 pararaphs -6920 8 -690





scheme payments











threshold


enerally an ETP

















scheme payments











threshold


enerally an ETP

















threshold


enerally an ETP













income from personal services and employment

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