Chapter 6

Income from personal services and

employment

2015 Thomson Reuters (Professional) Australia Ltd. All Rights Reserved.

Jonathan Teoh, Monash University

Introduction

A receipt from employment and providing personal services

may be subject to income tax or fringe benefits tax:

PoTL 2015 paragraph [6.10]

Ordinary income: reward for services

Nexus

A connection or nexus with a receipt resulting from a taxpayers

personal service constitutes ordinary income.

Courts have used a two-step approach to determine if an amount

is ordinary income from personal services:
1. Identification of the activity undertaken; and
2. Determining whether the receipt is a reward for performing
that particular activity.

A genuine salary sacrifice has no nexus under ordinary

concepts.
PoTL 2015 paragraphs [6.20] [6.30], [6.60]

Ordinary income: reward for services

Nexus: clearly established

Nexus clearly established for common items of personal

exertion, including:
Salary and wages
Commissions
Bonuses
Fees charged for services rendered
Ancillary payments that are an incident of labour.
Nexus not impacted by lump-sum or one-off receipts for the
performance of a specific task.
See, Brent v FCT (1971)
It is irrelevant who pays or when it is paid: Kelly v FCT (1985).
PoTL 2015 paragraphs [6.40] [6.50]

Ordinary income: reward for services

Nexus: uncertain - voluntary payments

Unexpected or voluntary payments received as an incidence

of employment constitutes ordinary income. For example:

Christmas bonuses paid to employees paid in the form of

redeemable gift vouchers: Laidler v Perry (1965)
Tips received by a taxi driver: Calvert v Wainwright (1947).
Note, possible to characterise as ordinary income based on the
nature of payment (income characteristics), rather than nexus:
Additional periodic payments as a substitute for wages that
were relied upon by the taxpayer: FCT v Dixon (1952).

PoTL 2015 paragraphs [6.70] [6.80]

Ordinary income: reward for services

Nexus: uncertain - gifts

Gifts:

For personal qualities is not regarded as ordinary income.

Arising from the taxpayers ability to work and/or the
employment contract is ordinary income.
Necessary to distinguish between the above where a gift is
made and there is an employment or commercial connection.
Importance of a personal relationship between the parties:
Scott v FCT (1966).

PoTL 2015 paragraph [6.90]

Ordinary income: reward for services

Nexus: uncertain - gifts

Non-determinative factors to consider in borderline cases:

Expectation of the gift: Scott v FCT (1966)

Lump sum or regular payments: FCT v Blake (1984)
Motive of the donor (note, weight placed on the nature of
receipt in the hands of the recipient): Scott v FCT (1966)
Whether the recipient has been fully remunerated for
services provided: Scott v FCT (1966); Hayes v FCT (1956)
Personal relationship: Scott v FCT (1966); Hayes v FCT
(1956)

PoTL 2015 paragraph [6.100]

Ordinary income: reward for services

Nexus: uncertain - prizes

Prizes and chance winnings are non-assessable if the windfall

gain is derived by luck.

Winnings of a casual participant on a TV show: Case 37

(1966); Ruling IT 167.
Alternatively, ordinary income if derived by exercising degree of
skill (personal exertion) that sufficiently outweighs luck.
Professional sporting people: Kelly v FCT (1985).
Irrelevant that payment does not arise from employer.

PoTL 2015 paragraph [6.110]

Ordinary income: reward for services

Nexus: uncertain - prizes

Difficulty with determining the sufficient degree of skill that

outweighs luck. Consideration factors include:

PoTL 2015 paragraph [6.120]

Ordinary income: reward for services

Non-cash benefits

Prerequisites of ordinary income:

A non-cash benefit may have a nexus with personal exertion,

however if not convertible to cash it is not ordinary income:
Redemption of frequent flyer points that were accrued from
work-related travel: Payne v FCT (1996).

Note, may however be assessable under s 15-2 ITAA97 or

subject to fringe benefits tax.

PoTL 2015 paragraph [6.130]

Ordinary income: reward for services:

Capital receipt or personal exertion

Necessary to distinguish between ordinary income receipts

and capital receipts (not ordinary income).

PoTL 2015 paragraph [6.140]

Capital receipt or personal exertion:

Changes
A gain from
change to entitlements under employment
toa entitlements

or

service contracts takes the character of what it replaces:

Relinquishing employment rights (eg rights to control a

company as managing director): Bennett v FCT (1947).
Loss of employee entitlements: AAT Case 7,752.

PoTL 2015 paragraph [6.150]

Capital receipt or personal exertion:

Restrictive
Restrictive covenant
or restraint of trade may be formed:
covenants

Ordinary income if connected with the current employment

agreement (ie payment of future services).
Capital characterisation:
Separate agreement to give up valuable rights: Higgs v
Olivier (1952); FCT v Woite (1982).
No nexus with earning activity (eg payment made at end of
contract): Hepples v FCT (1991).
Note, capital gains tax may apply (CGT event D1).
PoTL 2015 paragraphs [6.160] [6.170]

Capital receipt or personal exertion:

Sign-on
Sign-on (enticement)
fees as part of normal
fees

practices of

attracting people into a new employment contract:

Characterised as a payment for future services (ordinary

income): Pickford v FCT (1998); Ruling TR 1999/17.

PoTL 2015 paragraph [6.180]

Statutory income:
Services
Broad provision
that brings the value
of certain
and employment
(s 15-2)

gains from
labour into assessable income, including non-cash benefits
that are not convertible to cash under ordinary concepts.

Consider application of s 15-2 only if s 6-5 does not apply.

Applies when the following three requirements are satisfied:

PoTL 2015 paragraph [6.190]

Statutory income:
Services
First requirement
and employment (s 15-2)

There is an allowance, gratuity, compensation, benefit, bonus

or premium.

Requirement has a wide scope, and would include:

Cash, cash convertible or non-cash convertible receipts
Voluntary receipts (eg gratuities)
External arrangements (eg an accounting firms employee
receives free hotel accommodation from a client).

Second requirement
Taxpayer is required to receive the first requirement (ie
provided to you).
PoTL 2015 paragraphs [6.200] [6.210]

Statutory income:
Third requirement
Services
and employment (s 15-2)
Nexus must be established. The gain must be:
in respect of, or for or in relation directly or indirectly to,
any employment or services rendered by the taxpayer.
Easier to establish nexus under s 15-2 than ordinary income:
Amounts paid by an employer to its employee on completion
of relevant tertiary subjects: Smith v FCT (1987).
Reward money for helping to prevent disaster: FCT v
Holmes (1995).
Insufficient nexus for redemption of frequent flyer points that
were accrued from work-related travel: Payne v FCT (1996).

PoTL 2015 paragraph [6.220]

Statutory income:
Relationship
withemployment
other tax provisions
Services
and
(s 15-2)
Section 15-2 will not apply under certain circumstances.
Key exclusions include:

PoTL 2015 paragraph [6.240]

Statutory income:
Payments
to apayments
taxpayer as an
Return
tomade
work
(s inducement
15-3)

to return to
work or to provide services constitutes statutory income.
Same position under income from ordinary concepts
(ordinary income: s 6-5).

PoTL 2015 paragraph [6.250]

Payments upon termination of employment

Specific provisions prescribing taxation treatment of payments
made in connection to the termination of employment.
Main termination payments include:

PoTL 2015 paragraph [6.260]

Payments upon termination of employment:

Employment
Two broad sub-types
of ETPs:
termination
payments

Requirements for a payment to be an ETP under s 82-130:

Payment is in consequence of the employment termination
There was in fact a genuine termination payment
The payment does not fall within an exclusion, eg
superannuation payments, pensions and annuities, genuine
redundancy payments or early retirement scheme payments.
PoTL 2015 paragraphs [6.270] [6.280]

Payments upon termination of employment:

Employment
In consequence
of termination payments
of employment
termination
Employment termination needs to be one of the causes for the
ETP, but does not need be the dominant cause): Reseck v FCT
(1975); Le Grand v FCT (2002).
Fact that termination and payment occurs are similar times is
insufficient to establish causation: Brennan J in McIntosh v FCT
(1979).
Genuine termination
Termination includes cessation of employment due to
retirement or death: s 80-10.
Fixed-term position made permanent not regarded as a
termination: Grealy v FCT (1989).
PoTL 2015 paragraphs [6.290] [6.310]

Payments upon termination of employment:

Taxation of ETPstermination payments
Employment
Two components:

PoTL 2015 paragraph [6.370]

Payments upon termination of employment:

Taxable component
of a life benefit payments
termination payment:
Employment
termination
ETP taxable
component
amount

Taxpayer is at
preservation age
( 55 years)

Taxable is below
preservation age
(< 55 years)

0 threshold

Taxed at normal marginal

rates but capped at a rate
of 15% plus 2% Medicare
levy.

Taxed at normal marginal

rates but capped at a rate
of 30% plus 2% Medicare
Levy.

Amounts over Taxed at 47% plus 2%

the threshold Medicare levy.

Taxed at 47% plus 2%

Medicare levy.

Broadly, the threshold amount is the lower of (s 82-10(4)):

$185,000 (for 2014/15); and
A $180,000 whole of income cap which is reduced by any
non-ETP taxable income and subject to certain exclusions.
PoTL 2015 paragraph [6.370]

Payments upon termination of employment:

Employment
Taxable component
of a death benefit
termination payment:
termination
payments
ETP taxable
component
amount

Recipient is a dependent

Recipient is not a
dependent

0 $185,000

Not taxed, except for 2%

Medicare levy (ML) where
applicable.

Taxed at normal marginal

rates but capped at a rate of
30% plus 2% ML.

$185,000 +

Taxed at 47% plus 2% ML.

Taxed at 47% plus 2% ML.

Dependent includes under s 302-195:

Spouse or ex-spouse
The deceaseds child who is under 18
Interdependency relationships
Anyone else dependent on the deceased before death.
PoTL 2015 paragraph [6.380]

Payments upon termination of employment:

Genuine redundancy
payment
a payment
made to an
Genuine
redundancy
andis early
retirements
employee whose position is genuinely made redundant.

Early retirement scheme satisfies the following conditions:

Scheme is open to all eligible employees;
Employers purpose of having the scheme is to reorganise
the operations of the workplace; and
The Commissioner has approved the scheme as an early
retirement scheme.

PoTL 2015 paragraphs [6.320] [6.340]

Payments upon termination of employment:

Further conditions
exist in ss and
83-175early
and 83-180
for payments
Genuine
redundancy
retirements

to be considered redundancy payments and early retirement

scheme payments:
The employee must be dismissed before he/she reaches 65
years of age
The payment must represent what would be payable under a
normal commercial arrangement
There must be no arrangement at the time of dismissal that
the employee be re-employed by the employer.

PoTL 2015 paragraph [6.350]

Payments upon termination of employment:

Taxation treatment
Genuine
redundancy and early retirements
Not ETPs and tax-free to the extent they are below the relevant
threshold:

To the extent the payment is above the relevant threshold, it is

generally an ETP.

PoTL 2015 paragraph [6.360]

Payments upon termination of employment:

Annual leave
and long
service
payments
are generally
Unused
annual
and
longleave
service
leave
taxed at normal marginal tax rates.

Concessional treatment (capped at the rate of 30% plus

Medicare levy) under certain circumstances, including:
Payment due to leave accruals in respect of services
performed before 18 August 1993; or
Payment was in connection with a payment that consists of
a genuine redundancy payment or early retirement scheme
payment, or an invalidity segment of an ETP.

PoTL 2015 paragraph [6.390]