Ass Income.HD.

PART A ISSUE: Will James Lucas’ receipts be assessable as Ordinary Income? LAW: - Scott v DCT - Brent v FCT - FCT v Cooker and Sherden - Federal Coke Co Pty Ltd V FCT - Kelly v FCT - Gupta v FCT - Lindsay v IRC - Jarrold v Boustead - FCT v Dixon - Brown v FCT - Inkster v FCT - Thomas v FCT - Inglis v FCT - FCT v Walker - Rutledge v IRC - Smith v Anderson - IR Commissioners v Livingston - Commissioner of Taxation v Stone - Evans v FCT APPLICATION: The legislative definition of ordinary income as recognised in Section 6-5(1) identifies ordinary income as ‘income according to ordinary concepts.’ In case law, Ordinary income is further defined as income according to the “ ordinary usages and concept of mankind” (Scott v DCT). Some of the key characteristics of ordinary income developed by the courts are: - It comes to the recipient beneficially ( Brent v FCT) - It is money or money’s worth (FCT v Cooke and Sherden) - It must be received as income, i.e. it must have a sufficient nexus with an earning activity ( Federal Coke Co Pty Ltd v FCT) - It will often exhibit recurrence & regularity ( Kelly v FCT) - Compensation receipts may be income if they replace a revenue loss ( Gupta v FCT) Income from Personal Exertion Income from personal exertion is defined in section 6 (1) ITAA36. The definition is “income consisting of earnings, salaries, wages, commissions, fees, bonuses, pensions, superannuation allowances, retiring allowances and retiring gratuities, allowances and gratuities received in the capacity of an employee or in relation to any services rendered… But does not include, rent, dividends or interest.” Two of James’ receipts are easily identifiable as income from personal exertion as they are directly listed under the definition. These receipts are James’ $160,000 wages from Brisbane Roar and $2,800 travel allowance. Both of these receipts satisfy the following characteristics of ordinary income: They come to James beneficially, they are money, they are received as income in return for the employment services James has provided, and wages are received regularly with a travel allowance likely also to be supplied recurrently. As these receipts are named in the definition of income from personal exertion it is determined that they are considered to be ordinary income. High Distinction: Grade 7 Answer

Both the $30,000 incentive for James to sign with a Spanish football club and the $2,000 he received for winning player of the match are not directly identified as income from personal exertion in the definition. These receipts are one-time payments that satisfy some characteristics of ordinary income. These being, they have come to James beneficially, they are money, and both have a nexus with James’ earning activities as a professional footballer. For the incentive, as established by Jarrold v Boustead if the incentive saw James give up his amateur status the receipt would be deemed capital in nature. However, James is already a professional footballer, and the incentive is simply to transfer to another club, therefore this precedent does not apply. Thus relying upon Kelly v FCT and Commissioner of Taxation v Stone, both the $30,000 incentive and $2,000 prize for winning player of the match are a financial reward for James’ professional pursuit of playing football professionally and to the best of his abilities. Both these receipts exhibit a sufficient nexus between themselves, and James’ employment services provided as a professional footballer. Because of this and the precedents set in Kelly v FCT and Commissioner of Taxation v Stone, the $30,000 incentive to sign with a Spanish football club and $2,000 earnt for winning player of the match are ordinary income. The $250 Rebel sports voucher that James received as a thank you for coaching an under 8’s football development team exhibits some of the characteristics of ordinary income. These being, it is money’s worth, it has come to James for his benefit and there is a link between the receipt and James’ work as a coach. The receipt is a voluntary payment given to James by a 3 rd party, as James only coached the development team twice during the 9-week program it can be assumed that no long-term relationship existed between James and the parents of the team. James was fully renumerated for his services as a coach by Olympic Football Club. Therefore, applying FCT v Dixon and Brown v FCT the $250 voucher is not a gift but a reward for services rendered as the voucher was explicitly given as a thank you for James' coaching and not due to any existing personal relationships, and is thus considered ordinary income. Compensation for lost wages is likely to be assessable as ordinary income. However, compensation received for personal injury is capital, as it is compensation for the loss of an individual’s profit- making structure. The $20,00 receipt that James received from the Brisbane Roar’s income insurance provider for the weeks he could not play due to injury is presumed to be compensation for lost wages as it was made by an income insurance provider. Thus relying upon Inkster v FCT the compensation takes on the nature of the income it is replacing which in this case is wages meaning it will be ordinary income as wages are explicitly stated in the definition of income from personal exertion.

receipts similar to the above $1,800 payment from Olympic Football Club initially appear to be income from personal exertion as they are ‘caused’ by James’ employment as a professional footballer. However, the receipt does satisfy some of the key business indicators, these being, the commercial nature of the activities and the expectation of profitability. Drawing on the precedent set in Commissioner of Taxation v Stone , James’ acceptance of payment, in the form of cash and clothing, as it is money’s worth, was also an acceptance of the associated commercial requirements, meaning that James’ acceptance and activities constituted the conduct of a business. This interpretation remains consistent even if James’ intent was not to make a profit but rather focused on covering expenses not met by the Brisbane Roar. Therefore, the $15,000 cash and $4,000 clothes that James was given as part of his Nike sponsorship are assessable income under ordinary concepts. Exempt Income Exempt income is income that the taxpayer does not have to declare to the ATO and subsequently never has to pay tax on it. The $3,000 winnings that James received from playing Blackjack at the Treasury Casino fall into this category of exempt income. James’ gambling winnings have no connection to his employment or property. The winnings are a one-off receipt and are not expected to be relied upon. The precedent set in Evans v FCT exhibits that gambling with a lack of an organised system involved is more akin to a hobby than a business and so is not ordinary income from a business and is considered exempt income. Non-assessable non-exempt income Non-assessable non-exempt income means that the taxpayer will not be assessed for tax however some other taxpayer or business will be assessed for tax for that specific receipt. The $20 parking fee to attend a dentist appointment James was reimbursed by the Brisbane Roar is different to his travel allowance examined above as reimbursements for an expense incurred are not seen as income as they are expense payment fringe benefits (FBT). In accordance with s23L of the ITAA36, this reimbursement would be non-assessable non-exempt income, as the receipt would be an expense payment benefit for FBT purposes and subject to FBT, therefore this receipt is not ordinary income. CONCLUSION: The following of James Lucas’ receipts will be ordinary income and therefore assessable under section 6-5 (1): His $160,000 wages from Brisbane Roar, the $2,800 travel allowance, the $30,000 contract incentive, $2,000 for winning player of the match, $250 Rebel Sport voucher, $20,000 compensation for wages lost, $35 interest, $1,800 payment from Olympic Football Club for coaching, $15,000 cash from Nike sponsor and $4,000 worth of clothing from Nike. This equals a total of $235,885 of income assessable under section 6-5 (1). The receipts not assessable under this section are the $3,000 gambling winnings and the $20 reimbursement for a parking fee.

PART B It is important to include gifts received that are connected to work activities as part of an individual’s income in order to uphold the fairness and equity of the Australian tax system. The gifts received by James of a $2,000 award for winning player of the match and a $250 Rebel Sport voucher from the parents of the under 8’s elite team contribute to his overall financial position and are fully the result of his work activities and should therefore be subject to taxation. Treating gifts that have a sufficient nexus with income-earning activities ensures equal treatment of all forms of compensation and prevents individuals from exploiting the system to evade taxes. This approach works in order to maintain a level playing field for all taxpayers and subsequently promotes fairness. Including gifts as part of taxable income also works to promote vertical equity as higher-income earners are likely to have greater access to opportunities that result in these kinds of assessable gifts. By taxing them, the system ensures that those with more substantial financial means contribute proportionally more to Australia’s revenue, thereby mitigating income inequality. Furthermore, the inclusion of gifts in taxable income supports the funding of public services and infrastructure which subsequently benefit all Australians. The additional revenue generated by the inclusion of gifts relating to work activities as income can work to support and boost government initiatives in areas such as healthcare, education and social welfare overall enhancing societal well- being. In principle, the inclusion of gifts related to work activities as part of income within the Australian tax system is pivotal for maintaining a fair and equitable system. This approach prevents manipulation and addresses income inequality, ultimately fostering a balanced and prosperous society.