ADVICE FOR JIM
Salary
Jims Salary of $80,000 is assessable as statutory income under s 26(e), as it is
paid for the provision of services.
Inducements to become an employee
The $15,000 payment Jim received is assessable under s 26(e). The payment is
to be assessed in the hands of the taxpayer (Federal Coke). In Jim’s hands, the
payment is of an income nature – it was paid to induce Jim to commence
employment with Rave (Case AATA 822).
The $20,000 payment was made in return for Jim giving up the opportunity to live
in Melbourne. From Jim’s perspective, the payment is in consideration for giving
up the opportunity to live near his son. As a result, the payment is a restriction,
and is of a capital nature (Woit).
Unlike Woit’s case though, Jim has agreed to leave Canberra. There are not
details as to the specifics of the employment contract, but it can be assumed that
at the point when Jim received the payment, he was either a current or future
employee of Rave.
Therefore, the payment is a residual fringe benefit (see
below).
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Payments from competition
The appearance fee of $15,000 is clearly linked to the provision of personal
services and is assessable income (Stone).
Whether or not the grant from Triathlon Australia and the $20,000 prize money
are assessable depends on whether Jim is carrying on a business or merely
competing as a pastime or hobby (Stone). The receipts will not be assessable
merely because there is a nexus between Jim’s skill and the receipt of money;
nor will they be assessable because of their quantum (Stone).
It is possible that Jim’s case could be distinguished from Stone, due to the fact
that he takes leave-without-pay in order to compete. Thus, it is easier to make
the argument that Jim has a profit motive for competing, as he needs to recoup
his lost salary. If Jim is carrying on a business, the prize money of $20,000 will
be assessable as ordinary income under s 6-5.
The motive of Triathlon Australia in providing the grant was to assist Jim with his
costs. Although this motive is a relevant consideration, it does not determine the
nature of the payment (Scott). In Jim’s hands, the payment compensates him for
the employment salary he has lost by taking leave-without-pay. Therefore, the
grant is assessable as ordinary income under s 6-5.
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The Qantas Club membership, TV and bike
These items are fringe benefits, and thus Jim is not assessable on their value
(ss23L and 26(e)(iv)). See advice to Rave, below.
Jim should be aware that if he sells his bike for more than $10,000, he will be
subject to capital gains tax. Although the bike is a personal use asset, it comes
within the CGT provisions by virtue of the fact that it cost $10,000. While this is
not what Jim paid for the bike, this is the cost base applied, since Jim and Rave
did not deal at arm’s-length (s 112-20).
ADVICE FOR RAVE
Rave is in the business of manufacturing mobile phones.
Entering licensing
agreements is extraordinary to the ordinary course of Rave’s business. This does
not mean though that the receipts from these agreements are prevented from
being assessed as income (Myer).
The licence agreement
Rave has provided its know-how under the licence agreement. The $80,000 can
be considered a royalty under the definition in s 6(1). Although it is payed in a
lump sum, it is calculated by reference to the number of phones created using
the licence. This is not an exclusive licence - Rave has not disposed of its capital
asset. The asset is retained and used to bring in revenue (Murray). Therefore,
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the payment under the agreement has a revenue nature, and is assessable as
ordinary income (s 6-5).
The supplementary agreement
At the time of the transaction in 2002, when the licence was granted, Rave did
not dispose of its capital asset (the patent). However, when Rave entered into
the supplementary agreement one year later, it was effectively giving up an
income-earning activity, and losing the ability to make use of its capital asset.
So, the supplementary agreement can be seen as a restrictive covenant, which
gives rise to CGT event D1 – Rave has created a right in favour of the purchaser.
The amount of Rave’s capital gain will be $100,000 less any costs incurred in
drawing up the agreement. A D1 event is not a discount capital gain (s 115-25).
Assignment of right to royalties
The income stream from the royalties has been capitalised into a lump sum
payment; however, under the second limb of Myer, the lump sum continues to
have an income character. Therefore, the $2 million is assessable as ordinary
income.
Fringe Benefits
Jim is Rave’s employee. Benefits provided to Jim in respect of his employment
will attract fringe benefits tax, payable by Rave under s 66 FBTAA.
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$20,000:
The payment of $20,000 to Jim was in respect of Jim’s employment, even though
Jim had not yet commenced with Rave (s 148(1) FBTAA). The taxable value of
the benefit is the amount payable by the provider, that is, $20,000 (Div 12
FBTAA).
Television
The television was provided to Jim as a performance bonus, therefore it was in
respect of employment, and assessable as a property fringe benefit.
The
televisions were purchased in a bulk purchase, which is in the ordinary course of
business. The taxable value of the television is the cost to the employer, i.e.
$5000 (s 43, FBTAA).
Qantas Club membership
The payment of Jim’s Qantas Club membership is an exempt benefit under s
58Y, so is not assessable.
Bike
Jim has been told that the bike is now his property, therefore it would seem that it
is a property fringe benefit. However, for the bike to be classified as a fringe
benefit, it must have been provided in respect of Jim’s employment with Rave.
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Although competing in triathlons is outside the scope of Jim’s employment, he
will be wearing Rave’s logo and thus promoting the company, with the expected
result of increased sales for Rave. This promotion of his employer provides a
sufficient nexus between his employment and the provision of the benefit,
therefore, the bike will be assessed as a fringe benefit. Under s 148(1) of the
FBTAA, the bike will still be a fringe benefit notwithstanding:
(a) that it was also provided by virtue of Jim competing as a triathlete; and
(h) that it was provided as a reward for services rendered.
The taxable value of the bike is the cost to Rave (s 43 FBTAA).
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