Assignment 1

Question 1.

Janet Foster was an employee of a large chartered accounting firm where she was
required to travel overseas for business purposes. For this, her employer provided her
with flights (Flight Star Airlines) and accommodation. During her travel she was offered
the membership of Flight Star Airlines Frequent Flyer Program in which she got free
tickets for traveling to Europe which would otherwise cost her $10,000.

1.) Are the free flights provided to Janet by Frequent Flyer Program
assessable for tax?
According to s. 6-5(1) assessable income includes ordinary income and under s 6-10(1)
it also includes statutory income. Therefore the free flights provided to Janet are
assessable only if they fulfill the characteristics of ordinary income or statutory income.

Ordinary income
Section 995-1(1) defines ordinary income as having the meaning given by s 6-5 which
describe it as income according to ordinary concepts, but does not specifically define it.
Following are the characteristics attributed to ordinary income:
• Money or convertible into money
As per the decision arrived at in Tenant v. Smith (1892) 3 TC 158, income must be either
in the form of money or convertible into money. Since the free flights provided to Janet
could not be sold or exchanged for any form of consideration as per the rules of the
program, so it would not meet the first characteristics of the ordinary income.
This principle is also applied in FCT v Cooke & Sherden 80 ATC 4140 where the court
decided that the holidays received by the soft drink retailers were not convertible into
cash, therefore the first characteristics was not met.
As the free flights were not money or convertible into money therefore they are not
ordinary income and so are not assessable under s 6-5.
But section 21A and s 15- 2 provides a modification for the above characteristic in
context of non cash business benefits even if they were not convertible into money.

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 2) Are the free flights provided to Janet by Frequent Flyer Program
assessable for tax under Section 21A?
For s 21A to apply there must be a non cash business benefit as per s 21A (1) which
requires a business relationship and also services provided as a consequence of that
relationship. Also S 21A (5) provides a valuation at arm’s length value to give the benefit
a taxable value in dollar terms.
Janet received the flights from the Airline Company which could not be convertible into
cash but as there was no business relation between Janet and the Airline Company, it
does not satisfy the conditions of s 21A. Also even if the flight tickets were worth value of
$10,000 if it were not for the Frequent Flyer Program but still S 21A (5) does not make
the non cash benefit assessable because there is no business relationship between
Janet and Airline Company.
Therefore the free flights are not assessable under s 21A.

2.) Are the free flights provided to Janet by Frequent Flyer Program
assessable for tax under Section 15-2?
Section 15-2(1) includes in assessable income the value to the taxpayer of all benefits
provided directly or indirectly to the taxpayer in respect of any employment or services
rendered by that taxpayer. According to the principle applied in Payne v FCT (1996) 66
FCR 299, benefit of free tickets was obtained by the taxpayer not because of her
employment with the accountant firm but because she was entitled to it under airline
frequent flyer scheme.
The benefit of free flights received by Janet was also not because of her employment in
the chartered accounting firm but because of her entitlement under the Airline Frequent
Flyer Scheme for which she paid $150 application which was not even reimbursed by
her employer. This makes her contract with the Airline Company totally private.
Nexus with employment or services rendered
The nexus test in s 15-2 ITAA 97 requires an employment or service relationship
between the parties to receive a benefit. But the nexus test is not satisfied as Janet had
a personal contractual relationship with the airline company rather than an employer
relationship. Decision arrived at in Constable v FCT (1952) 86 CLR 402 also gave this
principle that there was no sufficient nexus to employment at the time of receiving the
benefit, rather it was due to happening of certain events.

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Therefore s 15-2(1) does not apply mainly due to the following 2 reasons:

• The provision of free tickets resulted due to crystallizing of contractual

entitlement and therefore it was not a benefit allowed or granted to her due to her
employment. It was only because she paid for the application fee, she got the
free tickets. She was entitled to the tickets under that program and not because
of her employment.
• There was no employment relationship between Janet and the Airline Company
and also no relationship between Airline Company and the Chartered Accounting
firm.

Conclusion
Janet’s flight reward not convertible into cash so it was not assessable as ordinary
income under s 6-5. Also there was no business or service relation between the airline
and Janet so it was not assessable under s 21A. As the flight reward received by Janet
was purely due to her personal contractual relationship with the airline company and due
to crystallizing of contractual entitlement. Therefore these free flights were not taxable
under any of the sections15-2 also.

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Question 2.

John Searle was a full time banking officer who was sponsored by Athlete’s Footy Pty
Ltd to promote their new shoes for which John received $500 for each event. Also, the
company paid him $2000 to agree not to promote clothing products for any other
company while promoting their shoes. On participating, John won $5000 as the first
prize. But, due to his promotion to a bank manager, he decided to retire from the
triathalon racing. He received $1000 as a parting gesture from the athlete company.

1.) Is $500 assessable for tax?

According to s. 6-5(1) assessable income includes ordinary income. There are three
characteristics of ordinary income which have to be satisfied in order to be assessable.
These are:
• Money or convertible into money
Since John received $500 for each event he wore the shoes in, so according to section
6(1) 1936 Act $500 will be treated as John’s income from personal exertion. He received
this amount because of his provision of services to the athlete company. Therefore it
fulfills the first characteristic of ordinary income.
• Regularity, periodicity and recurrence
As John receives the $500 every time he promotes the shoes, so it is assumed that he
received this money regularly, therefore fulfilling the second characteristic of ordinary
income as per s 6-5(1)
• Receipts from income producing activities
According to Stone v FCT (2002) ATC 5085, the athlete who was also employed as a full
time police officer was considered as carrying on a business as professional athlete
because she was turning her talent to account for money. Her sponsorship receipts were
assessable income.
John was also a full time banking officer and was also converting his talent to account
for money by competing in triathalon series and promoting the shoes for the athlete
company. He was paid in return for undertaking the obligation to promote his sponsor
(athletic company). There is a nexus between receipt and income earning activity.
Therefore it is considered as his receipt from income producing activity and satisfies the
third characteristic of ordinary income.

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Thus, the $500 received by John is assessable for tax as ordinary income under section
6-5(1).

2.) Is $2000 assessable for tax?

According to the principle applied in FCT V Woite 82 ATC 4578, any undertaking given
by one party to another to trade only in a certain line of products or not to compete
against the other party results into restrictive covenants. In this case, Peter Woite was
paid $10000 by North Melbourne Club for not playing for any other club. Supreme Court
held that the $10000 was considered as capital.
John Searle was also paid $2000 by his sponsor restricting him not to promote clothing
products for any other company while he was promoting their shoes. This payment is
treated as restrictive covenants as it involves giving up a right to promote clothes for any
other company. Therefore, it is considered as capital and not as income for services
rendered or to be rendered in future by John. It is not assessable as income but comes
under capital gain tax implications.
A similar decision was also reached in the case of Higgs v Olivier (1951) Ch 899 where
Olivier was paid 15000 pounds for agreement not to act for 18 months in any other film.
This amount was also considered as non assessable having being paid for giving up his
rights to earn income as an actor.
Therefore the $2000 received by John Searle is characterised as capital in character.

3.) Is $5000 prize money assessable for tax?

As per the decision made in Kelly v FCT 85 ATC 4283, prizes received by individuals
from participation in sports are treated as payments received from employment or
rendering of services as under s 6-5(1). In this case, the award won by the footballer
was due to exploitation of personal skills in a commercial way therefore it was treated as
assessable income.
It is also discussed in Stone v FCT (2002) ATC 5085 that the athlete was turning her
talent to account for money because of which her rewards became assessable. She was
considered carrying on a business as a professional athlete.
The prize money received by John Searle is also due to rendering of services by him
and exploitation of his personal skills in a commercial way. Therefore, $5000 received by
him is assessable for tax under s 6-5(1) as it is a prize received due to income producing
activity.

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 3.) Is $1000 cash received as parting gesture assessable for tax?
A payment received by a person after his employment relationship ends when there was
no obligation to receive that additional payment and was unexpected is not assessable
as income for the taxpayer. It is considered as a voluntary payment for the taxpayer by
his previous employer. This conclusion was made in the case of Moore v Griffiths (1972)
3 All ER 399, where the taxpayer received 1000 pound after his agreement with the
World Cup Association ends. This payment was treated as a reward for victory in the
nature of a personal tribute rather than a reward for services rendered. Therefore it was
not assessable.
John also received $1000 cash from the Athlete’s Foot Pty Ltd upon his retirement as a
parting gesture. He was not obligated to receive this amount and it was totally
unexpected for him. Therefore it is not treated as income for John and is not assessable
for tax purposes.

Conclusion
Cash received by John Searle as sponsorship money is treated as ordinary income
under s 6-5(1) as it fulfills all the characteristics of ordinary income. Money received for
restricting his activities for not to promote any other company’s clothes while he was
promoting the Athlete’s Foot Pty Ltd’s shoes is considered as capital in character rather
an income. Prize money of $5000 received by John is assessable for tax because it falls
under ordinary income s 6-5(1) as he was turning his talent to account for money.
Parting gesture in the form of cash $1000 is not assessable because it is a voluntary
payment by the athlete company which was unexpected for John.

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 Reference

• Barkoczy. S, Core tax Legislation & Study Guide, 2008,11th edition, Mc

Pherson’s Printing Group, Australia
• Woellner. RH, Barkoczy. S, Murphy. S, Evans. C, Australian Taxation
Law, 2008, 18th edition, Mc Pherson’s Printing Group, Australia