UNIVERSITY OF SOUTH AUSTRALIA

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Student Name (Print clearly) ID Number

1. NISHANTHI WITHANA 100071437

2. NATASHA MILOVANOVICH 100055381
3.XIAOJING CHEN 100072465

Course code and title: ACCT5017, AUSTRALIAN TAXATION LAW

Program code: DMBS School: SCHOOL OF COMMERCE
Day, Time & Location of Tutorial/Practical: THU 9:10 TO 11:00, CWE/BH4-33
Course Coordinator: MR ROB WHAIT Tutor: MR ROB WHAIT, NADIA
Extension granted (Yes/No): YES Due date: 9 MAY 2008
Assignment number & topic: ASSIGNMENT 1

We declare that the work contained in this assignment is our own, except where acknowledgement of sources is made.

We authorise the University to test any work submitted by us, using text comparison software, for instances of plagiarism. We understand
this will involve the University or its contractor copying our work and storing it on a database to be used in future to test work submitted by
others.

Signed: Date:

1.Nishanthi 9 MAY 2008

2. Natasha Milovanovich 9 MAY 2008
3.Xiaojing Chen 9 MAY 2008

Date received from student Assessment/grade Assessed by:

Recorded: Dispatched:

Question 1
Australian Taxation Law ACCT 5017 Group Assignment

The main issue in this question is whether the free flights under Frequent Flyer Program
redeemed by Jane Foster are assessable income under ordinary income concept in s. 6-5(1) of
the Income Tax Assessment Act 1997 (ITAA 97) or under a specific statutory provisions other
than s. 6-5.

Are free flight tickets assessable under ordinary concept?

To be determined according to ordinary concepts and usages of mankind, Scott v CofT (NSW)
(1935) 38 SR (NSW) 215 at 219, the value of benefit provided to the taxpayer must be money
or convertible into money, Tennant v Smith 1892 3 TC 158. In this case, the free flights could
not be sold or exchange for money by Jane, like free holidays in the case of FCT v Cook &
Sherden 80 ACT 4140, therefore the first characteristics of the ordinary income is not met,
consequently free flights are not ordinary income under s. 6-5(1).

Does s. 15-2 apply?

Generally, under s. 15-2 ITAA 97 (formerly s26(e) ITAA36), benefits provided to the taxpayer,
directly or indirectly in relation to their employment will be held as income, and therefore will
be taxed, although they are not ordinary income under s.6-5(1). In this case, like in the case
Payne v FCT (1996) 66 FCR 299; 96 ATC 4407, benefits are provided under frequent flyer
reward program by the FlightStar Airlines (third party) under a separate personal contractual
agreement, not because of her employment with the firm of charted accountants. Jane become
a member of this program by filling the form under her name and paying $150 application
fee, for which she was not reimbursed by the company. Therefore, the nexus between
employment of the taxpayer and benefit in a form of the free flights is not satisfied. Moreover,
this nexus requirement, as a benefit being a product, incident or consequence of employment
must exist before a benefit; in this case flight reward points are granted (Smith v FCT (1987)
164 CLR 513; 87 ATC 4883). Consequently, the free flight tickets are not statutory income
under s. 15-2 and therefore, Jane will not be taxed on the real value of the free flights tickets
of the $10,000.

Does s. 21A apply?

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Australian Taxation Law ACCT 5017 Group Assignment

According to s. 21A(5), non convertible free flight tickets will be treated as if it is convertible
to cash and would be assessed as an ordinary income under a provision s. 6-5, if they were
provided in respect of the direct or indirect business relationship, derived by the taxpayer
from the carrying on of a business for the purpose of gaining the income and they exceed the
value of $300. Benefits under $300, are classified as an exempt income under s. 23L (2), thus
are not assessable. In this case as mentioned above, there is no business relationship between
Jane and FlightStar Airlines; therefore s. 21A does not apply in assessing the value of the free
flights as ordinary income under s. 6-5(1). If this provision, would apply in this case, the
value of the free flights received by Jane will be converted into cash and treated in accordance
with s.6-5(1) to the extent that the assessable income is not reduced by ‘once-only’ deduction
if the taxpayer incurred costs (s. 21A(3)) or non-deductible entertainment expenditure, which
has been incurred by the provider (s. 21A(4).

In conclusion, the fact that Jane would have paid for these tickets if she wants to go to
Europe with her husband by themselves did not make the benefit ordinary income. According
to the ‘come in’ principle, generally income is something that ‘comes in’ to the taxpayer as
money or in a form that could be converted into the money, Tennant v Smith 1892 3 TC 158.
Non-cash benefits, such as non-convertible holidays or frequent flyer reward tickets that are
merely saving of expenditure and generally have been held to not constitute income (FCT v
Cook & Sherden 80 ACT 4140; Payne v FCT (1996) 66 FCR 299; 96 ATC 4407). Only, the
reduction of a liability (a saving of expenditure) will be treated as income if they are a
product, incident or consequence of taxpayer’s employment, FCT v Unilever Australia
Securities Ltd (1995) 56 FCR 152; 95 ATC 4117..

(Words 747)
Question 2

Is sponsorship of the $500 for each event ordinary income?

The payments received by John Searle are ordinary income under s. 6-5(1) since they are in
cash, Tennant v Smith (1892) 3 TC 158 and have the periodical nature of the payments given
regularly upon each event that John wore the shoes, FCT v Dixon (1952) 86 CLR 540.

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Australian Taxation Law ACCT 5017 Group Assignment

It is crucial that the sponsorship amounts have nexus with income earning activity for the
taxpayer, FCT v. Harris 80 ATC 4238. According to personal exertion principle, an amount
that is reward for service rendered is ordinary income, Section 6(1) of 1936 Act. In our case,
due to John’s talent in triathlon and success in the competition, Athlete’s Foot Pty Ltd has an
agreement with John, a full-time bank officer, regarding using John’s sporting prowess to
promote its new “Super Sprint” running shoes by sponsorship, for which John was paid in
cash for service rendered. Like in a case FC of T v Stone 2005 ATC 4234, Stone turned her
athletic talent / skill to account for profit even though she was employed full time as a police
officer. The court focused on Stone’s sponsorship arrangement as evidence of the commercial
nature of her sporting activities. When receiving that particular amount, she has an obligation
to the company to provide a service by promoting them/their product.
Therefore, the cash for each event is ordinary income assessable under s. 6-5(1) due to the
connection to the provision of service.

(Words 241)

Is $2,000 ordinary income or capital?

Generally, the payments for entering into an agreement constitutes a restrictive covenant,
which places a restriction on a person’s trading of income earning activities or rights, then the
payment for entering into such an agreement is treated as capital.

In our case, John, as a professional athlete, has rights to appear for any promotional activities
with any other company. By entering a restrictive agreement with Athlete’s Foot Pty Ltd,
John has given up his rights for not promoting clothing products from any other company
while he was promoting the “Super Sprint” shoes. As seen in the case FCT v Woite 82 ATC
4578, a professional football player entered into an agreement with North Melbourne club,
which restricted him playing for any other club in the VFL. It was held that the amount he
received by signing this agreement to be capital.

In conclusion, the $2000 John received in relation to his agreement with Athlete’s Foot Pty
Ltd in consideration for giving up valuable rights rather than for the performance of services
is not income from personal exertion. It is a capital and therefore will not be assessable under
s. 6-5.

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Australian Taxation Law ACCT 5017 Group Assignment

(Words 190)

Is the $5,000 first prize windfall or ordinary income?

It is necessary to distinguish prizes of a windfall nature, hobby activities from those

incidentals to income earning activities. Generally, prize of a windfall and income from
hobby activities are not assessable because they relate more to luck or chance or personal
activity for personal enjoyment or pleasure than to income earning or business activity, Jones
v. FCT (1932) 2 ATD 16 and Martin v. FCT (1953) 90 CLR 470.

However, the prize would be assessable if it is proved to be a direct result of business

activities, FCT V. Cooke & Sherden 80 ATC 4140 and Kelly v. FCT 85 ATC 4283. If any
amount is to be assessable, then it will be so as ordinary income under s. 6-5(1).

If a person, a professional athlete, conducts his / her athletic activity in their part – time, it is
important to distinguish whether the athletic activities of the taxpayer constituted the conduct
of a business. In FC of T v. Stone 2005 ATC 4234, it was held that a taxpayer who was
employed as a police officer was engaged in a business activity when she also derived income
as a world – class athlete.
In our case, John Searle regularly competed in the local triathlon competition on weekends
with considerable success even though he was employed as full time banking officer. The
time involved in the competition is taken into consideration for conducting business activities.
As the taxpayer was heavily involved in triathlon competition, the competition prize was not
only luck, but he has turned his sport ability to account for money and he had been engaged in
a business.

According to our discussion, the taxpayer did carry the business of his triathlon competition
and since the cash prize was money and satisfied the first characteristic of ordinary income
(Tennant v. Smith (1892) 3 TC 158), thus this amount would constitute ordinary income
assessable to John Searle under s. 6-5(1). The fact that the prize is not periodic is not decisive
(FCT v. Harris 80 ATC 4238).

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Australian Taxation Law ACCT 5017 Group Assignment

In conclusion, the $5,000 first prize is ordinary income under s. 6-5(1) and will be subject to
the assessment under s. 6-5. In addition, John is entitled to tax deduction when he is found to
be carrying on a business unless the loss quarantining rules in Div 35 ITAA 97 apply.
(Words 395)

Is the $1,000 cash a gift or ordinary income?

Generally, a voluntary payment made in the course of an ongoing employment or services

relationship will be ordinary income. Only in exceptional circumstances will it be a purely
personal gift, Scott v FCT (1966) 14 ATD 286, therefore, a gift was not assessable under s.
25(1) or s. 26(e) of the 1936 Act.

As we discussed above, John Searle did have a strong service relationship with Athlete’s Foot
Pty Ltd since the company sponsored him for the triathlon competition and as a return, John
Searle promoted its new “Super Sprint” running shoes. Having a services relationship only, it
is obvious that there is a sufficient nexus between the voluntary payment and an earning
activity, thus the amount is ordinary income under s. 6-5(1).

If there is a services relationship and a personal relationship and the taxpayer can prove the
$1,000 cash was purely personal gift, then the amount is not ordinary income, see for example
Scott v. FCT (1966) 14 ATD 286. In this case, we can strongly argue that the $1,000 as a
parting gesture is a purely personal gift based on the following factors rather than income
from earning activity.

The factors proved as a personal gift:

1. It was out of generosity and goodwill instead of income from earning activity. John
has established an intimate personal relationship with the company during the long
period of competition and therefore the $1,000 cash is only a gift for appreciation of
his service upon retirement.

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Australian Taxation Law ACCT 5017 Group Assignment

2. It is given in unusual circumstances when John retired from triathlon after he was
promoted to Bank Manager. Importantly the triathlon series had finished when the
money was given. Furthermore, it is only a small amount and paid once only.

In conclusion, the $1,000 is a purely personal gift and not ordinary income and therefore not
assessable under s. 6-5(1).

(Words 306)

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Australian Taxation Law ACCT 5017 Group Assignment

References

1. Barkoczy, S, et al (2008). 2008 Core Tax Legislation. 11th edition. Sydney: CCH.

2. Woellner, R H, et al (2008). 2008 Australian Taxation Law. 18th edition. Sydney: CCH.