Tax Law

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Ordinary income
Tennant v Smith, (money or convertible into money)
An employee was given accommodation rent free by his employer. Was this ordinary income? • The employee could not sublet the accommodation to anyone else, therefore could not turn this accommodation into cash. • The Court said it was not ordinary income under s. 25(1) (now s.6-5) since the accommodation was not convertible into money. • Not ordinary income under s.6-5. FCT v Cooke & Sherden. (money or convertible into money) Soft drink retailers were given holidays by wholesalers/manufacturers for selling a certain number of soft drinks. Was this ordinary income? The holidays could not be cashed in or transferred to anyone else. The holidays were not convertible into cash, therefore the first characteristic was not met, and therefore the holidays were not ordinary income under s. 25(1). There is a further principle from this case. If the holidays were a substitute for income, rather than a voluntary reward, then the holiday would assume the character of the income it replaced. Not a binding principle from this case (Obiter Dicta).

FCT v Dixon, Periodicity, recurrence and regularity/substitution principal Taxpayer left his job to enlist in the armed forces, but the army did not pay as much as his old job. Former employer topped up his pay on a regular basis to make up the difference. 2 of the 5 judges said the payments were judged to be incidental to the army service. Therefore ordinary income. 1 judge said that the payments were a substitute for salary from the taxpayer’s former employment, therefore were ordinary income. The other two judges said there was no connection to an earning activity and concluded that it was not ordinary income. But the case was decided on a 3-2 majority of the High Court that the receipt was ordinary income.

FCT v Harris, Periodicity, recurrence and regularity
Ex-gratia payment (voluntary) made to a retired bank manager to offset the effects of inflation on his pension. One payment only was originally intended but others were made later. This case considered the first payment only. The majority of judges agreed the payments were not ordinary income because the payments were not a product of past services. However one judge disagreed saying that the past employment was the cause of the payments. He was in the minority so the payments were judged to not be ordinary income. Regularity and periodicity is relevant, though not generally decisive. The decisions in Harris and Dixon turned on whether the payment had a connection to any earning activity.

FCT v Blake. Periodicity, recurrence and regularity
Similar to Harris, but regular supplementary payments were made and considered in the case. Held to be income (contrast with Harris). The judge in Blake agreed with the minority judge in Harris that the payments were ‘caused’ by the previous employment. Commentators favour the approach in Blake therefore Blake’s reasoning is preferred. Myer Emporium capital v income

The case involved assignment of an income stream on a loan (ie interest) to a third party. Myer received a lump sum for that assignment. High Court held that the receipt was ordinary income. Refer back to FCT v Harris & periodicity not being a decisive characteristic.

Mclaurin v FCT, Allsop v FCT.(capital)
Where a lump sum is made up of both income and capital, but we don’t know how much of each, then the whole amount is capital

Scott v FCT.
If there is an employment/services relationship only, you can argue strongly that there is a sufficient nexus between the voluntary payment and an earning activity, therefore it is ordinary income under s. 6-5(1). If there is an employment/services relationship and a personal relationship it is assumed that there is sufficient nexus unless the taxpayer can prove the gift was personal.

Gambling Cases:
Jones v FCT.
Jones was a grazier who betted heavily and lost lots of money. High...
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