Taxation Law: Bonus Payments

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  • Topic: Capital gain, Taxation, Bond
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  • Published : March 22, 2013
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1. The assessability or otherwise to Jino and Anna of the annual bonuses paid by Darling Bank to them.

Consideration of the proximity of services or employment relationship, the importance of the donor’s motive and the status of gratuitous payments are relevant in determining whether the bonuses received are assessable income. We can determine that the bonuses satisfactorily fulfil the requirement that for the bonuses to be assessable they must “come in”.(tenant v smith)

Natural incidents of employment will be income, because they arise from a service relationship and because they are an expected incident of the occupations. (Kelly v DCT) Ultimately, it is the character of the payment in the hands of the recipient that is determinative (Scott) of income. The bonuses received by Jino and Anna were not mere gifts. The amount in Scott v FCT was a gift; it was gratuitous, not made in discharge of an obligation and not taken by the recipient as discharging an obligation and not income by ordinary concepts. The payments in Scott v FCT and Moore v Griffiths were ‘one-off’. The payments were in addition to entitlements under service agreements; the donor’s motive was to make a personal tribute and the payment was unexpected. While income generally exhibits recurrence, regularity and periodicity, it would be wrong to conclude they were necessary elements and that a ‘one-off’ payment in the nature of a ‘gift’ cannot be income. (demonstrated by Squatting Investment Co)

In Moore v Griffiths, the bonus received was a testimonial or personal gift rather than a reward for services rendered by the taxpayer in the course of his employment. The payment had no foreseeable element of recurrence, and there was no knowledge or expectation on the taxpayer’s part that the payment would be made as a reward for rendering his services.

A bonus payment is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997, which provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The initial presumption, prima facie, a payment from taxpayer to recipient is not income (Hayes v FCT) may be displaced if in substance and reality the payment was a product of services.

Ordinary income is typically regarded as including salary and wages and fees connected with employment or provision of services; the critical element being the connection with an earning activity.

Amounts derived from employment or the provision of services are income. In FCT v Dixon, the amount taxpayer received was assessable because the receipts were of an income character, and the amount was an expected periodical payment arising out of circumstances, and also because it formed part of the receipts upon which he depended for regular expenditure. Similarly, the bonuses Jino and Anna received fulfilled 3 critical elements in FCT v Dixon; the payment was periodical, incidental to employment and relied upon for regular expenditure.

In FCT v Harris, payments were unrelated to the length or quality of service, and were periodic yet unpredictable. Hence, they were unassessable as the critical elements in Dixon’s case were absent in Harris.

In FCT v Kelly, the prize money the footballer received was held to be payments as income. Kelly was aware that the prize would be offered,

S15-2 sets out that allowances and other things provided in respect of employment or services can be included in your assessable income. S15-2(1) states that “assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided… in respect of… any employment of or services rendered”. Hence, if the bonuses are consequently not considered ordinary income, it will still be regarded assessable under s15-2 as the amount that is assessable as ordinary income under s6-5 is not included in assessable...
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