Private ruling: Assessability of a lump sum payment
Published: December 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Is the foreign lump sum payment you received included in your assessable income? | Yes.

Relevant facts and circumstances: You are employed as a software developer. In your spare time at home, you are involved with writing or developing 'Small Basic' programs which you consider to be a hobby and to be unrelated to the type of work you undertake in your paid employment. You have previously written programs that have been distributed as freeware over the internet which you believe is a good way to advertise your skills to potential employers. You have never been paid for any of the programs you have written in your spare time. You entered into a campaign or challenge run by international electronics company in which software developers were invited to submit software 'apps'. You state that your involvement with the campaign involved 'porting' (adapting) software titles that you had previously made freely available in an app store. Applications for the campaign were open to both individuals and companies. To be eligible, any app submitted had to be registered on a particular store. 'Incentive' payments were to be paid for each application accepted. An additional incentive payment would be paid if two or more applications were accepted. App registrations were to be accepted in order of arrival until the total incentive pool was exhausted. Incentive payments were to be made after confirming the successful registration of apps on the store. Two of your apps were accepted and you were eligible for a lump sum payment. You received a lump sum payment and foreign withholding tax was deducted from the payment by the payer. You were required to complete and submit an invoice as part of the process of claiming your payment. You state that: • your involvement with the campaign was a result of activities you did as a hobby and was not related to your paid employment; • the lump sum payment you received was an 'unrepeatable windfall' in relation to your hobby; and • you have no plans to work for yourself, have no business plan for the programming you do, do not expect to derive any further income from it and have no intention of pursuing these activities on anything more than a hobby basis.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. Ordinary income has generally been held to include three categories, namely, income from carrying on a business, income from rendering personal services and income from property. Other characteristics of income that have evolved from case law include receipts that are earned, are expected, are relied upon and have an element of periodicity, recurrence or regularity. Generally, a payment in the nature of a prize or gift is regarded as a personal windfall gain and not as ordinary income unless the taxpayer has received the prize or gift because of, in respect of, or in relation to any income-producing activity of the taxpayer. | Detailed Reasoning - Was the payment a prize or gift?: In your case, you received a one-off lump sum payment as a result of successfully submitting software apps to a campaign initiated by an international electronics company. You consider the amount to be an unrepeatable windfall gain that is related to your hobby. In regard to the campaign, we note that it was run by a commercial entity, applications were invited from both individuals and companies, successful applicants were required to submit an invoice to receive payment and there was a substantial pool of funds available to anyone who made successful applications. Based on the information provided, successful applicants were being paid by a commercial entity for submitting products that had the potential to further the commercial goals of the entity. Consequently, it is considered that the nature of the campaign was a commercial one and that successful applicants were providing a service to the entity in return for payment. Therefore, the lump sum payment you received cannot be characterised as a prize or gift but as a payment for services rendered. | Detailed Reasoning - Was the payment received from the carrying on of a business or a hobby?: Guidance on whether a particular activity constitutes the carrying on of a business or a hobby can be found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although the ruling deals with carrying on a primary production business, the principles discussed apply to any set of operations. Paragraph 86 of TR 97/11 states that the pursuit of a hobby is not the carrying on of a business for taxation purposes. Money derived from the pursuit of a hobby is not regarded as income and therefore is not assessable. In Ferguson at ATC 4265; ATR 877 it was stated that: ... if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial. The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis. Paragraph 13 of TR 97/11 provides a list of indicators that generally need to be considered in deciding whether a business is being carried on: • whether the activity has a significant commercial purpose or character: • whether the purpose and intention of the taxpayer is to carry on a business activity; • whether the taxpayer has a purpose of profit as well as a prospect of profit; • whether there is repetition and regularity of the activity; • whether the activity is carried on in a similar manner to that of the ordinary trade in that line of business; • whether the activity is planned, organised and carried on in a businesslike manner; • the size, scale and permanency of the activity; and • whether the activity is better described as a hobby, a form of recreation or a sporting activity. In your case, you consider that the lump sum payment was a one-off windfall gain received as a result of the activities you carry out as a hobby and was not related to your normal employment duties. You also state that you have no plans to work for yourself, have no business plan for the programming you do, do not expect to derive any further income from it and have no intention of pursuing these activities on anything more than a hobby basis. From the information provided, we accept that your activities cannot be said to constitute the carrying on of a business. Therefore, the payment you received is not assessable as income received from carrying on a business. For an activity to be classified as a hobby or pastime, it is generally considered that the hobby or pastime would be a separate activity to the occupation, trade or income earning activities of the taxpayer. For example, an accountant who sails yachts, a nurse who enters horse riding competitions or a bank officer who occasionally makes items of furniture. In your case, you are employed as a software developer and are also involved with developing software programs in your spare time that you describe as a hobby. Although we appreciate that being a 'software developer' can encompass many different types of actual activities and employment roles, in your case, we consider that the activities you undertake in your spare time are not far enough removed from your normal occupation to be considered to be a hobby in terms of the application of the income tax legislation. In addition, one of the reasons you published the software written in your spare time was that you believed it was a good way to 'advertise your skills to potential employers'. Further, as already mentioned, it is considered that the lump sum payment you received was from providing a service to another entity. Therefore, as income from rendering personal services is assessable, the foreign lump sum payment you received is assessable as ordinary income under section 6-5 of the ITAA 1997.