Private ruling: Derivation of income
Published: February 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the payments for your personal services included in your assessable income even though the payments will not be paid directly to you but will be retained by the payer on trust for you, up until a future point in time when the payments will be applied to purchase a property? | A1: Yes

Relevant facts and circumstances: You, in your individual capacity, intend to enter into a contract with Company X to provide services for a residential development. The value of this contract will be a certain amount per month. You will be available at all times as the role involves a 24/7 at call service. You intend to purchase a property in the residential development. An agreement has been reached between the Company X and yourself that the payment for services of a certain amount per month will not be paid directly to you. It will be retained by Company X on trust for you, up until the point in time that you purchase a property in the residential development. The purchase price of the property will be reduced by the amount held on trust at that time by Company X.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-5(4)

Reasons for decision: Summary: The amounts for the provision of services will be dealt with on your behalf or as you have direct, and you will constructively receive the payments even though they will not be paid directly to you, under subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997). You are taken to have received the amounts at the time when Company X retains the amounts on trust for you and, therefore, to have derived the amounts as ordinary income then. | Detailed Reasoning - Detailed reasoning: Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes the income according to ordinary concepts (ordinary income) which is derived during the income year. Payments for rendering personal services are ordinary income and are included in assessable income under section 6-5 of the ITAA 1997. Under section 6-5 of the ITAA 1997, ordinary income is assessable in the income year in which it is derived. Subsection 6-5(4) of the ITAA 1997 provides guidance on whether an amount of ordinary income is derived, and if so, when it is derived. It states that although an amount is not actually paid over, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. Taxation Ruling TR 98/1 provides guidelines for determining when ordinary income is derived for the purposes of section 6-5 of the ITAA 1997. It discusses when income is brought to account for tax purposes, including the issue where income is earned in one year of income but received in another. TR 98/1 states that the receipts method is appropriate to determine the following payments as reward for the provision of personal services by a taxpayer: · income derived by an employee · non-business income from the provision of knowledge or the exercise of skill possessed by the taxpayer; and · business income derived from the provision of knowledge or the exercise of skill possessed by the taxpayer in the provision of services. Under the receipts method, income is derived when it is received, either actually or constructively under subsection 6-5(4) of the ITAA 1997 (the effect of which is that income is taken to have been derived by a person although it is not actually paid over, but is applied or dealt with on their behalf or as they direct). In other words, an amount accountable on a receipts basis can be your income, even if it has not been actually received, as soon as it is applied or dealt with in any way on your behalf or as you direct. | Detailed Reasoning - Income received on behalf of another: Income may be received by one person on behalf of another, for example, as an agent or trustee. The fact that a person receives income for which he or she is accountable to another does not mean that the income is not derived by the other person. The person who is beneficially entitled to the income is assessable on it. In your case, an agreement has been reached between Company X and yourself that the payment for services of a certain amount per month will not be paid directly to you. It will be retained by Company X on trust for you, up until the point in time that you purchase a property in the residential development. The purchase price of the property will be reduced by the amount held on trust at that time by Company X. The issue of income received on behalf of another, by a trust, has been considered in a number of cases. Some of these cases are discussed below. In Case Q45 83 ATC 215, a professional footballer instructed his solicitor to negotiate a contract with the club on his behalf. The solicitor proposed to the club that it make an annual payment of $5,000 to the taxpayer personally for three years and a payment of $25,000 to a family trust. The club agreed to the proposal and entered into a three year contract for a playing fee of $5,000 per annum. On the same day, the club also entered into an agreement with a company controlled by the taxpayer's wife which acted as trustee of her family trust. Under this agreement the company received $25,000, purportedly in return for "guaranteeing'' the taxpayer's services and ``indemnifying'' the club against loss. Similar agreements were entered into in a later year, the taxpayer receiving a playing fee of $20,000 per annum for two years and the family trust receiving $40,000. The Commissioner took the view in Case Q45 that the taxpayer was assessable on the amounts of $25,000 and $40,000 paid to the family trust. He contended that the ``guarantee'' and ``indemnity'' agreements were a sham used to divert income from the taxpayer. It was argued for the taxpayer that the payments had been made as a result of separate negotiations between the club and his wife under which money was placed at her disposal in return for her agreement not to make any difficulties at home which would interfere with the taxpayer's playing football. The guarantee and indemnity agreements were held to be a sham. Even though the taxpayer did not receive any part of the $25,000 and $40,000 paid to the trust, those payments formed part of the consideration for each contract for personal services which he made with the club. The amounts represented income applied for the taxpayer's benefit or at his direction and were therefore assessable in his hands. In FC of T v White 2010 ATC 20-195; (2010) 79 ATR 49 ( White's Case ), a taxpayer was found to have derived assessable income where an amount referrable to services rendered by the taxpayer was paid to an employee incentive share trust of which the taxpayer was a beneficiary. The Federal Court held that the amount was dealt with on behalf of or at the direction of the taxpayer under subsection 6-5(4) of the ITAA 1997. The court held that had the amount in question been paid directly to the taxpayer that it would have been assessable income according to ordinary concepts. It was and remained a reward for services. In White's Case it was held that it was not necessary that an item of income be paid over to the taxpayer; it was sufficient that the item was applied or dealt with on behalf of or at the direction of the taxpayer. In that case the whole of the sum was applied or dealt with on behalf of or at the direction of the taxpayer in the 2000 income year and was thus assessable as income in the 2000 year. What the trust then decided, or was bound, to do with that sum was not relevant to the issue of whether the taxpayer derived that amount as income. | Detailed Reasoning - Your case: The payments for services will be dealt with on your behalf or as you have direct, and you will constructively receive the payments even though they will not be paid directly to you, under subsection 6-5(4) of the ITAA 1997. You are taken to have received the amounts for the provision of services at the time when Company X applies the amounts or deals with the amounts on your behalf (that is, retains the amounts on trust for you) and, therefore, to have derived the amounts as ordinary income then (as in Case Q45 and White's Case ).