Private ruling: Assessability of gift payment
Date of advice: 9 January 2020
Published: March 2020
Ruling period: Period ending 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Will the gift of cash you receive constitute assessable income under section 6-5 of the Income Tax Assessment Act 1997? | A1: No, the gift of cash will not constitute assessable income under section 6-5 of the Income Tax Assessment Act 1997

Relevant facts and circumstances: XXXX was a shareholder and director in a company, holding a controlling interest in that company. The company has recently been sold to another business. As part of the sale of that company, XXXX decided to retire effective XXXX. He sold his portion of shares held in the company upon his retirement and sale of the business. XXXX's role was a manager of one of the operational divisions of the company based in XXXX. XXXX has decided to gift you and other colleagues who were also directors of the company a cash amount of $XXXX divided between you all. The ex-colleagues including you were non-executive directors, noting one has been made an executive director during the 2019 financial year. XXXX built a personal as well as professional relationship with you and the others over an extended period of time. When the payment is made, XXXX will no longer be employed by the company where you all previously were employed. The amount to be transferred will be decided on an arbitrary basis. XXXX plans to give you and your colleagues this gift of cash in 20XX. The gift of cash is to be given in a personal capacity, using monies XXXX received from the sale of his shareholdings. XXXX advised that he is gifting the money on the basis of natural love and affection and that there is no expectation from you and the other directors that he will receive something in return. In addition, the money being gifted has no relationship to income-earning activities or services rendered by you and the other directors in your role within the company. The gift of cash is to be given in a personal capacity, using monies XXXX received from the sale of his shareholding. XXXX has included the proceeds from the sale of the shares in his individual income tax return in the relevant income year.

Relevant legislative provisions: Income Tax Assessment Act 1997section 6-5 | Income Tax Assessment Act 1997section 6-5(2) | Income Tax Assessment Act 1997 section 6-10

Reasons for decision: Summary: The amount you receive will be considered a gift and will not be considered assessable income under section 6-5of the Income Tax Assessment Act 1997. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(2) of the Income Tax Assessment Act 1997 provides that the assessable income of a taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Section 6-10 of the Income Tax Assessment Act 1997 provides that assessable income also includes statutory income. Statutory income includes amounts that are not ordinary income but are included as assessable income under the tax law. There are general principles to consider when working out whether amounts of money are a gift or assessable income. Taxation Ruling TR 2005/13 - Income tax: tax deductible gifts - what is a gift? sets out what the essential elements of a gift are. The TR 2005/13 states that the word 'gift' has its ordinary meaning and outlines that gifts generally have the following features: a) there is a transfer of the beneficial interest in property b) the transfer is made voluntarily c) the transfer arises by way of benefaction, and d) no material benefit or advantage is received by the giver by way of return Generally, a gift is not considered to be assessable income unless there is a connection to the income-producing activity of the taxpayer who will be gifting. In IT 2674, the ruling states that whether a gift will be assessable income depends on the quality of the character of the gift in the hands of the recipient. The factors outlined include how, in what capacity, and for what reason the recipient received the gift and whether the gift is of a kind which is a common incident of the recipient's calling or occupation. Although the motive of the donor is a consideration, it is rarely held to be a decisive factor. | Detailed Reasoning - Application to your situation: In your situation, you have a previous employment relationship with XXXX, as you were previously directors in the same company. However, XXXX has also stated that you have built a personal as well as professional relationship with them over an extended period of time. When the payments will be made, XXXX will no longer be employed by the company where you all previously were employed. The gift amount to be transferred will be decided on an arbitrary basis and is separate to the arms-length amounts of employment remuneration or termination payments you receive. In your situation, the gift of cash has the following features: a) there is a transfer of the beneficial interest in property - you and the other gift recipients will receive $XXXX divided between you and the others. b) the transfer is made voluntarily. In the private ruling application, it is stated that XXXX has forged a strong bond and friendship with these individuals who will receive the gift. In the application it is also stated that you and the others have been a constant source of support for XXXX in both a business and personal capacity over the years. The gift being given to the individuals is in recognition for unconditional support over a number of years and also for assistance when XXXX sold his controlling interest in the company. c) the transfer arises by way of benefaction - You have a previous employment relationship with the XXXX, with whom you worked as a director for many years. XXXX also stated in his application that the individuals are close family friends, as a result of them being close friends of XXXX's parent and therefore having known each other for a very long time. d) XXXX has retired from the business and therefore the gift you receive is separate to any amounts you may receive in relation to your employment. After considering all the relevant facts and circumstances, the Commissioner considers that the payment will be given to you for personal reasons and is therefore a gift and is non-assessable. Factors that lead to this decision include: a) the payment is at the discretion of the giftor b) the payment is not expected, relied upon or a common incident of your occupation c) the payment is being given voluntarily to you as well as others; these others have also developed a close personal relationship with the giftor over a long period of time Although there is a previous employment relationship the overall circumstances in which you may receive the payment leads to a conclusion that this will be a gift made voluntarily to you. The amount you receive will be considered a gift and will not constitute assessable income for you under section 6-5 of the Income Tax Assessment Act 1997 .