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Reconciling the Overlap of Charging
Provisions in Regard to Non-Cash
Benefits from Employment, Personal
Australia’s income tax regime contains a number of charging
provisions that may apply to non-cash proceeds of personal
exertion and business. There is overlap in the operation of these
provisions, which in turn requires priority of application rules
and anti-double taxation rules. The fact that one of these charging
provisions (i.e. fringe benefits tax) is in a separate piece of
legislation adds complexity. Further difficulty is added because
the various charging provisions contain different valuation rules.
This article highlights the problematic areas and anomalies
concerning charging provisions as they apply to non-cash
benefits, with the aim of attaining some clarity to the operation of
the rules. The approach is to use a tabular summary (table) to
identify the relevant charging provision (e.g. ss 6-5 and 15-2 of
the Income Tax Assessment Act 1997(‘ITAA 1997’)) that applies
in regard to various economic activities (e.g. personal exertion
that is not employment), and to reconcile the charging provisions
where overlap exists. For completeness, the table also identifies
circumstances where no charging provision applies to common
non-cash benefits obtained by taxpayers (e.g. mere gifts).
* Associate Professor, School of Business Law and Taxation, University of
New South Wales.
2015 17(1)
RECONCILING THE OVERLAP OF CHARGING
PROVISIONS
Australia’s income tax regime contains a number of charging
provisions in regard to non-cash benefits flowing from personal
exertion and business activities of taxpayers.1 There is
considerable overlap or overreach between charging provisions,
which in turn requires priority of operation rules and anti-double
taxation rules, some of which do not appear to be effective. The
fact that one of those charging provisions (i.e. fringe benefits tax
regime (‘FBTR’)) is in a separate piece of legislation, and that
there are different valuation rules for the various charging
provisions, only compounds problems and produces anomalies.
This article aims to highlight and clarify this unnecessarily
complex area of the income tax. The approach is to use a tabular
summary (table) to identify the relevant charging provision (e.g.
ss 6-5 and 15-2 of ITAA 1997) that applies in regard to various
economic activities (e.g. employment), and to reconcile the
charging provisions where overlap exists.2 To complete the
analysis, the table also identifies circumstances where no
charging provision applies to common non-cash benefits obtained
by taxpayers that may be viewed as being close to the proceeds
of personal exertion or business (e.g. mere gifts, pastime).
The rows in the table in Part 3 of the article identify the
various types of ‘economic activity’, and the columns in the table
identify the relevant charging provision under the income tax.
The entries in the body of the table contain a one-word response
(i.e. YES or NO) to the receipt of a non-cash benefit. Subject to
the comments below, a ‘YES’ entry means that the relevant
charging provision applies so that the value of the non-cash
benefit enters the relevant tax base under it, which will often be
1 Given that Australia’s FBTR is a surrogate tax on employee benefits, it is
appropriate to include that regime as part of Australia’s income tax.
2 ITAA 1997.
the assessable income of the recipient. A ‘NO’ entry means that
the relevant charging provision does not apply.
The limitations of a one-word response in a table are obvious,
and this is addressed through notes attached to each entry.
Accordingly, the notes are crucial to appreciating the
qualifications to a one-word response, in determining the priority
of application of the relevant charging provision and in
identifying the relevant anti-double taxation rule. Further, for
some transactions it makes little sense to have a ‘YES’ entry
under two or more charging provisions. Yet, this is the position
in the table in regard to certain transactions where there is overlap
of charging provisions so that a priority rule is required. This
underlines the importance of the contents of each note in Sub-Part
3.1 of the article. For completeness, the notes will also point out
whether any charging provision outside of those set out in the
table may apply to the relevant benefit (e.g. capital gains tax
(‘CGT’) event) and, importantly, whether a CGT acquisition has
occurred.
Arguably, one limitation of the article is that it does not deal
in detail with the case law that characterises the various economic
activities set out in the rows in the table (e.g. employment,
hobby). However, the absence of a detailed treatment of this
should not detract from the article, as this analysis is a discrete
topic in itself. Its absence does not undermine the main aim and
contribution of this article. In any event, Sub-Part 2.3 does
provide a sufficient description of, and sufficient references to the
case law in regard to, each economic activity. The other limitation
is that this article is limited to proceeds of personal exertion and
business, and circumstances that fall short of these activities. In a
‘closely held entity’ (e.g. company, trust), there is the possibility
that some cash receipts are the product of a taxpayer’s ownership
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interest in the operating entity.3 To deal with this issue in the
article would raise another series of issues, and it has been
decided not to pursue them here.4 In addition, the article does not
deal with the valuation of particular benefits under the FBTR.
Space does not permit this.
Aside from this introduction and the conclusion, the article is
in three parts. Part 2 contains an outline of the meaning of a non-
cash benefit, as well as a summary of the relevant charging
provisions that may apply to non-cash benefits from personal
exertion and business; which form the column headings in the
table (in Part 3). In addition, Part 2 contains the appropriate
classification given by the income tax law to the various
transactions and arrangements involving personal exertion,
business, etc, and activities contrasted with personal exertion,
business, etc. Part 3 contains the table with the yes and no
responses. Sub-Part 3.1 contains the notes to, and explanations of,
each response in the table. This is where co-ordination and
prioritising of the rules is set out.5
The overall conclusion of the article is that, whilst the rules
in regard to non-cash benefits from personal exertion and
business are unnecessarily complex and contain anomalies that
3 This was the issue in the Full Federal Court in J & G Knowles & Associates
Pty Ltd v Federal Commissioner of Taxation (‘FCT’) [2000] FCA 196; (2000) 96 FCR 402 (and
in the Administrative Appeals Tribunal (‘AAT’) decision in J & G Knowles &
Associates Pty Ltd v FCT (2000) ATR 1101; which was remitted to the AAT by
the Full Federal Court) and Starrim Pty Ltd v Commissioner of Taxation (2000)
4 The problematic issue of a receipt being the product of an ownership interest
as opposed to the product of personal exertion only really arises in the closely
held entity context where the principals of the ‘business’ occupy more than one
role or capacity in relation to the relevant entity. This article has a broader focus
than that circumstance.
5 As noted above, the notes will also point out whether any charging provision
outside of those set out in the table may apply to the relevant receipt (e.g. CGT
event).
should be addressed, the law has developed to the stage where
there is a reasonable degree of certainty of application of the rules
to non-cash benefits.
2. MEANING OF NON-CASH BENEFITS, CHARGING
PROVISIONS AND CHARACTER OF ECONOMIC ACTIVITIES
This part is broken into three sub-parts, namely the meaning
of non-cash benefits (Sub-Part 2.1), relevant charging provisions
(Sub-Part 2.2)6 and the character of economic activities (Sub-Part
2.3)7 set out in the table. For completeness, Sub-Part 2.2 also sets
out relevant exempt income rules, non-assessable non-exempt
(‘NANE’) income rules, etc., that are relevant to each charging
provision.
This article focuses on ‘non-cash benefits’. The central
element is that the recipient of the benefit (and the ‘payer’)
contemplates that his or her consideration will not be in the form
of money but rather in another form (e.g. property or services).
Non-cash benefits can come in a wide variety of forms. Most of
the specific categories of benefits dealt with in the Fringe Benefits
Tax Assessment Act 1986 (Cth) (‘ FBTAA 1986’) provide
examples of non-cash benefits (eg use of cars, use of a dwelling,
transfer of property). The case law provides other examples,8 as
do Australian Taxation Office (ATO) rulings.9 It will be
6 See the Column headings in table, 125.
7 See the Rows in table, 125.
8 Hayes v FCT [1956] HCA 21; (1956) 96 CLR 47 (gifting of shares) (‘ Hayes v FCT’); FCT v
Cooke and Sherden [1980] FCA 37; (1980) 29 ALR 202 (‘ Cooke and Sherden’) (free holiday);
Payne v FCT (1996) 66 FCR 299, 299 (free flight rewards or airline tickets)
(‘ Payne v FCT’); Case 7/97 97 ATC 143 (interest-free loan).
9 Australian Tax Office, Income Tax: Assessability of Payments Received under
the Military Skills Award Programme, TR IT 2474, 12 May 1988 (‘ Income Tax
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RECONCILING THE OVERLAP OF CHARGING
appreciated that non-cash benefits can take numerous forms.
Some could be described as consumables so that they will last a
very short period after being received by the taxpayer. Others may
be wasting items (depreciable items) but will still last a
considerable period. It is expected that a minority of non-cash
benefits will be non-wasting items.
The view taken in this article is that the discharge of a liability
for a person is not a non-cash benefit, and is therefore outside the
scope of this article. It is submitted that the approach of the Full
Federal Court in Burrill v FCT to the application of s 21(1) of the
Income Tax Assessment Act 1936 (Cth) (‘ ITAA 1936’) supports
this position.10 This is in spite of the fact that one could argue the
consideration received is a promise (or service) to meet a liability
rather than a cash receipt. For current purposes, waiver of a
liability will also not be treated as a non-cash benefit.11 The fact
that a debt waiver is treated as a category of benefit under the
Assessability of Payments Received under the Military Skills Award Programme
Ruling’); Australian Tax Office, Income Tax: Barter and Countertrade
Transactions, TR IT 2668, 13 February 1992; Australian Tax Office, Fringe
Benefits Tax: Sporting Clubs, TR MT 2032, 30 September 1986.
10 Burrill v Commissioner of Taxation (1996) 67 FCR 519. The Full Federal
Court said:
As Hill J said in Energy Resources [ FCT v Energy Resources of Australia Limited
[1994] FCA 1521; (1994) 54 FCR 25], the distinction [s 21(1)] draws is between payment in cash
and payment in kind. We do not think ‘cash’ is restricted to coins and notes (local
or foreign). In our view the phrase ‘consideration ... otherwise than in cash’ points
to a consideration that does not find expression in cash. The consideration in the
present case is a promise to pay money. That is not a consideration in kind, and
although it is not actually money, it sounds in money.
11 The benefit in the form of the waiver of a liability seems to have been treated
as a cash benefit to the taxpayer in the sense that s 21A of the ITAA 1936 (non-
cash business benefits) was not required in order to include the amount in
income as the proceeds of a business in Integrated Insurance Planning Pty Ltd
v Commissioner of Taxation (2004) 205 ALR 120, 139.
FBTAA 1986 12 does not undermine this because the FBTR is not
designed to be, and is not, restricted to non-cash benefits.13
There may be situations where a taxpayer has an option to
take cash instead of a non-cash benefit. For current purposes,
where such a choice exists, and a decision is made to take cash,
then this will generally be regarded as cash, and therefore will not
be a non-cash benefit. I say generally because the transaction may
reveal that a non-cash benefit has accrued to the taxpayer, and
then the taxpayer has realised it for a money sum. In this latter
situation, a non-cash benefit has accrued to the taxpayer; the
realization of the non-cash benefit for money is a separate event.
A distinction made by the ATO should be noted. At
paragraphs 11-13 of Miscellaneous Taxation Ruling MT 2032,
the ATO states:
11. For awards to players in the better paid teams a
distinction may be drawn between medals, plaques
and other trophies given to formally recognise
achievements, but not having functional utility, and
prizes in the form of valuable and useful goods such
as cars, TVs, etc.
12. The latter are properly subject to tax - either to
FBT if provided by the employer club (or associates)
or, as is the well-established position, to income tax
in the players’ hands if awarded by an independent
source such as a newspaper award.
13. Awards in trophy form such as medals, plaques,
cups, etc., are subject to neither FBT nor income tax.
They do not represent any intrinsic form of
remuneration. Their essential function is to recognise
and record the particular achievement of the recipient.
12 s 14.
13 Ibid ss 20, 30. The FBTR taxes certain cash benefits (e.g. reimbursements,
discharge of expense situations, living away from home allowances).
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For the purpose of this paper, the category of items identified
by the ATO as not having any intrinsic value will be viewed as
being non-cash items that are not a benefit (i.e. they are outside
this paper).14 Finally, the receipt of a non-cash benefit must be
expressed in its money value, which means Australian currency.15
Charging Provisions, Exemption Provisions and Anti-
Double Taxation Rules16
The term “charging provision” normally means that an
amount will come within the tax base, or a component of the tax
base, under the provision. Section 6-5 ITAA 1997 is clearly a
charging provision on this meaning. In light of s 6-10 ITAA 1997,
there is some doubt as to whether s 15-2 ITAA 1997 on its own
can be regarded as a charging provision.17 In spite of this, this
article will treat s 15-2 as a charging provision and no further
reference is made to s 6-10. Finally, in regard to Australia’s
FBTR, the definition of a ‘fringe benefit’ on its own cannot be
regarded as a charging provision because, for example, the
otherwise deductible rule (‘ODR’) may reduce the taxable value
of the benefit, in many cases to nil. Even if a taxable value for a
fringe benefit does emerge, that value must be grossed-up before
the FBT rate is applied to determine tax payable.18 Accordingly,
satisfying the definition of a fringe benefit does not necessarily
mean that an amount will be subject to the FBT regime. In spite
14 See also Income Tax Assessability of Payments Received under the Military
Skills Award Programme Ruling, [4], where the ATO also makes the distinction
between things having no intrinsic value and those that do have intrinsic value
in the form of remuneration.
15 ITAA 1936 s 21.
16 Each heading number in sub-part 2.1 corresponds with the number given to
the relevant item in the table, 125.
17 The main argument seems to be that s 15-2 does not contain jurisdictional
rules, but that s 6-10 does and that a charging provision must contain
jurisdictional limitation rules: ss 6-10(4) and ss 6-10(5).
18 FBTAA 1986, ss 5B, 5C, 66.
of this, the definition of a fringe benefit is the central entry point
into the FBT regime (and exclusion of the income tax) and that is
the key consideration in this article.
2.2.1 Section 6-5 of the ITAA 1997 (Income)
Section 6-5 states that a taxpayer’s assessable income
includes ‘income according to ordinary concepts’, which is called
ordinary income. Judges, in deciding cases over the years, have
effectively created categories (or schedules) of income according
to ordinary concepts. Two of the most important categories of
income are dealt with in this article, namely, ‘proceeds of
personal exertion’19 and ‘proceeds of business’.20 The question in
regard to both categories is usually framed in terms as to whether
the receipt is truly a product of, or the proceeds of, personal
exertion or the business respectively. This is determined by taking
account of all the facts and circumstances surrounding the receipt.
No one fact will usually be decisive.
2.2.1.1 Convertibility of a Non-Cash Benefit into Money
An overriding requirement of the income concept is that if a
benefit cannot be converted into money, it cannot be income.21 If
a non-cash benefit can be converted into money and it is
19 Commissioner of Taxation v Dixon [1952] HCA 65; (1952) 86 CLR 540 (Dixon CJ and
Williams J); Hayes v FCT; Scott v FCT [1966] HCA 48; (1966) 117 CLR 514 (‘ Scott v FCT’).
20 FCT v Squatting Investment Co Ltd [1954] UKPCHCA 2; (1954) 88 CLR 413 (‘ Squatting
Investment Co’); FCT v Myer Emporium Ltd [1987] HCA 18; (1987) 163 CLR 199, 199; FCT v
Montgomery [1999] HCA 34; (1999) 198 CLR 639, 649 [113]-[119]; Commissioner of Taxation
v Stone (2005) 222 CLR 289, 289 [16]-[19] (‘ Commissioner of Taxation v
Stone’). The ‘return from property’ principle ( Commissioner of Taxation v
McNeil (2007) 229 CLR 656, 656 [21]) and the ‘compensation receipts’
principle ( Commissioner of Taxation v Smith [1981] HCA 10; (1981) 147 CLR 578); Liftronic
Pty Ltd v FCT (1996) 66 FCR 175) developed by the courts are not dealt with in
this article.
21 Cooke and Sherden, 211-214; Payne v FCT, 299. See also Australian Tax
Office, Income Tax: Sportspeople – receipts and other benefits obtained from
involvement in sport, TR 1999/17, 24 November 1999 [54].
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otherwise income (e.g. from a recognised income-producing
activity), the amount of income is the realisable value of the
benefit.22 Whether the taxpayer actually converts the benefit into
money is not relevant, the key is whether it is capable of being
converted into money. This approach is consistent with the
principle that a ‘receipt must be characterised at the time it is
derived/received’.23
There is some debate about the precise formulation of the
non-convertibility principle involving non-cash benefits. Some
leading commentators have suggested that the principle is not as
stated above. Rather, the principle is, if a non-cash benefit is not
capable of being converted into money, there is income (provided
the
benefit
is
from
a
recognised
income-producing
source/activity), but the income is of a zero amount.24 For these
commentators, the presence of non-convertibility affects the
‘amount of income’, rather than the ‘presence of income’. In this
sense, the presence of non-convertibility is a valuation issue
rather than a characterisation issue. The wording of ss 21A(1)-
21A(4) of the ITAA 1936 - especially s 21A(2) - would seem to
support the ‘income of nil amount’ view.25 Section 21A was
enacted to ensure that non-cash benefits that were received as a
22 Donaldson v FCT (1974) 3 ALR 516, 533 (‘ Donaldson v FCT’). In Hayes v
FCT, Fullagar J referred to the market value of the shares received as being the
amount of income in the event that receipt of the shares was held to be income
to the recipient. In that case, the Australian Taxation Office (ATO) incorrectly
assessed the taxpayer on the face value of the shares received under the then
relevant income tax provision; s 25(1) of the ITAA 1936.
23 Constable v FCT [1952] HCA 64; (1952) 86 CLR 402.
24 P Burgess et al, Cooper, Krever & Vann’s Income Taxation: Commentary and
Materials (Thomson Reuters, 6th ed, 2009) [2.250]; R W Parsons, Income
Taxation in Australia: Income, Deductibility and Tax Accounting (The Law
Book Company Limited, 1985) [2.30-2.33].
25 Parsons, above n 24, [2.32]: one rationale for the principle - no matter which
view of the principle is taken - seems to be that the courts are reluctant to tax a
particular benefit unless the taxpayer can source funds from the benefit in order
to meet a tax obligation on the benefit.
product of a business, and which were not capable of being
converted into money, could be included in assessable income.26
In spite of the above, it is submitted that the correct position
in Australia, at least until the High Court authoritatively decides
the matter, is that there can be no income. The authority in
Australia is the Full Federal Court decision in Cooke and
Sherden.27 The principle was applied in Payne v FCT.28 In both
of these cases, the non-convertibility principle is couched in terms
of denying the existence of income.29
Various questions arise in regard to the meaning of non-
convertibility. For example, is a non-cash benefit to be treated as
not convertible into money merely because there is a contractual
provision preventing its conversion? Or, should the non-
convertible test focus on practical limitations to conversion (e.g.
difficulty of finding a buyer of a consumable) and ignore legal
restrictions, especially contrived ones?
First, in light of the decisions in Cooke and Sherden and
Payne v FCT, it is clear that non-convertibility can arise purely
from contractual obligations surrounding the giving of the
benefit. It is also submitted that the same holds true if non-
convertibility arises through a legal rule other than under a
26 Cooke and Sherden.
27 Ibid 211(free holiday won by business taxpayers, and which could not be
converted into money, was held not to be income).
28 Payne v FCT, 299 (receipt of flight rewards under a frequent flyer program).
29 On the face of it, there is no practical difference between: (a) a non-cash
benefit not having the character of income and (b) a non-cash benefit having the
character of income but having a taxable value of nil. In both cases, there is no
amount assessed as income. The issue will only become important where a
specific charging section dealing with non-cash benefits provides its own
valuation rule, but fails to override the non-convertibility principle. In these
cases, the ‘income with nil value’ approach will be important to the ATO. Where
the legislature has dealt with non-cash benefits through a specific charging
section, the legislature has ensured that the non-convertibility principle has been
overridden.
2015 17(1)
RECONCILING THE OVERLAP OF CHARGING
contract. The consequence of this is that a benefit that is
inherently convertible into money (e.g. non-wasting property) can
be made non-convertible through contractual stipulations of the
parties. Secondly, it is submitted that where a benefit, from a
practical viewpoint, is not convertible into money, it should be
treated as a non-convertible benefit. This is in spite of the absence
of a legal restriction on convertibility. The receipt of a cooked
meal at a remote location may provide an example.
2.2.1.2 Otherwise Deductible Rule
There is no express ODR that operates in regard to s 6-5 ITAA
1997. Briefly, an ODR prevents ‘over-taxation’” of a benefit by
reducing the taxable value of the benefit by the amount of the
deduction the recipient of the benefit would have obtained had
she or he incurred and paid to obtain the benefit. Another way of
putting it is that the benefit is used or consumed in the course of
an income-producing activity of the recipient, rather than in
private consumption. It will be appreciated that the ODR operates
on a ‘notional expenditure event’, and not an actual expenditure
event.
The absence of an ODR in regard to s 6-5 ITAA 1997 does
not necessarily result in over-taxation. First, most non-cash
benefits are provided in the context of employment and these will
be subject to the FBTR, which does have express ODRs for most
types of non-cash benefits. Secondly, even if a non-cash benefit
was assessable under s 6-5, it is submitted that the High Court
decision in Buckingham v FCT contains a judicial ‘equivalent’ of
an ODR in the employment or services context, so as to prevent
over-taxation.30 Justice Evatt made the following dicta comments
in regard to meals provided to the captain of a trading ship while
the ship was at sea and which the ATO was seeking to tax. His
Honour said:
30 (1934) 3 ATD 37, 39.
Assuming, as I do therefore, that the full value of the
meals should be regarded as part of his assessable
income, but that a deduction has to be made by reason
of the fact that solely by reason of the nature of the
employment, the alleged ‘income’ disappears so soon
as it appears, then the only deduction which is
applicable must be the full value of the meals
consumed.31
A couple of observations are worth making. First, it may not
strictly be an ODR because Evatt J appears to be talking about
giving an actual deduction through a deduction section rather than
reducing assessable income through a charging section. However,
this does not matter because the end result is the same. Secondly,
the scope of this judicial ODR is not clear, and it may only apply
to reduce the amount of income where the non-cash benefit is
consumed fairly quickly after receipt. When a non-cash benefit
has ‘more permanency’, the judicial ODR will not apply even
though the benefit is used by the recipient for income production.
What may assist in these circumstances though, is the rule in s 40-
185 of the ITAA 1997 in regard to the cost base of a depreciating
asset. Section 40-185 provides that the cost base of a depreciating
asset to a taxpayer includes the amount that was included in the
taxpayer’s assessable income on receipt of the non-cash benefit.
This then allows the taxpayer to take (actual) deductions for the
decline in value of the item, which effectively achieves the same
outcome as most current ODRs, except that the reduction in the
tax base is achieved over time.32 Section 40-185 provides the
deemed cost base inclusion no matter which assessable income
31 Ibid.
32 The once-only expenditure requirement in ODRs throughout the income tax
essentially means that in regard to non-cash benefits that are capital in nature,
the ODRs will not apply to reduce the taxable value of a non-cash benefit. This
is in spite of the fact that the non-cash benefit is used for income production.
This is where a rule like that in s 40-185 ITAA 1997 is particularly useful because
it overcomes the unfairness of the revenue requirement embedded in the current
ODRs. See sub-part 3.2.3 for a discussion of this in the context of fringe benefits.
2015 17(1)
RECONCILING THE OVERLAP OF CHARGING
section applied. There is no rule equivalent to s 40-185 in the
CGT regime, but this is of little consequence because most non-
cash benefits having a degree of permanence are likely to meet
the definition of a depreciating asset.33
2.2.1.3 Exempt Income, NANE Income
Section 23L(1) of the ITAA 1936 states that income that is
derived by way of the provision of a ‘fringe benefit’ is not
assessable income, and it is not exempt income (i.e. NANE
income).34 Section 23L(1) is sufficient to exclude fringe benefits
under the FBTAA 1986 from the recipient’s assessable income
under s 6-5 of the ITAA 1997. Section 23L(1A) of the ITAA 1936
states that income derived by way of the provision of a benefit,
that would be a fringe benefit if not for the benefit being an
exempt benefit, is exempt income of the recipient. Section
23L(1A) is sufficient to exclude benefits that are exempt benefits
under the FBTAA 1986 from the recipient’s assessable income
under s 6-5 of the ITAA 1997.35
33 The relevant part of s 40-30(1) ITAA 1997 states that a depreciating asset is
an asset that has a limited effective life and can reasonably be expected to
decline in value over time. It is also worth noting that the apportionment rule in
the depreciating asset regime (s 40-25(2)) can deal with the circumstance where
the non-cash benefit is only partly put to income-producing use. It is worth
noting that ITAA 1997 s 112-37 does provide an acquisition cost equal to the
assessable income inclusion but this section only operates in regard to the receipt
of a put option.
34 Somewhat importantly, an amount of NANE income does not absorb (reduce)
a prior-year tax loss before that loss can be used as a deduction against future
assessable income (taxable income): ITAA 1997 ss 36-15(3), 36-20.
35 Because s 23L(1A) of the ITAA 1936 makes exempt benefits under the FBTAA
1986 exempt income, rather than NANE, exempt benefits are required to absorb
a prior-year tax loss before a taxpayer can use such a loss as a deduction against
future assessable income: ITAA 1997 s 36-15(3).
Where a fringe benefit or exempt benefit would not be
income (e.g. non-cash benefit that is not convertible into money),
s 23L ITAA 1936 is not required to prevent double taxation
because s 6-5 will not include the amount in any event, because
the benefit is not income.36
2.2.2 Section 15-2 of the ITAA 1997 (Employment or Services
Rendered)
In order for s 15-2 of the ITAA 1997 to include an amount in
a taxpayer’s assessable income, three (or four) conditions need to
be satisfied. They are:
(a) The “benefit” must come within the definition of
only one of the items listed.37 They are: allowances,
gratuities, compensation, benefits, bonuses and
premiums;38
(b) The “benefit” must have been provided to the
taxpayer;39 and
36 Even if a non-cash benefit that cannot be converted into money is income of
a zero amount - a position this article rejects (Sub-Part 2.2.1.1) - no double
taxation will arise because a zero amount will be included in assessable income
under ITAA 1997 s 6-5.
37 Taxation Case B18 (1970) 70 ATC 78, 81.
38 Given that ‘benefit’ is a word of very wide connotation ( Taxation Case F18
(1974) 74 ATC 91, 93), most non-cash benefits will come within the term
benefit in ITAA 1997 s 15-2. With respect, the decision in AAT Case V60 (1988)
88 ATC 434 (taxpayer required to live in employer-provided accommodation as
a condition of employment but who preferred to live in own home was held not
to have obtained a benefit from the employer-provided accommodation) must
be regarded as questionable, or at least limited to the facts.
39 The requirement of ‘allowed, given or granted to him’ in the old s 15-2 (s
26(e) of the ITAA 1936) of the ITAA 1997 was not satisfied in Payne v FCT
because the benefit obtained by the taxpayer accrued to her by reason of her
contractual rights under the frequent flyer program with Qantas, rather than
being provided to her by Qantas or the employer. The second condition also was
not satisfied in Constable v FCT [1952] HCA 64; (1952) 86 CLR 402. It is submitted that the
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(c) The “benefit” must have been provided in respect
of employment, or in respect of services rendered.40
It is not enough to merely satisfy one or two of the conditions
for the section to apply.41
2.2.2.1 Non-Convertibility Doctrine
Section 15-2 of the ITAA 1997 does not require non-cash
benefits to be convertible into money in order for an assessable
income inclusion to arise. Relevant authorities for this point
include Donaldson v FCT and FCT v McArdle.42 The failure of
Foster J in Payne v FCT (frequent flyer benefits) to rely on the
non-convertibility doctrine as the basis for holding that s 26(e) of
the ITAA 1936 did not apply to tax the benefits also, by
words ‘provided to you’ in s 15-2 of ITAA 1997 have the same meaning as the
words ‘allowed, given or granted to him’ in old s 26(e) ITAA 1936: see s 1-3.
40 The majority judgments of Wilson, Brennan and Toohey JJ in the High Court
case of Smith v FCT (1987) 164 CLR 513 are the most authoritative statements
on the ‘in respect of employment’ concept in s 26(e) of the ITAA 1936 (now
ITAA 1997 s 15-2) (i.e. the benefit must be a product, incident or consequence
of the employment). See also the comments of the Full Federal Court in J & G
Knowles & Associates Pty Ltd v FCT [2000] FCA 196; (2000) 96 FCR 402, 402 [22]-[29] in the
context of the ‘in respect of employment’ requirement under the definition of a
fringe benefit in the FBTAA 1986 (i.e. there must be a discernible and rational
link between the benefit and employment, there must be a sufficient or material
connection between the benefit and employment). There is no reason to think
that the in respect of employment requirement in s 15-2 ITAA 1997 will differ
from that in the definition of a fringe benefit in FBTAA 1986. The Full Federal
Court decision in Commissioner of Taxation v Holmes (1995) 58 FCR 151
(‘ FCT v Holmes’) contains a discussion of the test in regard to the connection
required between a payment (benefit) and services rendered before s 15-2 ITAA
1997 can apply (i.e. there must be a real connection between the payment and
the services rendered): 151 [27]-[28].
41 Constable v FCT [1952] HCA 64; (1952) 86 CLR 402; Payne v FCT.
42 (1988) 89 ATC 4051, 4052; See also Case D23 (1972) 72 ATC 140, 148;
Case H54 (1976) 76 ATC 458, 461; Case P46 (1982) 82 ATC 218, 220; Case
F18 (1974) 74 ATC 91, 93-94.
implication, supports this.43 It is submitted that the valuation
formula in s 15-2 of the ITAA 1997, namely, value to the taxpayer,
is the thing that overrides the non-convertibility doctrine.44
2.2.2.2 Taxable Value
The assessable income inclusion is the ‘value to the taxpayer’
at the time of receipt of the benefit.45 First, unlike for some
benefits under the FBTAA 1986,46 this valuation formula is not
the cost of the benefit to the provider. Secondly, unlike s 6-5 ITAA
1997, it is not the realisable value of the benefit.47 A focus on the
words ‘value to the taxpayer’ alone implies that the subjective
circumstances and desires of the taxpayer are paramount in
determining value.48 If this were the case, factors that are peculiar
to the taxpayer and the benefit received could depress the value
43 The following comment on the old ITAA 1997 s 15-2 (s 26(e) of the ITAA
1936) by the ATO must be taken to be incorrect:
Where the benefit cannot be converted to money’s worth, such as the case with
non-transferable airline tickets, no amount can be assessable under section 25 or
paragraph 26(e) unless it falls for consideration as a non-cash business benefit
under section 21A of the ITAA.
Australian Taxation Office, Income tax and fringe benefits tax: Benefits received
under frequent flyer and other similar consumer award type programs, TR 93/2,
7 January 1993, [16]. TR 93/2 was withdrawn on 16 June 1999.
44 It is worth noting that if a non-cash benefit cannot be converted into money,
this fact is likely to depress the s 15-2 ITAA 1997 value compared to the same
benefit that is capable of conversion because objectively, the convertible benefit
has a wider range of ‘uses’ to the taxpayer.
45 FCT v McArdle (1988) 89 ATC 4051, 4058; Case 9 (1956) 7 CTBR (NS) 47,
54-56; Taxation Case F18 (1974) 74 ATC 91, 94.
46 See, eg, s 10 of the FBTAA 1986 (operating cost method for permitting use of
a motor vehicle, but note that s 10 also requires the inclusion of notional costs);
s 23 (amount of expense payment); s 43(a) (external property benefit).
47 Taxation Case P46 (1982) 82 ATC 218, 220.
48 Case 83 (1952) 2 CTBR (NS) 463; Case 65 (1963) 11 CTBR (NS) 396, 398;
Taxation Case D23 (1972) 72 ATC 140, 147; Taxation Case D59 (1972) 72
ATC 364, 367; Taxation Case F18 (1974) 74 ATC 91, 93; Taxation Case L10
(1979) 79 ATC 59, 60; Taxation Case P80 (1982) 82 ATC 390, 393. See also R
H Woellner et al, Australian Taxation Law 2014 (CCH Australia, 24th ed, 2014)
[4.160].
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of a given benefit,49 and make the task of valuation difficult. It is
noted that the fact the task of valuing a benefit is difficult does
not mean that s 15-2 ITAA 1997 does not apply.50
The authors of Australian Taxation Law 2014 suggest that
Bowen CJ in Donaldson v FCT applied a semi-objective test in
order to reduce the implications of, or the problems associated
with, a purely subjective test.51 The test set out by his Honour of
value to the taxpayer was ‘what a prudent person in [the position
of the taxpayer] would be willing to give for the rights [benefit]
rather than fail to obtain them.’52 However, it appears that his
Honour was merely drawing on the principle that is applied in the
land resumption jurisprudence where the term ‘value to the
owner’ is the critical guide in determining compensation payable
to a landowner whose property has been compulsorily purchased
by a government agency.53 It is submitted that the value to the
owner test in the land resumption jurisprudence encompasses a
mixture of subjective and objective considerations.54 In the end,
all the circumstances surrounding receipt of the benefit are
relevant in determining value including any restrictions on the
ability to convert the benefit into money.
2.2.2.3 Otherwise Deductible Rule
Like s 6-5 of the ITAA 1997, there is no express ODR rule for
s 15-2 of the ITAA 1997. Again, this does not necessarily lead to
over-taxation of a benefit. The comments in Sub-Part 3.2.1.2
concerning the ODR in regard to s 6-5 are equally relevant to s
15-2, and are hereby incorporated, including the point about s 40-
49 See, eg, AAT Case T76 (1986) 86 ATC 1076, 1089; and the cases cited therein.
50 Donaldson v FCT.
51 Woellner et al, above n 48.
52 Donaldson v FCT.
53 See Bowen CJ’s reference to Pastoral Finance Association Limited v The
Minister [1914] AC 1083 in Donaldson v FCT, 533.
54 See the commentary and cases cited in Alan Hyman, The Law Affecting
Valuation of Land in Australia (The Federation Press, 3rd ed, 2004) 273-302.
185 of the ITAA 1997 (deemed cost equal to the assessable
income inclusion).
2.2.2.4 Exempt Income, NANE Income
Section 15-2 ITAA 1997 does not apply if the value of a non-
cash benefit is included in assessable income under s 6-5 ITAA
1997 because it is ordinary income.55 There is no rule in s 15-2
that excludes the value of a non-cash benefit from inclusion in the
recipient’s assessable income under s 15-2 where the recipient
receives a fringe benefit or an exempt benefit under the FBTAA
1986. The old s 15-2 (s 26(e) of the ITAA 1936) did contain
express rules to exclude fringe benefits and exempt benefits from
inclusion in the assessable income of the recipient of the benefit.56
There is however a note under s 15-2 ITAA 1997 stating that s
23L of the ITAA 1936 provides that fringe benefits are NANE
income.57 The assumption, and one that is not necessarily sound,
is that s 23L of the ITAA 1936 will operate to exclude both fringe
benefits and exempt benefits from s 15-2 of the ITAA 1997. One
problem with ss 23L(1) and 23L(1A) of the ITAA 1936 is that they
only apply if an item is income derived. Where a fringe benefit or
exempt benefit is not income, ss 23L(1) and 23L(1A) cannot
apply to prevent ‘double taxation’. (Strictly, where exempt
benefits are involved, there is no double taxation that needs to be
prevented; it is more the aim of preserving the exemption
provided under the FBTAA 1986 through the exempt benefit).58
55 ITAA 1997 s 15-2(3)(d).
56 ITAA 1936 ss 26(e)(iv), 26(e)(v).
57 ITAA 1997 ss 2-45 and 950-100(1) state that notes form part of this Act (which
includes the ITAA 1936 and the ITAA 1997). However, ITAA 1997 s 2-35 makes
it clear that a note is not an operative rule. Accordingly, the status of the note
under ITAA 1997 s 15-2 is merely a helpful comment for the benefit of the reader
of the income tax law.
58 Some would challenge the label ‘double taxation’ in circumstances where a
gain is being taxed in the hands of two entities, which is the case with a fringe
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A non-cash benefit that cannot be converted into money
provides an example of a fringe benefit that is not income.59 If the
term ‘income’ is defined to mean an amount of assessable
income, instead of income on ordinary concepts, then s 23L(1) of
the ITAA 1936 can perform its full anti-double taxation role, and
s 23L(1A) of the ITAA 1936 could fulfil its preservation of
exemption role. There is no doubt that a word need not have the
same meaning everywhere it appears in a piece of legislation.60
Interpreting income in s 23L to mean an amount of assessable
income would give effect to the apparent purpose of s 23L,
namely, to prevent the double taxation of an economic gain, albeit
the double taxation involves separate taxpayers (i.e. provider of
benefit and recipient of benefit). Further, to restrict the word
income in s 23L to income on ordinary concepts would result in
prevention of double taxation where a benefit can be converted
into money, and would tolerate double taxation where a benefit
cannot be converted to money. It is submitted that such
differential outcome could not have been intended by parliament.
benefit (i.e. provider and recipient of a benefit). This author takes the view that
the label ‘double taxation’ is appropriate in these circumstances.
59 As noted in Sub-Part 2.2.1.1, this article rejects the suggestion that a non-cash
benefit that cannot be converted into money is income of a zero amount. Instead,
this article accepts that such benefits are not income. If the former
characterisation were correct, s 23L of the ITAA 1936 would clearly apply to
perform its anti-double taxation role, etc.
60 The word ‘income’ in ss 97 and 98 of the ITAA 1936 is not restricted to income
on ordinary concepts. Rather, the term income in these sections also
encompasses a net amount that subtracts expenses from income on ordinary
concepts (e.g. ‘surplus’ and ‘surplus income’: FCT v Totledge Pty Ltd (1982) 40
ALR 385, 393; ‘distributable net income’: Cajkusic v Commissioner of Taxation
[2006] FCAFC 164; (2006) 155 FCR 430, 430 [22]-[27]; ‘distributable income’: Bamford v
Commissioner of Taxation (2009) 176 FCR 250, 250 [43]). Further, based on
the High Court decision in Commissioner of Taxation v Bamford (2010) 240
CLR 481, 481[36]-[42], the receipts side of this net amount equation is not
limited to income receipts. See also, Clyne v Deputy Commissioner of Taxation
[1981] HCA 40; (1981) 150 CLR 1 (Gibbs CJ and Mason J); Cooper Brookes (Wollongong) Pty
Ltd v Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297 (Gibbs CJ and Mason and
Wilson JJ).
Finally, it may be very important that s 23L performs an anti-
double taxation role because there does not seem to be an
entrenched judicial principle of universal application against
double taxation,61 and s 6-25 of the ITAA 1997 is of no assistance
in the present circumstances.62
2.2.3 Definition of a “Fringe Benefit” in s 136(1) of the
The FBTAA 1986 has 12 categories of specified fringe
benefits (e.g. car benefits, property benefits, loan benefits) and a
residual category. Satisfying the definition of ‘fringe benefit’ in s
136(1) of the FBTAA 1986 is a necessary pre-requisite to the
imposition of fringe benefits tax, no matter what type of benefit
is involved. Briefly, the key ‘positive limbs’ of the definition of a
‘fringe benefit’ are:
(a) A benefit is provided;63
(b) The benefit is provided to an employee;64
61 In Executor Trustee & Agency Co of SA Ltd v FCT [1932] ArgusLawRp 58; (1932) 48 CLR 26, Dixon
J stated that: ‘No interpretation of a taxing Act should be adopted which results
in the imposition of double taxation unless the intention to do so is clear beyond
any doubt’. On the other hand, in Deputy Commissioner of Taxes v Executor
Trustee and Agency Co of South Australia Ltd [1938] HCA 69; (1938) 63 CLR 108, his Honour
accepts the notion that there is no reason to exclude from a taxpayer’s assessable
income the double income inclusion that occurs when a taxpayer changes from
an accruals basis of derivation to a cash basis of derivation in a subsequent year
where fees earned in the accruals year are received in the cash year. See also,
Evatt J’s comments in Richardson v FCT [1932] HCA 67; (1932) 48 CLR 192 concerning the
levy of tax on separate individuals in regard to the same income.
62 Section 6-25, an anti-double taxation rule, will not apply to prevent double
taxation because s 6-25 only applies where an amount is included in a taxpayer’s
assessable income twice by different assessable income provisions.
63 The definition of ‘benefit’ in s 136(1) of the FBTAA 1986 is extremely wide
( National Australia Bank Ltd v FCT [1993] FCA 531; (1993) 46 FCR 252, 254) and will cover
non-cash benefits related to employment.
64 Broadly, the term ‘employee’ is defined to mean someone entitled to receive
salary or wages under an employment contract. A benefit can be provided to an
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(c) The benefit is provided by the employer;65 and
(d) The benefit is provided in respect of the
employment of the employee.66
2.2.3.1 Salary or Wages Exception
After the positive limbs, the definition of a “fringe benefit”
contains a list of exceptions (negative limbs). The most important
one is salary or wages. Salary or wages is also defined in s 136(1)
of the FBTAA 1986. Paragraph (a) of the definition states that
salary or wages means: (1) a payment from which an amount must
be withheld (by payer) under a provision in Schedule 1 to the
Taxation Administration Act 1953 (Cth) (‘ TAA 1953’), and which
is listed in the Table in the s 136(1) FBTAA 1986 definition of
salary or wages and, (2) the payment must be assessable income.
Schedule 1 to the TAA 1953 contains the PAYG withholding
rules. In particular, s 12-35 in Schedule 1 to the TAA 1953 is
relevant, as s 12-35 is listed in the Table in the s 136(1) FBTAA
1986 definition of salary or wages.
Section 12-35 of the TAA 1953 mentions ‘salary’, ‘wages’,
‘commission’, ‘bonuses’ or ‘allowances’. In spite of being
distinct terms, salary or wages usually means the amount paid to
an employee for undertaking their normal employment duties and
normal hours of work (i.e. normal remuneration).67 Importantly,
associate of an employee and still be a fringe benefit. Sub-Part 2.3 explains why
the associate issue will not be dealt with in this article.
65 Broadly, the term ‘employer’ is defined to mean someone obliged to pay
salary or wages under an employment contract. A benefit can be provided to an
employee by an entity other than the employer, and still be a fringe benefit. Sub-
Part 2.3 explains why the analysis of such circumstances will not be dealt with
in this article.
66 Readers are referred to the comments in nn 41 in regard to the ‘in respect of
employment’ discussion there.
67 Mutual Acceptance Co Ltd v FCT [1944] HCA 34; (1944) 69 CLR 389 (DixonJ); AAT Case
1/97 (1996) 97 80 ATC 4424ATC 101, 109.
salary or wages are required to be paid in money.68 This strongly
suggests that the receipt of a non-cash benefit (e.g. use of
employer’s car) will not amount to salary or wages in s 12-35.
It is submitted that the terms, ‘commission’, ‘bonuses’ and
‘allowances’ in s 12-35 of the TAA 1953 also require the
‘advantage’ to be paid in money form. To not require this would
be inconsistent with the approach to interpreting salary or wages,
and would tend to leave little scope for the operation of the
FBTAA 1986 because once an advantage is found to be one of
salary, wages, commission, etc, the taxation of the advantage is
moved into the income tax, and not the FBTAA 1986. In any
event, the standard definitions tend to support the idea that they
involve money. The term ‘commission’ usually means an amount
payable to a person (e.g. salesperson) in return for services
provided, where the amount payable is in proportion on a
percentage basis, to the value of sales made by the person or value
of the transaction executed by the person, etc.69 The term bonus
usually refers to ‘something given or paid over and above what is
due and payable for ... services. Often it is paid out of profit
realised, in reward to those whose services have contributed to
the making of the profit ...’70 The term ‘allowance’ in the context
of an employment relationship usually means ‘a grant of
something additional to ordinary wages for the purpose of
meeting some particular requirement connected with [the
68 Section 323(1) of the Fair Work Act 2009 (Cth) requires employers to pay
employees in relation to the performance of work in money, which can include
cash, cheque or electronic funds transfer to an account of the employee.
69 Mutual Acceptance Co Ltd v FCT [1944] HCA 34; (1944) 69 CLR 389 (Dixon J).
70 Murdoch v Commissioner of Pay-roll Tax (Vic) (1980) 143 CLR 629, where
Mason, Murphy and Wilson JJ approve of McInerney J’s description in
Commissioner of Pay-roll Tax (Vic) v Trustees of Estate of Adams (Deceased)
(1980) 80 ATC 4085, 4087. See also the description of a bonus by Kitto J
(generally means ‘a gratuitous addition to contractual remuneration’2 in
Attorney-General (Cth) v Schmidt (No 2) [1963] HCA 12; (1963) 109 CLR 169, 172-173; also
cited by Gibbs J with approval in Murdoch v Commissioner of Pay-roll Tax (Vic)
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employment] or as compensation for some unusual conditions of
[the employment].’71
Subject to the comments below about exempt benefits, a non-
cash benefit will remain a fringe benefit because the salary or
wages negative limb does not remove it from the definition of
fringe benefit. It is also noted that a non-cash benefit can still be
a benefit received in respect of employment even if the benefit is
not in the nature of income (e.g. cannot be converted into
money).72
2.2.3.2 Exempt Benefits Exception
Exempt benefits are also taken out of the definition of a fringe
benefit,73 and they can be found in various parts of the FBTAA
1986.74 Examples of exempt benefits where ‘non-cash benefits’
are involved are: (a) use of certain motor vehicles where private
use is limited (e.g. travel from home to work);75 (b) property
benefits consumed on employer’s premises on a working day;76
(c) residual benefit in the form of child-care on employer’s
premises;77 (d) property benefit in the form of a work-related item
(e.g. portable electronic device);78 and (e) entitlement to use an
airport lounge membership.79
2.2.3.3 Taxable Value of Fringe Benefit
71 Mutual Acceptance Company Ltd v FCT [1944] HCA 34; (1944) 69 CLR 389.
72 FBTAA 1986 s 148(1)(g).
73 Ibid s 136(1)(g) (definition of ‘fringe benefit’).
74 Some exempt benefits are contained within the division dealing with each
category of benefit, and others are contained in FBTAA 1986 Part III Division
13 (Miscellaneous exempt benefits).
75 FBTAA 1986 s 8(2).
76 Ibid s 41(1).
77 Ibid s 47(2).
78 Ibid s 58X.
79 Ibid s 58Y.
Each category of fringe benefit and the residual category have
their own valuation rules, but some valuation rules are common
to some categories of benefits. For some benefits there is a one-
step valuation rule; for others there are two-steps; and for others
there can be three-steps. The first step (and where there is only
one-step) is referred to as the prima facie taxable value rule in this
article. Where there are two-steps, the second step is usually
referred to as a recipient’s contribution or recipient’s payment
and, where present, this reduces the prima facie taxable value of
the benefit by the amount of the recipient’s payment. Where there
are three-steps, the third step is referred to as the ODR and, where
satisfied, this further reduces the taxable value of a benefit (Sub-
Broadly stated, prima facie taxable value rules (step one) fall
into the following categories: (a) cost to the employer,80 (b)
market value,81 (c) saving to the employee,82 and (d) statutory
formula.83 The recipient’s contribution rule (step two) reduces the
prima facie taxable value of a benefit where the employee has
contributed to the cost of the benefit.84 This rule is present in
many categories of benefits.85
2.2.3.4 Otherwise Deductible Rule
The FBTAA 1986 does contain a number of ODRs. The role
of an ODR is to reduce the prima facie taxable value of a benefit
(step three) as determined under the appropriate valuation rule.
80 Ibid ss 10 (car benefit), 15 (debt waiver benefit), 23 (expense payment
benefit), 39 (tax-exempt body entertainment benefit), 43(a) (external property
benefit).
81 Ibid ss 26 (housing benefit), 39D (car parking benefit).
82 Ibid ss 18 (loan benefit), 33 (airline transport benefit). This category can give
a similar result to that of market value.
83 Ibid ss 9 (car benefit), 36 (board meal benefit).
84 Ibid s 136(1) (definition of ‘recipients [sic] contribution’).
85 Ibid ss 9(1), 10(2) (car benefits), 23 (expense payment benefit), 33 (airline
transport benefit).
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An ODR is present in regard to a number of fringe benefits (e.g.
loan benefits,86 expense payment benefits,87 property fringe
benefits,88 and residual benefits89). However, not all benefits
subject to the FBTR contain an ODR mainly because an ODR is
not required in all circumstances to prevent over-taxation arising,
and the nature of a particular benefit does not encompass
circumstances where an ODR is required (e.g. there can be no
consumption of the benefit in the course of any activity).
Put briefly, the taxable value of a fringe benefit will be
reduced if, had the employee incurred and paid to acquire the
benefit (instead of having been given the benefit), the employee
would have obtained a deduction for that cost. The reduction in
taxable value is the amount of this notional deduction.90
One arguably unfair aspect of the ODRs in the FBTAA 1986
is that they can only apply to reduce the taxable value of a benefit
where the whole of the ‘hypothetical expense’ would have been
deductible to the recipient of the benefit (employee) in the year of
‘incurrence’ (i.e. once-only deduction); if some of the deduction
would have been obtained in a future income year, the ODR is
not satisfied.91 Obtaining a decline in value deduction under the
depreciating asset regime will usually not qualify because the
86 Ibid s 19.
87 Ibid s 24.
88 Ibid s 44.
89 Ibid s 52.
90 See, eg, National Australia Bank Ltd v FCT [1993] FCA 531; (1993) 46 FCR 252 , where bank
employees provided with subsidised loans would have obtained deductions for
interest on the loans because the loan funds were used for income production;
Re Pollak Partners Pty Ltd and Deputy Commissioner of Taxation (1998) 98
ATC 2213, where employee trainers provided with a benefit in the form of lunch
at a local hotel would have been able to obtain a deduction for the cost of the
lunch, because it was a requirement of employment to discuss the training
material with trainees over lunch.
91 FBTAA 1986 s 136(1) (definition of ‘once-only deduction’).
deduction is not limited to the year of incurrence.92 It is also
important to note that s 40-185 of the ITAA 1997 (deemed cost
base for asset) cannot assist because no amount was included in
the employee’s assessable income through receipt of the benefit
(depreciating asset).93
2.2.3.5 Exempt Income, NANE Income
As noted in Sub-Parts 2.2.1.3 and 2.2.2, where a fringe
benefit or an exempt benefit has been provided, s 23L of the ITAA
1936 is designed to exclude the benefit from the recipient’s
assessable income.
2.2.4 Section 6-5 of the ITAA 1997, in Conjunction with
Section 21A of the ITAA 1936
2.2.4.1 Section 21A is not a Charging Provision, Role of s 21A,
Etc
Unlike ss 6-5 and 15-2 of the ITAA 1997, s 21A of the ITAA
1936 is not a charging provision. That is, s 21A of the ITAA 1936
does not include an amount in a taxpayer’s assessable income.
The main role or function of s 21A is to overcome the non-
convertibility doctrine in regard to ‘non-cash business benefits’
derived by a business taxpayer under Australia’s income tax.94
This ‘limited role’ of s 21A is consistent with its history of
addressing a particular ‘mischief’ (i.e. introduced to overrule the
principle in Cooke and Sherden).95 However, s 21A also goes on
92 ITAA 1997 s 40-80(2) does provide an immediate deduction for the cost of a
depreciating asset where certain conditions are satisfied (e.g. cost does not
exceed $300).
93 Of course, the taxable value of the benefit enters the FBT base of the employer
(provider). It is hard to see how this is not a deliberate and intended outcome.
94 ITAA 1936 s 21A(1). See also the comments of Deputy President AM Blow
in AAT Case 7/97 (1997) 97 ATC 143, 145.
95 Somewhat strangely, because of ITAA 1936 s 21A(4) (provider of benefit does
not obtain a deduction for the cost because the expenditure is ‘entertainment’),
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to provide a valuation rule for such benefits (i.e. what is the
amount of assessable income).96 Perhaps not surprisingly, s 21A
also provides a valuation rule for non-cash business benefits that
would in fact be convertible into money. The words ‘whether or
not convertible to cash’ in brackets in the introductory part of s
21A(2) is the authority for this. Accordingly, s 21A seems to go
further than just addressing the problem that confronted the ATO
in Cooke and Sherden so that the section becomes an exclusive
code for all non-cash business benefits. To be clear though, s 21A
only applies where the benefit is a product of a business.97
Among other things, the application of s 21A of the ITAA
1936 depends on a taxpayer deriving a ‘non-cash business
benefit’. Where the taxpayer has been given an item of property
that is not money, or provided with services, it is clear that such
property or services are non-cash business benefits. It is
suggested that s 21A will not apply to the receipt of cash or cash
equivalent,98 in spite of the fact that the definition of a non-cash
business benefit incorporates the term ‘property’. Therefore, s
21A should not apply to allowances, bonuses, reimbursements or
discharges of liabilities of monetary amounts. The comforting
thing for the ATO is that if a discharge of a liability is held to be
a benefit that is not convertible into money, s 21A can apply to
prevent under-taxation.
2.2.4.2 Taxable Value of Non-Cash Business Benefit
the taxpayers in Cooke and Sherden may again not be taxed today if the same
facts arose.
96 ITAA 1936 s 21A(2).
97 Strangely, this is confirmed through the definition of ‘income derived by a
taxpayer’ in s 21A(5) of the ITAA 1936: s 21A(1). It is interesting to note that
Deputy President AM Blow in AAT Case 7/97 (1997) 97 ATC 143 did not refer
to this requirement in reaching the conclusion that ITAA 1936 s 21A applied to
the loans made by a principal to agents where the relationship was one of
independent contractors.
98 A cash equivalent encompasses a direct deposit into a bank account, electronic
transfer of funds into a bank account, etc.
The first step in determining the taxable value is the arm’s
length value of the benefit. This means the amount the taxpayer
would have paid to obtain the benefit from the provider in an
arm’s length dealing.99 Where the benefit is not convertible into
money, restrictions on conversion are disregarded in determining
the arm’s length value.100 The second step is the recipient’s
contribution rule; where the taxpayer contributes to the cost of the
benefit, the taxable value will be reduced by this contribution.101
The third step is the ODR (see below). A fourth step is the
deduction denial for entertainment expenditure. In short, if the
provider of the benefit was denied a deduction for the cost of the
benefit because the expenditure was entertainment, the recipient
will reduce the s 21A taxable value by the amount of the non-
deductible entertainment expenditure.102
2.2.4.3 Otherwise Deductible Rule
Section 21A does contain an ODR,103 and this ODR is similar
in operation to those in the FBTAA 1986 (e.g. requires a once-
only deduction). It is also worth remembering s 40-185(1) of the
ITAA 1997. This section gives a deemed cost for commencing to
hold a depreciating asset equal to the assessable income inclusion
that arose on receipt of the asset (benefit).
2.2.4.4 Exempt Income, NANE Income
Where the total of a taxpayer’s non-cash business benefits
under s 21A of the ITAA 1936 do not exceed $300 in an income
99 ITAA 1936 ss 21A(2), 21A(5) (definition of ‘arm’s length value).
100 Ibid s 21A(2)(b).
101 Ibid ss 21A(2)(a), 21A(5) (definition of ‘recipient’s contribution’).
102 ITAA 1997 s 32-5 provides the deduction denial for entertainment
expenditure.
103 ITAA 1936 s 21A(3).
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year, the amount is exempt income.104 If the s 21A amount is more
than $300, no amount is exempt (i.e. whole amount is assessable).
Transaction/Arrangement/Activity
Each heading number in this Sub-Part corresponds with the
number given to the relevant item in the table in Part 3. It is also
noted that the categories of transactions, etc, follow on from the
categories created by the income tax rules in the relevant charging
provisions.
The notes in Part 3.1 to each entry in the table deal with the
particular problems raised by relevant characteristics of the
benefit (e.g. convertible into money). It is assumed that the
recipient of the benefit is the ‘taxpayer’ (i.e. taxpayer is the one
involved in the relevant transaction).105 For the most part, it is also
assumed that the provider of the benefit is the party that obtains
the benefit of the recipient’s ‘services’. The idea here is to avoid
the troublesome issues that arise where a third party provides
benefits to the recipient.106 I say for the most part because for a
small number of arrangements that need to be dealt with in this
104 Ibid s 23L(2).
105 The provision of receipts to ‘associates’ of the taxpayer raises a new set of
problems, including the problem of identifying the relevant employee in regard
to which a benefit was provided, as is required from the decision in
Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd
[2007] FCAFC 16; (2007) 158 FCR 325. To deal with them in this article would greatly expand the
length of the article.
106 For example, there would be difficulty in satisfying the definition of a fringe
benefit in FBTAA 1986 s 136(1), where a third party provides the benefit: FBTAA 1986 s 136(1)(e), (ea) (definition of ‘fringe benefit’). Further, there may
also be a difficulty in satisfying the ‘in respect of employment’ requirement in
ITAA 1997 s 15-2 where a third party provides the benefit: Payne v FCT, 301.
In light of the decision of the Full Federal Court in Federal Coke Co Pty Ltd v
FCT (1977) 15 ALR 449, there may also be a difficulty in satisfying the income
concept. To deal with these issues in this article would greatly expand the length
of the article.
article, benefits may come from a third party (e.g. recognition of
an achievement).
2.3.1 Proceeds for, or Product of Personal Exertion, which is
This category focuses on the activity of personal exertion that
is performed within an employment relationship. For all salary
and wage earners in Australia (i.e. employees under an
employment contract), this is the appropriate characterisation.
The case of Kelly v FCT 107 provides an example of a receipt that
was the product of personal exertion that was employment.
Arguably, the payments in Dean & Another v FCT 108 also provide
an example of a receipt that was the product of personal exertion
that was employment. 2.3.2
Proceeds for, or Product of
Personal Exertion, which is not Employment and not a
This category must accommodate the situation where the
activity does not amount to an employment relationship, but it
also falls short of being a business. This can include the situation
where the recipient does have employment, but the benefit is not
connected with their employment.109 There is considerable case
law on the factors to take into account in determining whether a
relationship between a worker and an entity that needs work done
is one of employment or one of independent contractor.110 While
107 Kelly v FCT (1985) 80 FLR 155, where an Australian rules footballer
received a $20,000 payment for winning the best and fairest player in the
Western Australian Football League from a TV station, in addition to match
payments of $150 per game from his club
108 McLean v FCT (No 2) (1997) 78 FCR 140, where payment was made to
senior employees by ultimate holding company of employer in order to get
senior employees to agree to continue in the employment for 12-months.
109 The facts in FCT v Holmes provide an example of this situation.
110 For a recent case that collects many of the authorities, see Roy Morgan
Research Pty Ltd v Commissioner of Taxation [2010] FCAFC 52; (2010) 184 FCR 448. On Call
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this distinction assists in determining whether or not an
employment relationship exists, it does not assist in determining
whether an independent contractor’s activities amount to a
business.
The line between a business and a mere independent
contractor is not clear. Logically, the notion of an ‘independent
contractor’ and a ‘business’ are not mutually exclusive (i.e. the
two labels can apply to the same circumstance). Similarly, and the
relevant point for this article, the line between ‘services rendered’
and a ‘business’ is unclear.111 It is clear that the absence of
employees is not enough to deny the presence of a business. The
High Court’s approach in Commissioner of Taxation v Stone and
Spriggs v FCT; Riddell v FCT 112 provides considerable support
for this, as in both cases a conclusion of a business was reached,
yet there were no employees of either ‘business’. A similar point
can be made in regard to number of clients, that is, the presence
of a very small number of clients did not prevent the High Court
in both cases reaching the conclusion of a business. It appears that
the threshold for a business is fairly low.
In the end, determining whether an activity that is not
employment falls short of being a business requires consideration
of all the usual indicators of what activity might amount to a
business. The following cases, most of which involve isolated
services, provide examples of receipts that are for services
rendered but which do not involve employment, and are likely to
fall short of a business:
Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (2011)
[2011] FCA 366; 279 ALR 341 also provides a good discussion of the factors that are relevant to
the issue.
111 In Integrated Insurance Planning Pty Ltd v Commissioner of Taxation (2004)
205 ALR 120, Nicholson J effectively held that the gain made by the taxpayer
in regard to the relationship between an agent and a general insurance company
was both the product of services rendered (140-141) and a business (138).
112 Spriggs v Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1.
1.
Brent v FCT: payment received by
taxpayer for making herself available for
interview by journalists, disclosing relevant facts
of her life with her husband (Ronald Biggs, one of
the Great Train Robbers) and lending her name to
the stories written by the journalists;113
2.
FCT v Holmes: salvage reward payment
received by a marine engineer who was part of the
crew (employee) on an anchor handling tug and
supply vessel that came to the assistance of an oil
tanker that had sent out a Mayday message as it
was floating towards shore;
3.
Brown v FCT: payment received by the
taxpayer from a development company in
Australia for introducing (and for providing other
services) a Japanese development company, who
wished to purchase suitable land in Australia, to a
development company in Australia that had land
available for sale;114 and
4.
Stone v FCT in the Full Federal Court:
receipts of sponsorship monies from commercial
firms and receipts of appearance fees for attending
functions by the taxpayer who was a high profile
sportswoman.115
2.3.3 Proceeds of, or Product of a Business
113 Brent v FCT [1971] HCA 48; (1971) 125 CLR 418.
114 Brown v Commissioner of Taxation (2002) 119 FCR 269.
115 Stone v Commissioner of Taxation [2003] FCAFC 145; (2003) 130 FCR 299. In light of the High
Court decision this case, it is also likely that the receipt of the sponsorship
monies is also the product of the business that the taxpayer was held to have
been carrying on.
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For all operators of businesses in Australia, this will be the
appropriate characterisation. The discussion in Sub-Part 2.3.2
about the difficulty of distinguishing between a taxpayer that is
merely rendering services, as opposed to operating a business, is
incorporated here. The following cases provide examples of
receipts that may be the product of a business:
1.
Squatting Investment Co provides an
example of a receipt that was the product of the
taxpayer’s business, rather than a mere gift given
on personal grounds; 116
2.
Cooke and Sherden seems to provide an
example of a benefit that was the product of the
taxpayers’ business;117
3.
Commissioner of Taxation v Stone
provides an example of a taxpayer who was held
to be in the business of ‘turning her athletic
activities to account for money’, or in the
business of ‘deriving financial reward from
competing and winning in the athletics arena’;118
and
4.
Case V6.119
116 Case involved voluntary payment received in 1949, by a taxpayer who
conducted a business of wool growing, in consideration for, or as an extra
payment for, the supply of wool to the Australian government during 1939-
1946 under a compulsory wool purchase program.
117 Case involved benefit received by taxpayers’ operating a business of buying
and selling soft drinks door-to-door.
118 Case involved a high profile sportswoman (javelin thrower) who pursued
commercial sponsorships and obtained three commercial sponsors, who had
made some paid appearances at functions and who had employed a manager.
119 AAT Case V6 (1987) 88 ATC 140. This case involved a taxpayer who
operated a news-agency business won a motor vehicle from the publisher of a
newspaper, under an incentive program, for achieving the largest growth in sales
of relevant papers above a target level.
2.3.4 Proceeds of, or Product of, a Personal Relationship
between Giver and Receiver (i.e. Mere Gift)
The central idea here is that the benefit is received because of
the personal relationship between the giver and the recipient. The
most common everyday examples of this are non-cash ‘transfers’
between family members. But even where family members are
involved, especially in a family business situation, there may be
times where it is not clear whether the benefit is given on personal
grounds.
This category can also arise outside of the family situation.
Scott v FCT 120 and Hayes v FCT 121 provide examples where the
receipt or benefit was the product of a personal relationship
between the giver and the taxpayer (i.e. mere gift). Even if
benefits involve a series of regular or periodical ‘mere gifts’, they
remain mere gifts.122
It is suggested that this situation will not arise often in regard
to business taxpayers. It is also suggested that the decision and
reasoning in The Federal Coke Company Pty Ltd v FCT
(compensation receipt of parent company diverted to taxpayer) is
not a case of a mere gift.123
120 Case involved a trusted family solicitor who received a large voluntary
payment from a long-term client and friend.
121 Case involved a successful businessman who voluntarily gave an accountant
shares in a public company, in circumstances where the accountant had at
various times worked for the businessman and was also a personal friend. The
facts in Christie v FCT [1956] HCA 20; (1956) 96 CLR 59 involved the same donor and similar
facts to those in Hayes v FCT.
122 Stone v FCT [2002] FCA 1492; (2002) 196 ALR 221, 242 (Hill J).
123 Federal Coke Co Pty Ltd v FCT (1977) 15 ALR 449. The better explanation
for the non-income conclusion is that the receipt could not be related to an
income-producing activity of the taxpayer.
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2.3.5 Reward as a Mark of Esteem, Recognition of an
Achievement or Respect for Receiver124
The central idea is fairly easy to state, but distinguishing this
categorisation from a situation of proceeds of personal exertion
on certain facts may be difficult.125 The reason is that usually, the
benefit that is supposedly a mark of esteem or recognition of an
achievement will follow upon a period of sustained service or the
provision of quality service by the recipient of the benefit.126
Where the service is given voluntarily, there should be little
trouble in concluding the benefit will be a mark of esteem, etc. In
addition, where the ‘service’ involves a sustained activity that
involves some payment, but is viewed as a mere pastime, hobby,
etc (see Sub-Part 2.2.6 below for examples), there should be little
difficulty in concluding the benefit is a mark of esteem, etc. One
common feature of benefits under this category is that they are
very likely to be one-off benefits. That, after all, is usual in
recognising someone’s achievement(s).
The English case of Moore v Griffiths (Inspector of Taxes) 127
provides an example of such a case. In Australia, the judgment of
Windeyer J in Scott v FCT provides a number of examples of such
situations. They are: (1) gift in a will given to a servant in the
employment of the deceased prior to death where the servant had
124 It is worth remembering that the ATO has stated that things like trophies,
medals, plaques, etc, are not regarded as an intrinsic form of remuneration and
do not have functional utility. These items are not treated as a benefit for the
purpose of this article.
125 It can be taken that there is no distinction between a mark of esteem,
recognition of an achievement or respect for receiver. Accordingly, these three
situations are treated as one in this article.
126 There is an argument that the taxpayer’s circumstances in Kelly v FCT (1985)
80 FLR 155 should have been characterised under this category, however it was
not characterised under this category.
127 [1972] 3 All ER 39, involving payment made by the English Football
Association to a player, who was part of the England World Cup squad that won
the Soccer World Cup in 1966.
been fully remunerated for their work and the will expressed the
gift as being for long and faithful service; (2) gift in a will by a
grateful testator to a doctor, or gift given before death to the
doctor; (3) members of a society who made a gift to a person who
had rendered services to the society; and (4) reward given to a
person who had found lost property.
The facts in Class Ruling CR 2002/83 could also fit within
this category.128 The facts in Taxation Ruling IT 2145, in which
payment of an amount of $40 000 under the BHP Award for the
Pursuit of Excellence program is made to a person who has
excelled in their field (e.g. engineering), could also fit within this
category.129
2.3.6 Proceeds of a Pastime, Hobby, Recreation or an Activity
that falls short of being a Business
This category covers activities that can be viewed as a
pastime, hobby or recreation (e.g. playing sport on the weekend,
playing chess, most gambling activities, lotteries, collecting and
128 This case involved cash prizes awarded to scientists, teachers of science, etc
under the various categories of the Science Awards provided by the Prime
Minster. See also Australian Tax Office, Income Tax: Science Prize: The
Australian Council of Deans of Science University Science Teaching Prize, CR
2003/71, 1 July 2003 (‘ Income Tax: Science Prize Ruling’) for another example
of this category (The Australian Council of Deans of Science University Science
Teaching Prize of $30,000, presented to recognise a Scientist who has made an
outstanding contribution to science education in Australia).
129 It is worth noting that in both Australian Tax office, Income Tax: Science
Prize Ruling and Australian Tax Office, Income Tax: BHP awards for the
pursuit of excellence – whether assessable income, IT 2145, 19 March 1985, the
term windfall gain is also used to describe the circumstance of the recipient
winning the relevant prize.
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swapping collectibles).130 Class Ruling CR 2009/42131 provides
an example of a taxpayer engaging in a pastime or a hobby.132 On
a similar basis, most participants in ‘weekend sport’ (e.g.
Australian Rules football players, rugby league players) who
receive a similar level of payment for playing as that received by
referees, as outlined in Class Ruling CR 2009/42, provide other
examples of this category.
The characterisation in this note can also cover situations that
cannot reasonably be called a pastime, hobby or recreation, as the
taxpayer is clearly trying to make money from the activity. In
other words, the taxpayer is trying to conduct a business (and
130 Gambling on poker machines was not a business: Case 1/2003 2003 ATC
101; participation in five car racing events per year was held not to be a business:
Taxation Case C18 (1971) 71 ATC 77.
131 This case involved soccer referees who receive payments from Football NSW
Ltd to officiate in Football NSW Premier League soccer matches as Grade 20
Referees (Referees, Assistant Referees or 4th Officials) and who receive match
fees in the range of $49 to $89. Given that the fees do not usually cover costs,
another way of looking at this is to say that the match fees are a “mere
contribution to the costs” of pursuing the pastime or hobby. The idea of a mere
contribution to costs seems to come from the case of FCT v Groser (1982) 65
FLR 121, 121; a property income case. The honorarium paid to the taxpayer in
AAT Case Z16 (1992) 92 ATC 183 at 187 was characterised as a contribution to
the costs of performing her voluntary role.
132 There are many other class rulings that reach the same pastime or hobby
conclusion in regard to umpires, coaches, etc, of various sporting codes in
Australia: see for example, Australian Tax Office, Income tax: assessable
income: cricket umpires: Burnie Cricket League Inc. receipts, CR 2003/63, 1
October 2002; Australian Tax Office, Income Tax: assessable income: cricket
scorers: Melbourne Cricket Club Inc. receipts, CR 2003/73, 1 July 2003;
Australian Tax Office, Income tax: assessable income: football umpire coaches
and umpire observers: leagues and associations affiliated with the West
Australian Football Commission Inc. receipts, CR 2004/70, 1 July 2003;
Australian Tax Office, Income tax: assessable income: basketball referees:
Townsville Basketball Inc. receipts, CR 2005/52, 1 July 2004; Australian Tax
Office, Income tax: assessable income: football umpires: Eastern Districts
Football League receipts, CR 2006/51, 1 July 2003; Australian Tax Office,
Income tax: assessable income: Rugby League Officials: Western Australia
Rugby League Referees Association, CR 2007/24, 1 January 2006.
claims to be), but the activities fall short of there being one. In the
gambling area, Evans v FCT 133 provides an example where
activities directed, at least in part, at making money, fell short of
being a business.134 Outside the gambling area, the activity
associated with the growing of pine trees in Thomas v FCT 135 also
provides an example of this. In contrast, the taxpayer’s activities
in Thomas v FCT 136 regarding the growing of avocado trees and
macadamia trees were held to be a business.
3. TABLE: INCOME TAX TREATMENT FOR NON-CASH
BENEFITS FROM PERSONAL EXERTION, BUSINESS AND
CONTRASTING ACTIVITIES137
Table Charging provisions under Australia’s ‘income tax’
133 Evans v FCT (1989) 89 ATC 4540.
134 Gambling or lottery winnings are at times also characterised as windfall
gains.
135 Thomas v FCT (1972) 72 ATC 4094.
136 Ibid.
137 To repeat, a reader should refer to the notes to the table in Part 3.1 and the
commentary in Part 2 in order to establish the hierarchy of operation of a
charging provision, where more than one charging provision could apply.
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RECONCILING THE OVERLAP OF CHARGING
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Notes to Entries in Table in Part 3138
If the benefit can be converted into money, it will be income.
The assessable income inclusion is the realisable value of the
benefit. A judicial ODR should be available for most benefits if
it is consumed in the course of the employment. However, given
that most non-cash benefits will be fringe benefits or exempt
benefits under the FBT regime, there will not be an assessable
income inclusion. If the benefit cannot be converted into money,
it will not be income in any event.
The benefit, whether or not convertible into money, satisfies
the positive limbs of s 15-2 of the ITAA 1997. The amount of
assessable income will be the value to the taxpayer of the benefit.
A judicial ODR should be available for most benefits if the
benefit is consumed in the course of the employment. There will
be a ‘double taxation’ problem if the benefit also comes within s
138 For the most part, the commentary here is brief and without elaboration, it
being assumed that the reader has read Parts 2 and 3 of the paper. However,
some detailed commentary is required where an analysis of the CGT regime is
required for comprehensiveness.
6-5 of the ITAA 1997, but this will only be the case where the
benefit is convertible into money. The double taxation problem is
resolved because s 15-2(3)(d) gives priority of operation to s 6-5.
Given that most non-cash benefits will be fringe benefits or
exempt benefits under the FBTR, there will not be an assessable
income inclusion under s 15-2.
Most non-cash benefits will come within the definition of a
‘fringe benefit’ in s 136(1) of the FBTAA 1986. If so, the value of
the benefit should not be included in the employee’s assessable
income. A legislative ODR is available under the FBTAA 1986 to
prevent over-taxation. If the benefit is income on ordinary
concepts, s 23L(1) of the ITAA 1936 excludes the amount from
the employee’s assessable income. If the benefit is caught by s
15-2 of the ITAA 1997, but it is not income (e.g. benefit not
convertible into money), it is not clear which provision excludes
it from the employee’s assessable income. As noted earlier, s
23L(1) of the ITAA 1936 strictly read, only applies when the item
is income. Perhaps, the term ‘income’ in s 23L(1) means ‘an
amount of assessable income’. In any event, the ATO is unlikely
to seek double taxation.
Section 6-5 of the ITAA 1997, in conjunction with s 21A of
the ITAA 1936, will not apply to receipt of the benefit because s
21A only applies to a business taxpayer.139 In short, the benefit,
at the very least, must be a product of a business. Engaging in
employment is not, on its own, a business.140 The definitions of
139 ITAA 1936 s 21A(1) only applies to ‘income derived by a taxpayer’, and this
is defined in s 21A(5) as being income derived by a taxpayer in carrying on a
business.
140 Note the conclusion reached in the joint judgment of French CJ, Gummow,
Heydon, Crennan, Kiefel and Bell JJ in the High Court in Spriggs v
Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1, 2[60]-[73] that employment can
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‘business’ in s 6(1) of the ITAA 1936 and s 995-1(1) of the ITAA
1997 supports this (i.e. occupation as an employee is excluded).141
If the benefit can be converted into money, it will be income.
The assessable income inclusion is the realisable value of the
benefit. A judicial ODR should be available for most benefits if
the benefit is consumed in the course of rendering services. If the
benefit cannot be converted into money, it will not be income.
If the benefit is income (i.e. benefit is convertible into
money), s 15-2 of the ITAA 1997 will be excluded from applying
and there will be no double taxation.142 Section 15-2 will only
apply where the benefit is not income, and this is only likely
where the benefit cannot be converted into money. The value to
the taxpayer of the benefit will be the amount of assessable
income. A judicial ODR should be available for most benefits if
the benefit is consumed in the course of rendering services.
The FBT regime does not apply as the definition of a ‘fringe
benefit’ is only satisfied where the benefit is ‘in respect of
employment’. Here, the benefit is a product of (or in respect of)
services rendered which is not employment.
be a component of carrying on a business. With respect, this decision may raise
the problem of identifying the appropriate activity to which a particular benefit
is related (i.e. proceeds of or product of). This will not matter when the charging
provisions bring about the same result. However, where the charging provisions
do not do this, the identification issue becomes important.
141 It is also arguable that to have a business relationship, the payer of the benefit
must also be in business. On the other hand, it may be enough that the payer is
not acting as a private consumer.
142 ITAA 1997 s 15-2(3)(d).
Similar to Note 4 above, s 6-5 of the ITAA 1997 in
conjunction with s 21A of the ITAA 1936 will not apply. The
reason is that s 21A only applies to a business taxpayer.143 In
short, the benefit here is not a product of a business. The notions
of ‘services rendered’ and a ‘business’ may overlap, but where
the activity only amounts to services rendered, s 21A cannot
apply.
If the benefit is not convertible into money, it will not be
income. However, the benefit could still be chargeable to tax
through s 21A of the ITAA 1936 operating in tandem with s 6-5
of the ITAA 1997. Further, even if the benefit is convertible into
money, the benefit will still be chargeable to tax through s 21A
ITAA 1936 in tandem with s 6-5 ITAA 1997. In the end, there is
little difference in the tax outcome between a convertible and non-
convertible non-cash business benefit for the following reasons:
1.
The advantage that a non-convertible
benefit previously enjoyed (i.e. not income) over
a convertible benefit, has been removed by s 21A
of the ITAA 1936;
2.
The assessable income under s 6-5 of the
ITAA 1997 in isolation is the realisable value of
the benefit. But this valuation rule is irrelevant
(displaced) because s 21A of the ITAA 1936 is an
exclusive code for all non-cash business
benefits. This means that the valuation rule(s) in
s 21A applies to both convertible and non-
convertible business benefits. Under s 21A, the
143 ITAA 1936 s 21A(1) only applies to ‘income derived by a taxpayer’ and this
is defined in s 21A(5) as being income derived by a taxpayer in carrying on a
business.
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prima facie taxable value is the arm’s length
value of the benefit, which is what the taxpayer
would reasonably have paid to acquire the
benefit from the provider. Importantly, in
determining this value, any restrictions on
converting the benefit to cash are disregarded so
that depressing the taxable value through the
attachment of restrictions will not be effective;
and
3.
Because s 21A of the ITAA 1936 is an
exclusive code for all non-cash business
benefits, the potential absence of a judicial ODR
under s 6-5 of the ITAA 1997 does not matter
because the legislative ODR in s 21A ITAA 1936
will apply to all non-cash business benefits.
Here, the taxpayer’s activities are not merely, or only, the
‘rendering of services’; they have gone beyond this and amount
to a business. Accordingly, s 15-2 of the ITAA 1997 does not
apply.
The FBT regime does not apply as the definition of a ‘fringe
benefit’ is only satisfied where the receipt or benefit is ‘in respect
of employment’. Here the benefit is a product of (or in respect of)
a business.
The comments made under Note 9 are incorporated into this
note.
Section 6-5 of the ITAA 1997 (income concept) does not
capture or apply to a benefit that is a mere gift given (or received)
on personal grounds. The reason is that if a benefit is given (or
received) on personal grounds, it is not the proceeds for, or the
product of, personal exertion and the benefit is not the product of
a business.144
Section 15-2 of the ITAA 1997 does not capture or apply to
mere gifts given (or received) on personal grounds. The reason is
that if benefits are given on personal grounds, they are not ‘in
respect of employment’ or ‘in respect of services rendered’.145
The short point again is that the definition of ‘fringe benefit’
in s 136(1) of the FBTAA 1986 does not capture mere gifts given
(or received) on personal grounds. The reasoning is similar to that
in Note 14 above concerning s 15-2 of the ITAA 1997 (i.e. not in
respect of employment). This conclusion holds in spite of s 148(1)
of the FBTAA 1986, the wording of which seems to cast some
doubt on this.146 If it is needed, the ATO has confirmed that s
148(1) does not bring mere gifts within the FBT regime.147
Section 6-5 of the ITAA 1997, in conjunction with s 21A of
the ITAA 1936, will not apply as the benefit is not the product of
144 See the comments under Note 16 in regard to other charging provisions (e.g.
CGT regime) that may apply to mere gifts.
145 See comments under Note 16.
146 For example, FBTAA 1986 s 148(1) states that a benefit will still be in respect
of employment: (1) whether or not the benefit is in respect of any other matter
or thing, (2) whether the employment will occur, is occurring or has occurred
and, (3) whether or not the benefit is a reward for services rendered or to be
rendered by the employee.
147 Australian Tax Office, Fringe benefits tax: benefits not taxable unless
provided in respect of employment, MT 2016, 16 June 1986, [5], [7], [12]. See
also the comments under Note 16 in regard to other charging provisions (e.g.
CGT regime) that may apply to mere gifts.
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a business. That is, the receipt of a mere gift given on personal
grounds is not the product of a business, which is an indispensable
requirement of s 6-5 ITAA 1997, and s 21A of the ITAA 1936.
There are no other charging provisions in the income tax that
apply to a mere gift. In particular, CGT event D1 in s 104-35 of
the ITAA 1936 cannot apply because there is no creation of rights
by the recipient in such circumstances. Indeed, a mere gift
situation suggests an absence of rights. CGT event H2 in s 104-
155 of the ITAA 1936 should also not apply. First, there is
difficulty in characterising the giving of a benefit as a gift as an
‘act, transaction or event’. However, even if there is an act,
transaction or event, CGT event H2 requires that the act,
transaction or event occur in relation to a CGT asset that the
recipient owns. This is very unlikely because most, if not all, mere
gift situations suggest an absence of conditions or wishes
associated with the benefit, let alone an association with a CGT
asset owned by the recipient.148
Finally - and these comments could have been made in other
notes - if the benefit received is not a consumable, then the receipt
of the benefit may involve the acquisition of a depreciating asset
as defined in s 40-30 of the ITAA 1997 and/or the acquisition of a
CGT asset under the CGT regime. Where the benefit is used or
‘consumed’ in the taxpayer’s domestic or personal setting, which
is expected to be the case most of the time, there will usually be
no tax consequences. That is, the holding and ultimate disposal of
the asset will not give rise to a taxable gain or an accrued
(recognised) loss.149 If the benefit received is a CGT asset that is
148 The ATO has indicated that ITAA 1936 ss 160M(6), 160M(7) (old versions
of CGT event D1 and CGT event H2) do not apply to gifts: see Agenda Item 2
of the CGT sub-committee minutes of the National Tax Liaison Group,
December 1992.
149 ITAA 1936 ss 40-25(2), 40-25(7), 40-285 and 40-290 for a depreciating asset,
and ITAA 1936 ss 108-20 and 118-10(3) for a CGT asset that is a personal use
asset.
a collectable, then it is more likely that a taxable gain can arise
and an accrued (recognised) loss will be made; it will depend on
whether a greater than $500 acquisition cost can be attributed to
the asset.150
Such ‘rewards’ will not be income on ordinary concepts
because they are not the product of the recipient’s personal
exertion or a business. Even though the examples of this category
of receipt set out in Sub-Part 2.3.5 from Scott v FCT were
provided by Windeyer J in the context of an analysis of s 26(e) of
the ITAA 1936 (now s 15-2 of the ITAA 1997), it is clear that his
Honour’s comments are relevant to the income section, now s 6-
5 ITAA 1997.151 Further, the ATO’s approach in Taxation Ruling
IT 2145 (i.e. that winning an amount of $40 000 under the BHP
Award for the Pursuit of Excellence program in a particular field
is not income) and Class Ruling 2002/83 (cash prizes awarded to
scientists, teachers of science, etc under the various categories of
the Science Awards provided by the Prime Minster are not
income) also supports the non-income conclusion.152
Such ‘rewards’ will not be caught by s 15-2 of the ITAA 1997.
These rewards are not ‘in respect of employment’ or ‘services
150 ITAA 1997 ss108-10, 118-10(1).
151 See the various references to the term ‘income’ in Scott v FCT.
152 It is worth noting that three Prime Minister’s Prizes (i.e. Australian History,
Science, and Literary Award) are expressly made exempt from income tax: ITAA
1997 s 51-60. It is doubtful that s 51-60 has any operative effect given that such
prizes are unlikely to be caught by any charging provision. See the comments
under Note 20 in regard to other charging provisions (e.g. CGT regime) that may
apply to rewards to mark an achievement, etc.
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rendered’. The comments and the authorities set out in Note 17
above are also relevant to s 15-2.153
Such ‘rewards’ are not in respect of employment. The reasons
are the same as those set out in Notes 17 and 18 above.
Accordingly, the FBT regime will not apply.154
Section 6-5 of the ITAA 1997 in conjunction with s 21A of
the ITAA 1936 will not apply, as the ‘reward’ is not the product
of a business or the proceeds of operating a business.
There are no other charging provisions in the income tax that
apply to a reward as a mark of esteem, recognition of an
achievement or respect for receiver. Given the closeness of a mere
gift situation to that of a reward as a mark of esteem, recognition
of an achievement or respect for receiver, the analysis here is
essentially the same as that in Note 16 in regard to mere gifts. In
particular, CGT event D1 in s 104-35 of the ITAA 1997 cannot
apply because there is no creation of rights by the recipient in
such circumstances. Indeed, the esteem, achievement, etc
situation suggests an absence of rights. And, CGT event H2 in s
104-155 of the ITAA 1936 should not also apply. Even if there is
an act, transaction or event, CGT event H2 requires that the act,
transaction or event occurs in relation to a CGT asset that the
recipient owns. This is very unlikely because most, if not all, mark
of esteem situations suggest an absence of conditions or wishes
associated with the receipt, let alone an association with a CGT
asset owned by the recipient.
153 See the comments under Note 20 in regard to other charging provisions (e.g.
CGT regime) that may apply to rewards to mark an achievement, etc.
154 Ibid.
Finally, the comments in Note 16 in regard to the acquisition
of an asset through receipt of a benefit are incorporated here.
These types of activities are not regarded as income-
producing activities (e.g. proceeds of personal exertion or a
business) and therefore any benefits thereon will not give rise to
income on ordinary concepts.155
Section 15-2 of the ITAA 1997 will not apply because none
of the listed activities involve employment or services
rendered.156
The definition of a ‘fringe benefit’ cannot be satisfied because
none of the listed activities involve employment.157
Section 6-5 of the ITAA 1997 in conjunction with s 21A of
the ITAA 1936 will not apply, as the ‘reward’ is not the product
of a business or the proceeds of operating a business. The
activities covered by this category can take many forms (e.g.
gambling, sporting activities). They can also involve the sale of
property. Accordingly, there is a need to make some comment to
ensure sufficient coverage. The approach is to select three types
of activities that would come within this category.
1.
Gambling, lottery, etc: s 118-37(1)(c) of
the ITAA 1997 states that capital gains and
capital losses are disregarded for a CGT event
155 See the comments under Note 24 in regard to other charging provisions (e.g.
CGT regime) that may apply to the various activities set out here.
156 Ibid.
157 Ibid.
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relating to gambling, a game or a competition
with prizes. This exemption from CGT should
cover most forms of gambling.158
2.
Sporting activities: Unlike the gambling
situation, there is no specific exemption in the
CGT regime for receipts from sporting activities
(e.g. playing, coaching, refereeing sport). Given
that capital gains and capital losses can only arise
from a CGT event,159 the issue is whether a CGT
event can be identified as applying. It is hard to
see how the pre-existing asset events (e.g. CGT
event A1, CGT event C2)160 can apply because
no asset is realised through participating in the
sporting activity. And, it cannot be said in any
event that the benefits received are in respect of
an asset; rather, they are in respect of the
‘service’. CGT event D1 cannot apply because
the participation in sport does not involve the
creation of rights in the provider of the benefit.
There may have been a creation of rights at the
time the participant agreed to participate in the
future, but at the time of actual performance,
which is also the time of receipt of the benefit, a
creation of rights is not occurring. CGT event
H2161 also cannot apply. While there may be an
act, transaction or event in the form of
158 ITAA 1936 s 26AJ will not apply to the type of gambling winnings
contemplated in this article. Section 26AJ can only apply where the gambling
winnings arise from a gambling opportunity offered to the taxpayer because of
an investment the taxpayer made. In short, the way to view s 26AJ is that it is
taxing returns that are considered to flow from an investment (i.e. return from
property principle).
159 ITAA 1936 s 102-20.
160 Respectively, ITAA 1936 ss 104-10, 104-35.
161 ITAA 1936 s 104-155.
performance of the ‘service’, that act is not in
relation to a CGT asset owned by the taxpayer.162
3.
Sales of items: Where an activity that
incorporates the sale or exchange of items is a
pastime, hobby, etc, the activity would fail to
satisfy the notion of a taxable purpose in the
depreciating asset regime.163 Accordingly, there
will be no balancing charge or loss on sale of
such items.164 Further, the items should also
satisfy the notion of something ‘used or kept
mainly for personal use and enjoyment’.
Accordingly, the item will be a personal use
asset,165 or a collectable166 under the CGT
regime. The difference between a personal use
asset and a collectable is that to be a collectable,
the asset must fall within a list (e.g. artwork,
jewellery, antique).167 The significance of all this
is the following: (1) all losses on personal use
assets are disregarded;168 (2) gains will only
accrue on personal use assets where the purchase
cost was more than $10 000;169 (3) gains and
losses can only arise on collectables where the
purchase cost was more than $500;170 and (4)
162 It is worth noting that the personal use asset exemption in s 118-10(3) of the
ITAA 1936 may not assist to exempt gains from sporting activities because that
provision only seems to apply where a pre-existing asset is involved. The
reference to the first element of the cost base of the personal use asset is one of
the bases for this conclusion.
163 ITAA 1936 s 40-25(7).
164 Ibid s 40-285, 40-290.
165 Ibid s 108-20(2).
166 Ibid s 108-10(2).
167 Ibid ss 108-10(2)(a)-(c).
168 Ibid s 108-20(1).
169 Ibid s 118-10(3).
170 Ibid s 118-10(1).
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losses on collectables can only be used against
gains on collectables (i.e. quarantined).171
Finally, the comments in Note 16 in regard to the acquisition
of an asset through receipt of a benefit are incorporated here.
The income tax rules in regard to non-cash benefits as
proceeds of personal exertion and business are complex. There is
considerable overlap of charging provisions and the valuation
rules for each charging provision are not the same. The
reconciliation rules and priority of operation rules become
important. However, we have reached a point where there is
sufficient familiarity with the rules, how they interact, etc, so that
there is a reasonable degree of certainty of application of the rules.
Further, although there are some anomalies, they are not that
significant and can probably be addressed through judicial
‘clarification’ and/or sensible administrative practices.
171 Ibid s 108-10(1).
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