LAW 601 Law Taxation Income from Personal

LAW 601 Law – Taxation Income from Personal Services Lecturer: Arvin Ajay Sami 3/15/2018 1

Overview n n Total Income (s. 11, ITA Cap 201) Cash receipts Fringe Benefits FNPF Scheme 3/15/2018 2

Income n Income from personal services encompasses income from: Employment u An office u Exercise of a vocation u 3/15/2018 3

Employment n n n Contract of service Means a contract of service as distinct from a contract for service Is largely a contractual relationship Authority in the employer Employee is a person under the direct control of his employer and obliged to obey his orders 3/15/2018 4

Employment (cont’d) n n Contract for service The contractor is obliged to do work contracted for but is his ‘own boss’ as to how the work will be accomplished Note: S. 79 gives an extended definition of employment but only for the purpose of Part XI of ITA 3/15/2018 5

Office n n n Is a permanent position which has an existence independent of the person who fill it Continues and is filled in succession by successive holders Status than a contractual relationship Example, managing director hold and exercise an office Distinction between employment and office is not important since managing director will normally have a contract of employment with the company 3/15/2018 6

Vocation n n Is included as a reference to persons who obtain income from services but who are neither employees in any usual fashion nor carrying on a business Example An actor who appears in a variety of productions u An author u 3/15/2018 7

Income from personal services n n n s. 11, ITA Cap 201– receipts to be included in total income Opening paragraph of s. 11 provides total income includes: “…the annual net profit or gain or gratuity, whether ascertained and capable of computation as being wages, salary, or fixed amount, or unascertained as being fees or emoluments or as being profits from a…calling… directly or indirectly accrued to or derived by a person from any office or employment or from any profession or calling … including the estimated annual value of any quarters or board or residence or of any other allowance or benefit provided by his employer or granted in respect of employment whether in money or otherwise…. ? 3/15/2018 8

s. 11 - terms used n n Wage (weekly, hourly) Salary (annual figure) Emoluments (salary, fee, or profit from employment or office) S. 79 define emolument but only for the purpose of Part XI of ITA 3/15/2018 9

Allowance n n S. 11(z) Paragraph begins with a general reference to any benefit or allowance granted in respect of or arising from employment List eight specific instances of allowance or benefits All examples concern private expenses or benefits enjoyed by an employee in his private capacity 3/15/2018 10

Allowance (cont’d) n n Money provided for a specific purpose or might be granted to assist an employee in meeting a personal expense Have a descriptive title, eg. housing allowance Granted to compensate an expense incurred for the benefit of the employer, eg. petrol allowance, per diem (accommodation and food) when away from home Allowance – is clearly income 3/15/2018 11

Allowance (cont’d) n n Mutual Acceptance Co. Ltd v FCT Australian High Court decision concerning payroll tax Legislation in issue defined wages as including an allowance Taxpayer (employer) claimed legislation did not include car allowance paid to traveling salesman using own cars for employers business 3/15/2018 12

Income from personal services n Income from personal services will be discussed in three headings: Cash receipts Not every cash payment to an employee, office holder or person exercising a vocation will be income u Attention is given to examples of payments that are not income but something else u 3/15/2018 13

Income (cont’d) n Fringe benefits u n Commonly take a form other than a cash payment FNPF scheme u 3/15/2018 The ITA has a number of provisions granting concessionary treatment to the scheme, which require specific attention 14

Cash receipts n n Sum received as a reward for services – income Not necessary that there be a contractual right to a payment in order for it to be income Payment from a third party are regular incident of some vocations Example: Bonus – a reward for services u Tip paid to a waiter by the customer u 3/15/2018 15

Cash receipts (cont’d) n n Not always true that payments from employer constitute income Example: u n Cheque given by boss to employee after he gets married is personal gift, not income Questions to ask Was payment for acting as employee u In case of an office, was payment a profit arising from the office u 3/15/2018 16

Cash receipts (cont’d) n n n n n Hochstrasser v Mayes u Not every payment from employer to worker is income u Character of payment Taxpayer was employee of ICI Chemical plants at various locations around Britain Employees to shift their place of employment Company operated housing scheme Married worker selling his family home Because of relocation would be indemnified to married workers who company believe need a home Relieve worker anxiety about incurring financial hardship where relocation coincided with falling property market Agreement (scheme), taxpayer entitled to a payment of $350 3/15/2018 17

Hochstrasser v Mayes n n Crown, tax payment as income from employment Only an employee might obtain such a payment Absence of any independence consideration from the taxpayer for the indemnity Payment could only be received in return for services rendered 3/15/2018 18

Hochstrasser v Mayes n n Two interesting perspectives This is reimbursement case No gain u Sold his house on account of the job requirement to relocate, suffered a loss, then was restored to a net zero position by the payment u n The facts gave rise to an unquantifiable fringe benefit u 3/15/2018 Benefit to employee from housing policy was not $350 but indemnity itself 19

Gifts n n n Distinction between a payment received as remuneration for services and a payment for ‘something else’ appears most commonly in gift cases In legal terms, a gift is a payment or transfer of property to which the recipient has no legal entitlement or right, No contractual obligation or legal obligation on the transferor to make the payment or transfer 3/15/2018 20

Gifts (cont’d) n n Legal character of a payment or transfer, as being a gift, does not determine the payment’s character for income tax purposes Some gifts are income in the hands of the recipient, others not 3/15/2018 21

Gifts (cont’d) n n Corbett v Duff (English case) …if the payment, though voluntary, is remuneration for the office or employment, it is taxable, but, if it is personal in the sense that it is given to the person, not as the holder of an office or employment, but as a personal testimonial, it is not…. 3/15/2018 22

Gifts (cont’d) n n n n Factors for determining a gifts legal character for tax purposes: Legal issue concerns the character of the gift in the hands of the recipient Form of the gift Quantum of the gift The occasion on which gift was made The time at which the gift was made The period of time between rendering services and the receipt of the gift Where there is an expectation or some sense of moral right to receive a gift - income 3/15/2018 23

Gifts (cont’d) n n n Reed v Seymour (English case) Taxpayer a professional cricketer, World War 1 Club rules, benefit match for a particular player Gate takings, benefit match, paid to Trustees, invest funds A player had no contractual right to a benefit match nor under the discretionary trust any right to the trust funds 3/15/2018 24

Reed v Seymour n n n Towards end of taxpayers cricketing career Club designated regular game as benefit match for taxpayer Gate takings paid to Trustees together with donations solicited from the public Trustees invested funds, paid income of the trust to taxpayer After three years the Trustees approved of a plan by the taxpayer to purchase a farm and paid over to him the trust funds Crown sought to tax portion of funds derived from gate takings as income from taxpayers employment 3/15/2018 25

Reed v Seymour (cont’d) n Benefit match, cricket lovers taking care of one of their own in his new life 3/15/2018 26

Payments received on commencing employment n n n A lump sum payment received at the commencement of employment, If payment in advance for services to be rendered, is income from employment But what if a payment is received in return for becoming an employee? 3/15/2018 27

Payments received on commencing employment n n n Shilton v Wilmshurst A payment for becoming an employee is income from employment Taxpayer, a professional soccer player contracted to play for Nottingham (old team) Southampton (new team) wished to acquire taxpayers service Transfer require consent of both old team and taxpayer 3/15/2018 28

Payments received on commencing employment n n n Jarrold v Boustead Taxpayer, a rugby union player Received a lump sum on agreeing to accept employment with a rugby league club as a professional footballer Taxpayer lost his amateur status Payment was held to have compensated this loss rather than rewarded the taxpayer for agreeing to employment 3/15/2018 29

Payments received on commencing employment n n n Pritchard v Arundale Taxpayer, forty seven, had a family and senior partner in an accounting firm Client of the firm, L, wished the taxpayer to leave the partnership and managed a company owned by L Taxpayer was reluctant to accept offer because of his personal and professional circumstances Three party agreement (company, L and taxpayer), company and taxpayer agreed to taxpayers employment for a number of years and L agreed to transfer shares he held in the company to the taxpayer Crown, unsuccessful to tax shares worth $7, 000 as income from employment 3/15/2018 30

Pritchard v Arundale n n Shares did not constitute advance remuneration for services to be rendered Shares as an inducement to take up employment u n Taxpayers resignation from the partnership and difficulties he would face in returning to his former profession if his new career failed Source of payment (third party) 3/15/2018 31

Payments not to undertake employment or exercise a vocation n n Restrictive covenants Limit what the employee may do during the period of employment and for a time following cessation of employment First aim – ensure employee gives his full time and attention to his employment Second aim – to protect the business of the former employer e. g. ex-employee is prevented from exploiting relationships developed with customers of the business during his employment 3/15/2018 32

n n n n n Payments not to undertake employment or exercise a vocation Beak v Robson Managing director 5 years Annual salary ($2, 000) plus bonus linked to companies performance Either party to terminate agreement, 6 months notice Taxpayer received $7, 000 for the covenant Taxpayer, not to work in same industry and geographic area as the company House of Lords, held not income from employment Covenant concerned not undertaking employment, concerned events after employment ceased, separate from employment agreement 3/15/2018 33

Payments not to undertake employment or exercise a vocation n n n n Higgs v Olivier Taxpayer is a movie star Not to act in any other film anywhere for eighteen months Received lump sum payment of $15, 000 Agreement did not restrict actor from acting on the stage or other productions of film makers Crown sought to tax the lump sum as income from vocation Court of Appeal, ruled for the taxpayer, agreement were not standard industry practice Receipt did not arise in ordinary course of profession 3/15/2018 34

Payments upon termination or conclusion of employment n n n Circumstances in which employment terminates determine character of a payment Employment terminates rightfully (contract expire) – income from employment Employment terminates wrongfully – damages obtained in wrongful dismissal is not income 3/15/2018 35

Payments upon termination or conclusion of employment n S. 11(j) ITA Cap 201 u n Payments received on termination of employment (other than redundancy payments and superannuation payments) s 17 A – Redundancy payment 3/15/2018 36