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Issue – Identify and state the legal issues arising from the fact situation

Rule – Identify and sate the legal principles or ‘rules’ relevant to those issues

Application / analysis – apply those legal principles or rules to the facts, for one side and then the other, but doing so
on an issue‐by‐issue basis

Conclusion – draw a mini‐conclusion after evaluating how the legal principles apply to the particular issue that has
been raised by the facts

Advise Isabelle and Audrey as to their assessable income consequences arising from the above information (i.e.
whether or not an amount needs to be included in her assessable income).

The principles stated in the Higgs v Olivier [1952] case stated that payments made after the
termination of the service agreements for the purpose of restriction are considered capital in
nature. This principle isn’t applied to this case as the covenant was formed at the time of entering
the contract, not after its completion.

All the conditions above aim to show whether the reason the rewards were awarded to Audrey was
either due for her personal quality or services. This correlation is made based on the “flow” concept
established in Eisner v Macomber, where for a receipt to be income it must be derived/connected to an
income-earning activity (Audrey’s services) rather than Audrey’s own traits/qualities.

Items to Consider:

 Isabelle

Isabelle’s Description Amount Condition/Information

Amount per jewellery Isabelle
Sale Offer from “Jewels Are Us” -- $250/unit
Offer for Isabelle to not sell her
Injunction Offer -- $30K
Jewellery to anyone else
Sold in August 2019
Note: 6 Months in 2015 – house
Selling House was rented at market price to a
-$500K Bought in August 2010
Bought for $2K in 2015, Sold in
Selling Car August 2019
-$2K Buying Price in 2015

Car Restoration -$5K Spent to restore car to sell

 Audrey

Audrey’s Description Amount Condition/Information

Given by businessman due to
“Gift” -- $5K + Gold Watch
him being saved


 Sale Offer

o Same arguments as profits form jewellery making activities

 Not to Sell Offer

The issue from the restriction covenant agreement between “Jewels Are Us” and Isabelle is whether the
payment is capital or ordinary income of nature. In FCT v Woite (1982), although not part of the decision,
Judge Mitchell J suggests that payments made as a part of the normal contract are more likely to be income,
as it is generally viewed as a payment for a future service (the restriction activity itself). There may be
argument that the $30K is payment for a separate agreement for which Isabelle is to give up her right to sell
jewellery to anyone else. However, it may simply be part of her jewellery sales contract which could include
the restriction clause.

However, the facts are not too clear on the subject, with the answer relying on whether the
manufacturer would approve the sales agreement separate from the restriction covenant regardless of the
fact Isabelle accepts it or not. If they don’t, it shows that the restriction is a contractual obligation (service)
for Isabelle. Hence, the $30K would be ordinary income as it is generally viewed as payment for a future
service (Woite (1982)); assessable under s6-5.

On the other hand, if it’s a separate agreement, the formation of the restriction covenant would be a
CGT event D1 as defined in s104-35(1) and needs to be assessed in CGT. In this case, the manufacturer
creates a restraint of trade against Isabelle and when the covenant is entered into, Isabelle will have
possessed a capital proceed of $30K. The cost base is non-existent as it involves a CGT event D1 (s112-
20(1)(a)(i)). Hence, the capital gain equals the proceed: $30K.

Also, no discount capital gains are available for CGT event D1 (s115-25(3)), as the CGT asset held for less
than 12 months (s115-25). Hence, the final net capital gains are $30K, which is assessable under statutory
income (s102-5). In the end, both cases lead to the receipt being assessable income regardless.

 Selling House

Isabelle’s old house in Hawthorn is a CGT asset as defined in s108-5. Hence, the issue of Isabelle selling
(or disposing) her CGT asset will be classified as a CGT event A1 (s104-10(1)). Since, it is logical to assume
that the house is Isabelle’s main residence, the main residence exemption could be applied.
The basic exemption case where any capital gain/loss from the CGT asset is disregarded does not apply
in this case initially. This is due to the fact that the dwelling was not the taxpayer’s (Isabelle) main residence
throughout the WHOLE of the ownership period (s118-110(1)) – as Isabelle rented the house for 6 months
in 2015.

However, s118-145 could be used to extend the exemption – allowing Isabelle to treat her house as her
main residence during a period of absence provided no other dwelling is treated as her main residence. As it
was assumed that Isabelle has no other permanent/main residence during her trip, the exemption is

As she had used the dwelling for the purpose of producing income (renting), she can only claim
exemption for a maximum of 6 years (s118-145(2)). This is sufficient enough for Isabelle to treat her
dwelling as main residence for the whole ownership period – allowing application of s118-110(1) and any
capital gain obtained by Isabelle is non-assessable.

 Renting Home

Meanwhile, payments received by Isabelle from her friend for the exclusive use of her property (6-
months in 2015) constitutes rent (United Scientific Holdings Ltd v Burnley Borough Council (1978)). This rent
collected by Isabelle clearly constitutes ordinary income from property (Adelaide Fruit and Produce
Exchange Co Ltd v DCT (1932)). Hence, the receipt is assessable as ordinary income under s6-5.

 Selling Car

Another CGT event A1 occurs when Isabelle sold her car (CGT asset under s108-5). Regarding
exemptions, s118-5 states that any capital loss/gain made on “car” is to be disregarded. The issue here is
whether it falls under the definition of car set in s995-1(1), which is “a motor vehicle designed to carry a
load of <1 tonne and < 9 passengers”. Hence, it is likely for Isabelle’s car to fall under the definition,
disregarding the capital gains from assessable income.

 Audrey’s Gift

For Audrey, the issue from the “gifts” ($5000 + gold watch) she received is whether they’re considered
as gifts or payments for services (income). The following relevant indicators are used to determine the
tendency to which the gains could be characterized:

1. Audrey has been adequately remunerated for her services - likely to be a gift (Scott (1996)).

2. Audrey hadn’t expected the payment - likely to be gift (Scott (1996))

3. Benefit can be traced to some activity/service by Audrey for which donor is grateful - likely to be
income (Holmes)

4. Recurrence of payment - likely to be income (Dixon (1952))

5. Existence of pre-existing personal relationship between donor and Audrey - likely to be a gift (Scott
Even if it is not stated in the information, it is assumed that Audrey has been adequately remunerated
for her services as a firefighter - making the rewards she received more likely to be a gift (Scott (1996)).
Next, it is again assumed that Audrey didn’t expect the rewards, hence making it more likely to be gift (Scott
(1996)). Payment is also paid lump sum, again making it more likely to be a gift (Dixon (1952)). However, the
lack of a personal relationship between Audrey and donor (assumed, not stated), if true, would make the
payments more likely to be income (Scott (1996)). The fact that the donor was grateful for Audrey’s services
(for saving his life) makes it more likely as income based on the judgement set in Holmes (1995).

Even if some indicators point to gift, the important factor is that the only reason the reward was
awarded to Audrey was due to her saving the donor’s life – done while conducting her services as a
firefighter. Hence, the facts show a nexus between the rewards and her services. The lack of personal
relationship between the donor and Audrey strengthens this claim. Based on the nexus as well as the fact
that the rewards are either cash or cash-convertible (Cooke & Sherden (1980)), the rewards would be
assessable to Audrey under ordinary income (s6-5) or under s15-2 (if the court decided it does not fall under
s6-5 - unlikely).