Q1.

Megan Marvel was a senior executive working for Paradigm Films, an international film

production company. In this role, she earns a salary of $250,000 per annum.

This essay will look at whether Megan’s income is assessable for the purposes of income tax. In

order to adequately assess the provisions of the proposition, the following factors will be taken

into account: Firstly, the general provisions relating to income tax as laid out in the 197 legislation,

secondly, the two factors which allow income to be assessable: i.e. ordinary income + statutory

income to draw its conclusion. According to the Income Tax Assessment Act 19971, herein after

referred to as the ITAA97, income tax is payable each year by, inter alia, each individual. Thus,

Megan Marvel, a resident of Australia will be taxed on income from all sources. 2 In order to tax

such an income, it is firstly important to discern which income is assessable. In this case Megan

Marvel’s income is $250,000 per annum, which comes from her work as a senior executive at

Paradigm Films. S.6-53 lays out the formula for gauging what assessable income is, i.e. ordinary

income plus statutory income.

Whether Megan’s income will fall under the ambit of ordinary income for assesability will be

expounded upon by case law as the legislation in question does not provide much guidelines for

that this is. Her income needs to be, according to s. 6-5, an ‘income according to ordinary

concepts’. The interpretation of this can be seen to be that lay people regard as income as stipulated

by Jordan CJ in Scott v Commissioner of Taxation (1935)4 to be “… in accordance with the

1
S. 3-5(1) Income Tax Assessment Act 1997 (Cth) (ITAA97)
2
S. 6-5(2) ITAA97
3
ITAA97
4
[1966] HCA 48
ordinary concepts and usages of mankind”. To discern fully whether Meghan’s income falls under

these ordinary concepts and usages, we need to be aware of the fact that, for the purposes of tax

law, there are three categories of ordinary income: income from employment, income from

business and income from property. At the outset, it seems that as her payment is renumeration for

her work at the film studio, it is a result of employment and thus may be categorised as ‘ordinary

income’ that is assessable.

There are two pre-requisites that will have to be fulfilled for her income to be classified as

‘ordinary income’. Firstly, that the income be cash or cash convertible.5 The seminal case of FCT

v Cooke and Sherden6 provides that if the gain or income is cash convertible, then it does count as

ordinary income. In this case, however, we can see that her return of $250,000 per year is indeed

a cash renumeration in return for her employment at the studio. This is expounded upon in the

ITAA97 as well which allows for a receipt from employment and providing personal services to

income tax for the employee7. We can see that Megan was providing her personal services to the

Paradigm Studio as their employee, therefore, there is a nexus or connection between the tax

payer’s (Megan) receipt and the services provided to the source of that income (Paradigm Studio).

Thus, we can see that both limbs have been fulfilled of the approach that Australian courts take to

determine whether the $250,000 per annum is an ordinary income from personal services i.e.

firstly, identification of the activity undertaken and secondly, the determination that the receipt is

indeed a reward for that personal activity.

5
Tennant v Smith (1892) AC 150
6
(1980) 80 ATC 4140
7
S. 6-5 ITAA97
The second pre-requisite to the income being classified as ‘ordinary income’ is if there is a real

gain to Megan (tax payer). It must be noted here that a gain may be either an ordinary income or

capital but can never be both. As can be seen established by Hochstrasser v Mayes 8 Meghan’s

salary is a genuine gain, then it is be classified as ordinary income. This is in contrast to the facts

of the Mayes case where the taxpayer was merely reimbursed (gain) for loss incurred due to

employment (where he had to move cities because his employer required him to do so). Since

Megan’s gain is a salary, and not merely a ‘compensation for a work-related expense’, her income

will be assessable.

We can see further that Megan’s income will indeed be assessable since, there are certain

characteristics shared by her salary and what an ‘ordinary income’ gain must be, according to the

courts. According to FCT v Blake9 regular and periodic gains are likely to be ordinary income10.

In this case, Meghan’s salary is per annum and therefor fits this requirement. The ‘flow’ is also

present, as it is clearly flowing from a source that has a nexus with her personal exertion i.e. these

are wages/renumeration paid to her. Additionally, Megan’s salary is a payment that is ‘regular,

expected and depended upon by her’ and this her ordinary income. (This was obviously depended

upon before she left the studios, and this it will be assessable only until that point)

Thus, it can adequately be concluded from the in-depth analysis above that Megan’s income is an

ordinary income and thus assessable for purposes of tax under the ITAA97. Since it is an ordinary

income, there is no need to delve into the possibility of whether it also counts as statutory income

or not.

8
[1960] AC 376
9
84 ATC 4661
10
Also stipulated by FCT v Harris (1980) 10 ATR 869
Q2. In 2018, Megan received an Academy Award (‘Oscar’) for her work in directing a film. She

received a gold statue worth $20,000. She had to sign a contract agreeing not to sell the statue.

This essay will seek to discern whether the Oscar award received by Megan is assessable for

income tax. Factors which will be significant to this discussion will be whether this counts as

‘ordinary income’ under for the purposes of s. 6-5, the effect of the agreement not to sell, whether

this can still count as a gift under the ‘ordinary income’ common law provisions. In the alternate,

the possibility of this award being a statutory income will be discussed as well. For income tax

purposes, it remains to be discerned whether this gold statue that Megan received from the

Academy is assessable for income tax purposes. The formula for this is exactly the one laid out in

s. 6-5 of the ITAA97, i.e. ordinary income + statutory income. Firstly, it will be seen whether this

falls under the ambit of ‘ordinary income’. If it does not, then s. 15 may apply if it is a statutory

income. Thus, for the purposes of Megan’s case, any statutory income would be an amount that is

not ordinary income but is included in assessable income by provision of the governing legislation.

To discern whether its an ordinary income, the same provisions as above will apply i.e. that it

needs to be, per Jordan CJ in Scott v Commissioner of Taxation (1935)11 to be “… in accordance

with the ordinary concepts and usages of mankind”. Ordinary income would thus need to be cash

or cash convertible12 and a gain. FCT v Cooke and Sherden13 provides that if the gain or the income

is cash convertible, then it will count as ordinary income. In this case, we can see that the Oscar

statue is indeed cash convertible as it is gold and worth $20,000. However, there are two

11
[1966] HCA 48
12
Tennant v Smith (1892) AC 150
13
(1980) 80 ATC 4140
discrepancies to this, firstly, that she signed a contract not to sell it and secondly, and consequently,

does the statue then count as ‘income’ or gain for the purposes of tax assessment. If the court finds

that because of the agreement not to sell, it is not ‘ordinary income’ then it won’t be counted as

assessable.

If that is not the case, then we will have to look at whether the Oscar award counts as a real gain

for Meghan. According to Hochstrasser v Mayes14 if a receipt is a genuine gain then it is ordinary

gain. Real gain here would signify if the tax payer was better off financially. Since in this case,

Megan signed an agreement not to sell, we can see that she is not financially better off but it is a

mere accolade, then it is likely that the court may not find this, so far to be assessable.

The key contention pertaining to the receipt of the cash convertible Oscar award will in all

probability, lie on whether it’s a gift or not. In Kelly v FCT15 it was seen that if the ‘prize’ is linked

to employment, then it is assessable. In that case, a football player who was the taxpayer in the

case won an award for ‘best and fairest’ and won a $20,000 prize. In that case the $20,000 was

held to be an ‘ordinary income’ as the prize related directly to the football player’s level of skill.

Thus, when a prize is assessable for income tax purposes, there is a strong nexus16 or link between

the degree of exertion and skill (or business activity) which outweighs the fact that the prize was

given on change. In this case, we can see that Megan received as Oscar for ‘best director’.

In Kelly, the court laid out certain factors that must be kept in mind while deciding whether the

gift is assessable or not: firstly, the degree of professionalism, whether it was for a service or

14
1960 [AC] 376
15
(1985)16ATR478
16
As the requirement is laid out in Brown v FCT (2002) 49 ATR 301
personal qualities, whether it was paid before or after the service rendered, and whether it was

related to (Megan’s) contract. In relation to these requirements or tenets, we can see that

professionalism can be seen as the award was for her directing her film and receiving best actor,

the award was indeed cash convertible as its worth was $20,000. It was also certainly made out to

her after the services were rendered i.e. after the movie was made. It can also be seen that the

award (or its cash convertible worth of $20,000) was not made out to her because of her personal

qualities or because it was a personal gift (as laid out in the cases of Hayes v FCT17 and Scott v

FCT18). Assesability on basis of ordinary income in the case of Megan’s Oscar award is further

strengthened by the case of Brown v FCT19 where a nexus(connection) was established as the

property gifted to Brown was a benefit (a beachfront apartment) free of charge, however, this was

connected to his important role in a development project.

It is plausible to argue therefore, that the Oscar award may well have been assessable as an ordinary

income and susceptible to income tax. This is seen further since in Moorhouse v Dooland20 it was

pointed out that not just direct but also indirect amounts earned by virtue of personal services will

constitute ‘ordinary income’. This depends on the circumstances of the case however since, since,

as pointed out by the case of Scott v FCT21 just mere gifts are not income so can’t be assessed for

tax. In this case, the ‘agreement not to sell’ with the Oscar academy throws vague shadows at the

susceptibility to the award being assessable. It might be argued that because of the agreement to

17
[1956] HCA 21
18
(1966) 117 CLR 514
19
Brown v FCT (2002) 49 ATR 301
20
[CA 1954, 36 TC 1
21
(1966) 117 CLR 514
not sell, it might render the ‘gift’ not cash convertible at all. In this case, it would not fall under

‘ordinary income’ and we would have to check for statutory income.

There is still a possibility of this Oscar award being a ‘prize or voluntary, and unexpected

payment’, such as that in Laidler v Perry22. In this case it was laid out that if this ‘prize’ which is

cash, or a cash convertible, was given as a ‘reward for services’ then it was assessable, since it

arose was a benefit that arose out of employment. In Meghan’s case the Income Tax Commissioner

may argue that since the award was indeed a benefit that arose out her employment as it was in

relation to her work as best director, that it is likely to be assessable.

However, If the Oscar award does not fall under ‘ordinary income’ then it will need to be checked

under ‘statutory provisions’ which may make it liable to be taxed. According to s. 6-10(2)23

statutory income is that income which is not ordinary income but is included in assessable income.

The Oscar award would likely fall under s15-224 of the ITAA97. This is so because the award can

deemed to be one received in course of being ‘best director’ as a result of ‘personal exertion’. We

can see that it fulfills all the statutory criterions i.e. it is ‘provided to’ Megan inn respect of

‘employment or services rendered’. However, her employment wasn’t to the Oscar academy it was

to the film studio. Secondly, it does not seem to be the case that the award, even if it has a cash

22
[1965] 2 All ER 121
23
ITAA97
24
Previously s 26 (e) of ITAA 1936
value, was ‘allowance, gratuity, compensation, benefit, bonus or premium’. It was simply an award

praising her work.

It may thus be adequately concluded that the award is in all probability not going to be assessable

for income tax purposes, either as an ordinary income or as a statutory income. This is further

strengthened by the fact that she is not allowed to sell it, meaning that its cash convertible value

does not provide a ‘gain’ to her.

References

Legislation:

Income Tax Assessment Act 1997 (Cth) s 20

NCOME TAX ASSESSMENT ACT 1936 - SECT 344

Case Law:

Scott v Commissioner of Taxation (1935) HCA 48

FCT v Cooke and Sherden (1980) 80 ATC 4140

Tennant v Smith (1892) AC 150

Hochstrasser v Mayes [1960] AC 376

FCT v Blake 84 ATC 4661

Kelly v FCT (1985)16ATR478

Hayes v FCT [1956] HCA 21

Scott v FCT (1966) 117 CLR 514

Brown v FCT (2002) 49 ATR 301

Moorhouse v Dooland CA 1954, 36 TC 1

Scott v FCT (1966) 117 CLR 514

Laidler v Perry [1965] 2 All ER 121