Taxation: Assessability of Income from Running, Gardening and Gifts

This article discusses the assessability of income from running, gardening and gifts in the context of taxation laws and case laws. It covers issues related to ordinary income, prize money, hobby vs business, CGT exemption, timing of CGT and treatment of gifts.

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Introduction
In the situation presented, there are essentially two taxpayers in the form of Stella and Mia.
Besides, their full time jobs, the two taxpayers are associated in a host of activities. For
instance, Stella is a renowned runner participating in national and international events. On the
other hand, Mia has keen interest in gardening and has taken strides to plant some tress in a
five acre plot. In the backdrop of above details, the relevant issues here relate to the
production of assessable income from activities outside their employment which ought to be
determined considered relevant case laws and applicable legislation.
Facts
Stella has a full time employment in the capacity of a tax accountant. Besides, she also has
been running since the age of 12 and regularly participates in various competitions. The
earnings related to running amount to $ 85,300 has been derived during the given tax year.
The annual leaves available to her are used for attending the various games. Also, she has a
friend named Mia who also has interest in running but has been quite irregular and thereby
made only $ 5,000.
The full time job for Mia is in the capacity of teacher. Recently, she has built a house on a 2
acre land plot and has started residing in the same. Also, Mia has interest in gardening and
has planted trees of avocado, fig and walnut over the five acre plot, Details about the sale of
the old house of Mia are also offered. Besides, gifts that both taxpayers have provided each
other on various occasions have been described.
Issue
The critical issues on account of the facts outlined above are indicated as follows.
1) The assessability of the prize money of $ 85,300 that Stella has received on account of
running events.
2) The assessability of the prize money that Mia has derived from running events in the form
of prize.
3) The proceeds from the gardening activity started by Mia would be assessable or not which
in turn would be driven by whether gardening pursued by Mia is hobby or business.

4) The house related capital gains or capital losses that Mia may incur. Also, there is timing
issue of the taxation of the potential gains since the house sale agreement and proceeds
receipt did not take place in the same year.
5) The assessability of the gifts that Mia and Stella has provided to each other considering the
underlying circumstance and motive.
Rule
The various issues highlighted above have been critically analysed in wake of the underlying
legislation supported by case law and applicable tax rulings.
Ordinary Income
In accordance with s. 6-5 ITAA 1997, income that is derived from ordinary concept is
considered as ordinary income and is considered to be part of assessable income for the
taxpayer. The common proceeds include employment generated proceeds, business income
besides income from investment (dividend, interest, rent etc.) (Krever, 2017)
Prize Money
The relevant tax ruling for assessability of prize money is TR 1999/17 as per which these
would contribute to assessable or taxable income if the prize money has sufficient nexus with
the employment activity of the taxpayer. However, in certain cases, it may be possible that
the sports activity may be unrelated to the full time employment engaged by the taxpayer.
Therefore, various circumstantial factors ought to be considered for correct classification of
proceeds from engaging in such activity (Sadiq et. al., 2015).
A useful case with mentioning is Stone v FCT [2005] HCA 21 as the underlying facts are
similar to the situation presented for Stella. Ms. Stone (taxpayer) has full time engagement
with QPS (Queensland Police Force). But she also happened to be one of the premier javelin
throwers and represented Australia in many events. For the tax year under consideration for
the case, the proceeds derived based on engaging in javelin throwing events are summarised
below (Reuters. 2017)

As per the taxpayer neither of the above payments were taxable. However, later the matter
landed in court so as to decide the nature of the above payments that the taxpayer had
received. In context of sponsorship, it was highlighted by the court that a manager was kept
by the taxpayer whose specific role was to manage the sponsorships which reflects that the
taxpayer engaged in commercial exploitation of the talent. The net result is that the income
derived would be assessable. By appearing in various events and functions, a service was
offered by the taxpayer and hence the cash proceeds derived in lieu of these would lead to
assessable income production under s. 6-5 ITAA 1997. Besides, it was highlighted by the
honourable court that the taxpayer has organised her skills in a business-like manner and it
was not a hobby. As a result, the prize proceeds were also considered assessable income
(Barkoczy, 2017).
Hobby vs Business
It is of utmost importance to segregate business activity from hobby as the proceeds from
former would produce taxable income while the latter would be tax-exempt as highlighted in
tax ruling TR 97/11. A relevant case law is Ferguson v. FC of T (1979) 37 FLR 310 at 325
which highlighted the host of factors that are relevant to segregation between the two (Sadiq
et. al., 2015).
 An essential parameter is the purpose behind engaging in the activity. Business
activities are inspired by the profit motive while hobby activities are primarily for
personal entertainment, enjoyment and learning.
 The regularity in undertaking a particular activity coupled with repetition is also a
significant factor. The business activities have a more regularity associated which is
in sharp contrast with hobby which is carried out when time is available and hence
tends to be irregular.
 Another factor to consider in the underlying organisation and planning in conducting
of activities. For a business set-up, for the various expenses and sales, proper records

would be maintained so that the underlying income can be determined and
maximised. In contrast, no such organisation is observed in case of hobby since the
underlying profit motive is not important and hence the taxpayer does not maintain
proper records of costs and revenue.,
 Another factor which can be used to differentiate between the two is the amount of
resources and the scale of activities. Typically in case of hobby, the taxpayer would
not invest too much time or financial resources as it is aimed only at personal
satisfaction and also the scale of activity is lower. However, business activities are
large in scale so that the profits can be maximised and also require higher resource
deployment for commercial level operations.
It is noteworthy in the light of Evans v. FC of T 89 ATC 4540 case that form the above factor,
a single factor must not be considered along rather the above factors must be collectively
considered. In this regards, it was opined in Martin v. FC of T (1953) 90 CLR 470 at 474 that
the decision should be essentially based on the overall impression that may be derived about
the activity by giving consideration to all circumstances (Barkoczy, 2017).
CGT Exemption
In relation to property asset, if the underlying taxpayer uses the same as personal residence,
then exemption from application of CGT (Capital Gains Tax) may apply in relation to any
capital gains that may be obtained from house sale. This is extended in accordance with the
main residence exemption that is provided by the subdivision 118-B ITAA 1997. A crucial
condition to be fulfilled is that during the ownership period, the house ought to be deployed
as the main residence of the taxpayer. Additionally, the property must not be produced for
deriving any rental income during the ownership period. (Reuters, 2017).
Timing of CGT
It may happen at times that the contract for asset sale may be enacted in a given tax year but
the relevant proceeds are received only in the next tax year. In such a scenario, a relevant tax
ruling is TR 94/29 as per which the potential CGT should be applied in the year of contract
enactment irrespective of the timing of the actual proceeds (Krever, 2017).
Treatment of Gift

There is no tax levied on gifts as has been indicated in tax ruling TR2005/13. Further, there
are certain conditions that ought to be fulfilled for a payment or item to be recognised as gift
which are outlined in the Federal Commissioner of Taxation v. McPhail (1968) 117 CLR 111
case law. These are summarised as indicated below (Sadiq et. al., 2015).
 The ownership transfer has to necessarily take place.
 The voluntary nature of transfer is imperative.
 There must be absence of any mutual favour expectation on the part of transferor.
 The underlying intent must be of benefaction towards transferee..
Application
The discussion of the key issues is apparent as follows.
Stella – Tax Implications
1) Full Time Accountant – On account of this job, ordinary income would be derived by
Stella since salary from employment is a component of ordinary income which contributes to
assessable income under s. 6-5 ITAA 1997.
2) Running event earnings – All the components are considered as ordinary income as per s.
6-5 which is confirmed be reference to the Stone v FCT case. The regular participation on
part of Stella in various events using her holiday leaves clearly highlights that the running
activity is akin to a business. The prize money Stella has won is on account of her skill and
practice considering her engagement with running since the age of 12. The fee income from
appearance is on account of service being rendered and hence part of ordinary income under
s. 6-5. The sponsorships are derived on account of the business like conduct of the running
activity and thereby these proceeds would be akin to business income and thereby taxed.
3) Receipt of antique from Mia – It would not be prudent to consider this as a gift as this has
been extended by Mia on account of the cleaning related services that Stella offered. In the
absence of these services, the antique item would not have been provided. Therefore, the
market price of antique is assessable income for Stella since it is statutory income.
Mia – Tax Implications

1) Prize Money – In case of Mia, the running related commercial aspect is lacking owing to
the irregular participation and limited winnings which indicates limited practice and
investment. Hence, it is hobby and hence prize money non-taxable.
2) Ordinary income would be realised from the full time profession of teacher as this is
employment income and assessable under s. 6-5 ITAA 1997.
3) Gardening – The gardening activity would be classified as a business instead of a hobby.
The explanation in this regards is offered below.
 The motive of profit is very apparent since Mia is making arrangement to sell the
produce and does not intend to provide it for free to neighbours and relatives. Also, in
a bid to maximise the profit and attract more customers, she has created a Facebook
page under a brand name.
 The size of the gardening activity is quite huge considering planting of five acre land
and associated expenses and commitments with regards to time. These are reflective
of business.
 Also, she has been doing research with regards to organic farming and provided a
separate room for the storage of relevant farming equipment which indicate the level
of investment.
3) Old House Sale – Exemption of CGT under subdivision 118-B would be available for Mia
since after buying the house, she started a renovation and after finishing of the same , she had
made the house as main residence and thereby no CGT implications would arise.
4) Stella providing gift – All the aspects related to the gift are satisfied since item actually
given to Mia from Stella. Further, Stella had no expectations while giving the gift and it was
quite voluntary in nature.
Conclusion
The discussion above clearly indicates that Stella would derive assessable income from
accountant job, running related earnings and also the antique mirror since it was not a gift
from Mia. Mia has derived assessable income on account of teaching job. Further, any
proceeds derived from gardening would be business income since it is not a hobby. No tax
would be levied on the house owing to main residence exemption and gift from Stella.

References
Textbooks
Barkoczy, S. (2017) Foundation of Taxation Law 2017 (9th ed.). North Ryde: CCH
Publications.
Krever, R. (2017) Australian Taxation Law Cases 2017 (2nd ed.). Brisbane: THOMSON
LAWBOOK Company.
Reuters, T. (2017) Australian Tax Legislation 2017 (4th ed.). Sydney. THOMSON
REUTERS.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., & Ting, A.
(2015) Principles of Taxation Law 2015 (7th ed.). Pymont: Thomson Reuters.
Case Law, Tax Rulings & Legislation
Evans v. FC of T 89 ATC 4540
Federal Commissioner of Taxation v. McPhail (1968) 117 CLR
Ferguson v. FC of T (1979) 37 FLR 310 at 325
Martin v. FC of T (1953) 90 CLR 470 at 474
Stone v FCT [2005] HCA 21
TR 94/29
TR 97/11
TR 1999/17
TR 2005/13
Income Tax Assessment Act, 1997