Taxation Law: Personal Service Income and Tax Liability

This document discusses the tax concerns of salary received by taxpayer in the Westpac bank account, tax liability of airline ticket and voucher for vacation in Paris, and employment contract of providing services. It also explains the application of sec 6-5, ITAA 1997 and other relevant laws.

Running head: TAXATION LAW
Taxation Law
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Table of Contents
Answer to question 1:.................................................................................................................2
Issues:.........................................................................................................................................2
Application:................................................................................................................................2
Application:................................................................................................................................4
Conclusion:................................................................................................................................6
References:.................................................................................................................................7

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Answer to question 1:
Issues:
a. The issues that will be discussed is about the tax concerns of salary received by
taxpayer in the Westpac bank account.
b. Is the airline ticket for vacation in Paris and voucher to cover the expenses while in
Paris will be taxable as ordinary earnings?
c. Is the employment contract of providing services will attract tax liability in respect of
the ordinary sense of “sec 6-5, ITAA 1997”?
d. Is the sign on fees and compensation payment is a taxable proceeds in relation to “sec
6-5, ITAA 97”?
Application:
Receipts which has the relation with the performance of contracts or the provision of
services usually treated as the chargeable earnings for those that receives the money. The
income that is earned from personal efforts must be characterised as the produce or the
occurrence of service.
The definition of personal service income given in “sec 6 ITAA 1936” says that when
a taxpayer receives any money from the employment and from delivering personal services
then those incomes earned by the taxpayer will be liable for tax (Bankman et al. 2018). On
the other hand, the employers will be viewed taxable for the fringe benefit tax. There should
always be the relation with the receipts that is received by a person by rendering the personal
services will be taxable as ordinary income.
There should be the relation between the items of private items and services. The
remuneration that was earned in “Dean v FCT (1997)” by the taxpayer was treated

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chargeable earnings for the employee that has decided to be employed for 12 months (Schenk
2017). As it has been explained in “sec 6-5 (1)” the ordinary earnings of the taxpayer include
their taxable earnings that they have earned from all the sources.
One of the important characteristics of the ordinary income is that it should be either
money or can be converted in cash. A benefit that are non-cash in nature and has link with the
taxpayer’s personal services but if the benefit cannot be changed in cash then it is not
observed as earnings. Most notably, the decision that was made in “Tennant v Smith (1892)”
held that the worth of free accommodation that was given to a bank employee was not
regarded as income (Buenker 2018). Normally “sec 6-5, ITAA 1997” clarifies that there are
two prerequisites of ordinary income. Firstly, the income should either cash or it should be
easily converted in cash. Secondly, it should constitute a real gain for the receiver.
Payments that a taxpayer receives for entering in the contract mainly for providing
any personal service or selling the asset, then such kind of payments are considered as the
income derived from the personal exertion (Barkoczy 2016). The verdict stated in “Brent v
FCT (1971)” explained that payment that was given to the taxpayer on account of entering in
the contract for service was held as personal services earnings (Miller and Oats 2016). The
receipts were treated as the chargeable proceeds within the ordinary connotation of “sec 6-5,
ITAA 97”. The most notable thing regarding the receipts is that there should be the link
amongst the receipts and the services that is rendered which may of any type, namely,
reward, ordinary incident of services provision or product etc.
Based on the rule of reconciliation given in “sec 6-25 (2)” lay down that if the figure
is regarded as the ordinary and statutory proceeds then the statutory returns rule would
prevail unless there is any contradictory intentions is given (Morgan and Castelyn 2018). On
the other hand, when it is found that a fringe benefit is given to the wage earner by the

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employer then the employer is accountable for FBT based on the worth of fringe benefit
given while the employee is non-taxable under “sec 23L, ITAA 36”.
There are certain types of income that may be either classified as the capital receipt or
the personal service income (Morgan, Mortimer and Pinto 2018). As explained in “Taxation
Ruling TR 1999/17” the sign on fees that a taxpayer has received on the basis of common
practice of providing people with the lucrative offer of joining a new contract may be
characterised as ordinary income (Qureshi and Kumar 2019). The verdict given in “FCT v
Pickford (1998)” payment given to taxpayer for rendering the future services was
characterised as ordinary earnings.
The pay that is received from the individual exertion also includes the restrictive
covenants. When a taxpayer is given a lump sum payment in exchange of the promise of the
taxpayer to accept the payment for restricting the rights of earning the income then it is
commonly viewed as having capital in nature (Sadiq 2019). The decision that the federal
court gave in “Pritchard v Arundale (1972)” explained that the compensation that a taxpayer
has got for surrounding the status of “partner” was not treated as taxable earnings.
While in the another case of “Riley v Coglan (1968)” the decision associated to the
personal exertion was considered (Morgan, Mortimer and Pinto 2018). The law high court
handed its outcome by clarifying that the payment that was given in return for restricting the
operation during the exchange of current employment was considered as the payment that a
taxpayer was given in advance for the services which will be delivered. The payment was
chargeable as proceeds under “sec 6-5, ITAA 1997”.
Application:
The taxpayer here Rod McLean working as the computer system engineer was
transferred to Hong Kong for work purpose. He received a salary of $8,000 that was paid

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directly in Westpac bank account. Denoting “sec 6 ITAA 1936” the salary received by Rod
McLean is personal service income (Murray et al. 2018). Referring to “Dean v FCT (1997)”
the salary should be viewed as the having satisfactory connection with the employment and
delivering personal services. Therefore, it will be viewed chargeable on the basis of ordinary
conception of “sec.6-5, ITAA 1997”. The salary was paid to him in 1st April 2017, there will
be considered taxable in 2017/18.
Later after the services were completed by Rod he was given a return flight ticket for
the purpose of holiday in Paris. Rod was also presented with voucher to cover his expenses.
The flight ticket and the voucher covering his expenses is a benefit that is not in cash or
convertible in cash. By mentioning to the verdict in “Tennant v Smith (1892)” a non-cash
benefit having link with the Rod personal services but non-cash convertible will not be liable
for any tax in the current year (Murray et al. 2018).
Rod also entered in the contract with the RST Ltd that offered him with the consulting
job with the yearly remuneration of $100,000 and also a car. Similarly, the annual
remuneration of $100,000 must be viewed as payments for entering in the contracts for
rendering the personal services. Referring to the “Brent v FCT (1971)” the receipts must be
characterised as the ordinary incident of service provision (Butler 2019). The yearly
remuneration should be treated as the taxable earnings within the ordinary denotation of “sec
6-5, ITAA 1997”. The sum of $100,000 will be viewed chargeable in 2018/19.
Rod was also given a car by his employer. Referring to “sec 23L, ITAA 36” the car
amounts to a non-taxable fringe benefit for Rod while the employer here RST Ltd will be
accountable for fringe benefit tax purpose. Later during the year RST gave an incentive to
Rod for leaving the job with Softmicro so that he can permanently move to Hong Kong. The
payment amounted $40,000 for the year. Noting the decision in “Riley v Coglan (1968)” the

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payment must be treated as the sign on fees to Rod because the payment was received by him
in advance of the services to be rendered (Morgan et al. 2018). The payment that Rod has
received will be viewed chargeable ordinary proceeds under “sec 6-5, ITAA 1997”.
As the case develops further, an evidence gained suggest that a RST Ltd paid a sum of
$20,000 to Rod as the joining bonus. Since the amount was received by Rod in exchange of
the current employment, the amount received must be viewed as in advance of the services
which will be rendered by him. The amount of initial $20,000 will be considered taxable in
the year of 2018/19 while the rest of the $20,000 will be considered taxable in the income
year of 2019/20. The sum will be treated as taxable earnings within the ordinary meaning of
“sec 6-5, ITAA 1997”.
Conclusion:
The analysis that is done above regarding the taxability of the Rod tax it can be stated
that Rod will be viewed chargeable for the salary income that is received by him during the
year from employment. The receipts are treated as ordinary earnings within “sec 6-5, ITAA
1997”. Whereas the flight ticket and voucher for expenses will not amount as taxable income
since it is a non-cash benefit which is not convertible in cash.

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References:
Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2018. Federal Income Taxation.
Aspen Publishers.
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Buenker, J.D., 2018. The Income Tax and the Progressive Era. Routledge.
Butler, D., 2019. Who can provide taxation advice?. Taxation in Australia, 53(7), p.381.
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Morgan, A. and Castelyn, D., 2018. Taxation Education in Secondary Schools. J.
Australasian Tax Tchrs. Ass'n, 13, p.307.
Morgan, A., Mortimer, C. and Pinto, D., 2018. A practical introduction to Australian
taxation law 2018. Oxford University Press.
Murray, I., Taylor, J., Walpole, M., Burton, M. and Ciro, T., 2018. Understanding Taxation
Law 2019.
Qureshi, A.H. and Kumar, A., 2019. The public international law of taxation: text, cases and
materials. Kluwer Law International BV.
Sadiq, K., 2019. Australian Taxation Law Cases 2019. Thomson Reuters.
Schenk, D.H., 2017. Federal Taxation of S Corporations. Law Journal Press.

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