Smith v FCT Payne v FCT - Lecture notes 1 PDF

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MA613 Tax Cases Smith v FC of T 87 ATC 4883 In the case of Smith v FC of T 87 ATC 4883, the taxpayer was employed by a bank and received payments of $570 from the bank in relation to a management certificate course he completed. These payments were part of an ‘encouragement to study’ policy of the bank. The ATO sought to include the payment of $570 in the taxpayer’s assessable income based on sec 26(e) which included in a taxpayer’s assessable income all allowances, gratuities, compensations, benefits, bonuses and premiums provided to the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by the taxpayer. Decision: The court held that the payments received by the taxpayer were assessable income under former sec 26(e) as there was a strong connection between the payments and the taxpayer’s employment at the bank. The taxpayer’s employment at the bank had a direct causal relationship with the payment. The court could not find any outside reasons for the payment other than the taxpayer’s employment at the bank.

Payne v FC of T 96 ATC 4407 In the case of Payne v FC of T 96 ATC 4407, a taxpayer who worked for a firm of accountants (KPMG) redeemed airline tickets under a Qantas frequent flyer program. The points used to redeem the tickets were accumulated through flights taken in the course of employment, with these flights being paid for by the taxpayer’s employer. The ATO sought to include the value of the airline tickets in the taxpayer’s assessable income based on sec 26(e) which included in a taxpayer’s assessable income all allowances, gratuities, compensations, benefits, bonuses and premiums provided to the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by the taxpayer. Decision: However, the Federal Court held that although the points were earned by taking flights in the course of employment, they were not provided ‘in respect of’, or ‘for or in relation directly or indirectly to’, the taxpayer’s employment. Also, because the taxpayer was not providing any employment-related services to the airline, and the employer did not have any arrangement with the airline or pay for the frequent flyer membership, there was not a direct causal relationship between the earning of the points and the taxpayer’s employment.

Conclusion: The two cases above relate to the application of sec. 15-2 ITAA97 which has replaced the former sec. 26(e) ITAA36. This section includes in a taxpayer’s assessable income, all allowances, gratuities, compensations, benefits, bonuses and premiums provided to the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by the taxpayer. These two cases illustrate that where a benefit received by a taxpayer is provided by a third party who is not the taxpayer’s employer, and the taxpayer has provided no services for the benefit, a separate contractual arrangement under sec. 15-2 will therefore not apply....