In a recent decision the Federal Court, the Court had to consider whether or not some or all of a payment made by an employer of the taxpayer to a trust of which the taxpayer was a beneficiary was required to be included in the taxpayer’s assessable income. Of significance in this case was the fact that the contribution was made by the employer to the trust in consideration of the taxpayer waiving his entitlements to any remuneration or bonuses that may be payable to him under his employment contract.

The Court found that the whole of the payment to the trust was to be included in the assessable income of the taxpayer as ordinary income. The Court found that the income was ordinary income of the taxpayer on a number of bases.

Firstly the Court noted that it is established law that amounts paid in consideration of the performance of services will almost always be income. In this case the amount was paid to the trust in consideration of the taxpayer waiving an entitlement to bonuses under his employment agreement and therefore the amount was paid as a reward for services. The Court also noted that it is established law that the timing of a payment as against the provision of the services is not determinative of its character. Therefore the fact that the bonus entitlements were contingent and subject to claw back and were based on the employer’s future performance and therefore the payment to the trust may be viewed as having been paid before the services were provided, did not mean that the payment lost its character as income.

Secondly, the Court noted that it is established law that it if an amount is paid in substitution for another amount, then the amount which is paid has the same tax character as the amount it substituted or compensated. In this case the payment to the trust by the employer was in substitution for an amount payable under the taxpayer’s employment contract. It was therefore a payment in substitution for a payment that was a reward for services which is ordinary income. Thus the payment to the trust retained the same character as the payment for which it was substituted namely a reward for services which is ordinary income.

The taxpayer also sought to argue that he has not derived the income because the payment was made to a trust and therefore he had not received the payment. Therefore his argument was that the payment had not come home to him at the time when the payment was made to the trust.

However for income tax purposes in working out whether or not you have derived an amount of ordinary income you are taken to have received the amount as soon as it is applied or dealt with any way on your behalf or as you direct. Therefore income may be derived by the taxpayer even if it not received by the taxpayer directly if it is constructively received under this provision. The clear intention of this deeming provision as noted by the Court is to ensure that a taxpayer does not avoid income tax on amounts that if received by him or her would be ordinary income, merely by arranging for those amounts to be paid to another person, even though the taxpayer is receiving some benefit from the other person’s receipt of the amount.  

In this case the Court found that the payment was made to the trust at the direction of the taxpayer and therefore was derived by the taxpayer at the point of payment to the trust. The effect of later transactions were irrelevant as to whether or not the income had been derived at the point of payment into the trust because those later transactions occurred after the derivation of the income.  

The Court said that when one looked at either the realities or to the general understanding among practical business people, there was no other conclusion that could be reached than that the payment to the trust had the character of income and was applied or dealt with either at the taxpayer’s direction or on his behalf. Therefore the payment was ordinary income which was derived at the point of payment to the trust.