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Tax Updates: 15 August 2023
Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at email@example.com.
Gifts – when will they be assessable income?
Inland Revenue (IR) has issued a drafted interpretation statement titled, “Income tax: Income – when gifts are assessable income”.
It is a 59-page document with an accompanying six-page fact sheet.
The IS commences with the definition of a gift for the purpose of the statement as being the receipt of an amount in money or money’s worth that the payer makes voluntarily, by way of benefaction, and the payer receives no material benefit or advantage in return, which may include koha.
From an assessable income perspective, the specific provisions of Part C of the Income Tax Act 2007 relevant to gifts include amounts derived:
- from a business (section CB 1);
- from carrying on or carrying out an undertaking or scheme entered into or devised for the purpose of making a profit (section CB 3) (a profit-making activity);
- in connection with employment (section CE 1); and,
- in undertaking a voluntary activity (section CO 1, subject to section CW 62B, which exempts reimbursements of expenditure).
Finally, a gift may be income under the ordinary meaning of the word “income” (i.e., income under ordinary concepts) and liable to income tax under s CA 1(2).
As you would expect, the IS commentary covers each of the above five taxing provisions, commencing with a discussion on employment income, and the factors to consider when determining whether or not a gift may be considered employment income. Factors indicative that the amount should be assessable income of the recipient include; where the amount of the payment reflects the extent of any services provided, where the payment has recurred, or it is foreseeable that it will recur, rather than being a one-off payment, or where the payments are commonplace as a matter of practice in the occupation, profession, or industry. However, a gift is unlikely to be employment income where the recipient has already been fully remunerated for any services to which the payment might be related, or the employment relationship has ended at the time of the payment and is unlikely to resume.
With respect to a gift being determined to be income from a business or profit-making activity, factors supporting such a view include where the payer and recipient are both carrying on a business or profit-making activity, where the recipient cannot continue to carry on the activity without the payment or where the recipient is not a charity. However, the gift is unlikely to constitute assessable income where the gift is unexpected or unsolicited, the gift is made in recognition of past services that have been fully remunerated for at the time or where the business or profit-making activity had ended at the time of the payment.
In the case of voluntary activities, consideration needs to be given as to whether the gift and the activity of the recipient have a sufficient connection. An income determination is likely in this regard, where the amount of the gift reflects the amount of the recipient’s personal exertions in undertaking the voluntary activity, or where the gift has recurred or has a foreseeable element of recurrence rather than being a one-off payment. The amount is unlikely to be income, however, where the voluntary activity had ended at the time the payer made the gift.
Finally, while a gift may escape taxation under all the above taxing provisions, it could, however, still be deemed to be assessable income of the recipient as being income under ordinary concepts – a term itself not legislatively defined within tax law, and therefore one left to the decisions of the court of determine its meaning in each specific case.
In this respect, having considered the various decisions of the courts to date, IR considers that a gift may be income under ordinary concepts where:
- The series of gifts fulfils the notion of “an income”. That is, the gifts have the necessary periodicity, and the payer makes them for the recipient to rely upon, or intends the recipient to rely on them, for regular living expenses, and they are so relied upon by the recipient.
- The necessary periodicity of the payments refers to payments made with such regularity, recurrence, amount and frequency that they amount to “an income”.
- The payments are periodic and made with the intention of providing an income when they began (or this has been established over the passage of time) to the extent that the recipient could reasonably have expected to rely on the payments for their living costs.
- The recipient relies on the payments for their financial support; or,
- The payments are connected with some activity or personal exertion of the recipient, even though that exertion or activity does not necessarily arise in the context of an employment relationship (past, present or future) and does not amount to a business or a profit-making activity.
The IS covers each of the five taxing provisions in quite some detail, including commentary on the various relevant case law decisions, factors you should consider in determining the correct taxation of the gift amount received, and the provision of an example to illustrate the main points of the discussion.
Should you wish to provide feedback to the draft IS, the closing date for submissions is 18th September.
This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.