INCOME FROM PERSONAL

SERVICES: ORDINARY INCOME

OR CAPITAL RECEIPT?

1
Ordinary income: reward for services:
Capital receipt or personal services
• Necessary to distinguish between ordinary income receipts
and capital receipts (not ordinary income).

Income from
personal
services

Income Capital
Reward for Giving up a
services valuable right
Capital receipt or personal services:
Changes to entitlements
• A gain from a change to entitlements under employment or
service contracts takes the character of what it replaces:
– Relinquishing employment rights (eg, rights to control a
company as managing director): Bennett v FCT (1947).
– Loss of employee entitlements: AAT Case 7,752 (1992).
– No change to rights, likely ordinary income unless a gift.
Capital receipt or personal services:
Restrictive covenants
• Restrictive covenant or restraint of trade may be formed:

On During the On
entering a contract’s conclusion
contract operation of a contract

• Ordinary income if connected with the current employment

agreement (ie, payment of future services).
• Capital characterisation:
– Separate agreement to give up valuable rights: Higgs v
Olivier (1952).
– No nexus with earning activity (eg, payment made at end of
contract): Hepples v FCT (1991).
– Note, capital gains tax may apply (CGT events C2 and D1).
Capital receipt or personal services:
Sign-on fees
• Sign-on (enticement) fees as part of normal practices of
attracting people into a new employment contract:
– Characterised as a payment for future services (ordinary
income): Pickford v FCT (1998); Ruling TR 1999/17.
– Jarrold v Boustead (1963) – payment may still be capital if it
involves giving up and existing right.