Q: A client who is an employee architect, he and another employee entered a station design competition by the government office (OVGA). They progressed to the final five and received a prize of $40,000 to prepare a plan for the project, and they were requested to submit an invoice to OVGA for the amount. The ultimate prize for the competition was a contract to design the station. There is no precedent or interpretative decision that fits this situation. Whether the prize will be regarded as assessable income?
A: Generally, a gift or prize is regarded as personal windfall gain and not as ordinary income. Unless the taxpayer has received the prize or gift in relation to any income producing activity of the taxpayer. The courts have established that consideration of the whole of the circumstances is necessary and the following factors need to be considered:
- In what capacity and for what reason that the recipient received the prize or gift
- Whether the prize or gift is a common incident of the recipient’s calling or occupation
- Whether the prize or gift is made voluntarily
- Whether the prize or gift is solicited
- Whether the prize or gift can be traced to gratitude engendered by some service rendered by the recipient to the prize or gift donor
- The motive of the prize or gift donor
- Whether the recipient relies on the prize or gift for regular maintenance of themselves and any dependants.
In this case, it is quite clear that “prize” won in the “competition” was part of a tendering exercise for a contract. The amount “won” relates to the income-producing activity of the taxpayer and was received in recognition of an architectural design.
Therefore, it is clear that “prize” was really a fee provided for services and accordingly is fully taxable as assessable income.