The background facts Oceania is a mythical island country located in the South Pacific. Like many other island countries the national sport in Oceania is rugby. The Oceania ITA levies an annual income tax on persons having ‘chargeable income’. For a resident individual chargeable income is defined as aggregate net income from all sources worldwide for the year. Income is defined as ‘income according to everyday concepts and usage.’ Media interests in Australia operate a rugby competition (the "Competition") composed of teams from Australia, New Zealand and elsewhere. The Competition has an annual season of around eight months. It generates large revenues from the sale of television rights. Oceania Rugby Pte Limited (‘ORL’) is a private company incorporated in Oceania. It holds a right to enter a team in the Competition. X is a rugby player born in Oceania. For three years X has been coaching and playing rugby in Japan for Toyota Limited (‘Toyota’). X is married to a Japanese national (‘Wife’). Recent events In December of last year ORL approaches X with an offer to play rugby for ORL for two years. X is keen to return home and play rugby for a team based in Oceania but feels unable to accept ORL' s offer for the reasons listed hereunder. – X's employment agreement with Toyota provides for 20% of his salary each year to be withheld and paid on completion of his four year contract. Should X not complete his contract this money will be forfeited. After three years this amounts to $60,000. – ORL has a corporate sponsor. ORL's agreement with the sponsor forbids any ORL player endorsing or promoting any product (excepting products of the corporate sponsor). X has been holding preliminary talks with a footwear manufacturer to endorse its products in Oceania and elsewhere. Should X agree to play for ORL he would be required to abandon this and any other sponsorship opportunity. – Wife has a promising career with a Japanese company which she would be compelled to give up should X agree to return to Oceania to play for ORL. In January ORL again approaches X with a new offer to play rugby for ORL. X accepts this new offer and he and Wife move to Oceania. Principal provisions of the new offer accepted by X are summarized hereunder. • contract term - 2 years • sign-on fee - $15,000 in return for agreeing to accept ORL’s offer of employment. • annual salary - $90,000 • option fee - $30,000 in return for X granting ORL an option to renew the contract for a further year. • abandoned salary compensation - $60,000 payable on completion of the ORL contract being compensation for salary withheld by Toyota and forfeited on non-completion of the Toyota contract. • restrictive covenant one - $20,000 in return for X covenanting not to play rugby for any other team in the Competition for two years in the event that the contract with ORL is terminated by either X or ORL prior to its completion. • restrictive covenant two - $20,000 in return for X covenanting not to sponsor or endorse any product while under contract to play rugby for ORL. • re Wife - undertaking by ORL to find Wife employment in Oceania within three months of relocating, or failing that, payment to Wife of a sum of $25,000. Subsequent events On arriving in Oceania X receives $4,000 from ORL to cover expenses incurred by X and Wife in relocating. Wife is unable to find employment in Oceania and three months after arriving receives from ORL the sum of $25,000.

Question

1. Should the option fee, the payment received for restrictive covenant one, and the payment received for restrictive covenant two be included in X's chargeable income?
(Deal with each of these 3 receipts in turn and provide reasons in support of your answers.)

Answer rating: 100% (QA)

Option fee Yes the option fee should be included in Xs chargeable income The option fee is a payment ... View the full answer