“ INCOME ”

1. “INCOME” HOW JUDGES DETERMINED? Noor Rohin Binti Awalludin

2. PRESENTATION The word “Income” is not limited to “gains” or “profits”. A receipt may be taxable as income eventhough there is no element of gain or profit. Q: Illustrate the above statement with cases elaborating how judges have determined “income” that is subject to tax. You must look at cases in countries where income is defined in the ACT and where it is not. Also look at both Commonwealth and Non Commonwealth countries. Noor Rohin Binti Awalludin

3. OUTLINE Introduction Related Cases Commonwealth v Non-Commonwealth Conclusion References Noor Rohin Binti Awalludin

4. INTRODUCTION What income is subject to tax? Section 3, ITA ACT 1967; Subject to and in accordance with Act, a tax to be known as income tax shall be charged for each YA upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia. All income is subject to tax. Income is very broadly defined - "gross income means all income from whatever source derived" – Such as compensation for services (wages, fees, commissions, etc.), income from business, interest earned, rents, royalties, and dividends received, receipt of alimony, annuity or income from life insurance and endowment contracts, pensions, discharge of debts, income in respect of a decedent, and income from an interest in an estate or trust. Noor Rohin Binti Awalludin

5. INCOME- BY JUDGES Australia - Scott v Commissioner of Taxation Held : the word “income” is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usage of mankind, except in so far as the status state or indicate an intention that receipts which are not income in ordinary parlance are to be treated as income” Noor Rohin Binti Awalludin

6. COMMONWEALTH CASE-Gambling Income is defined by Sir George Lowndes in CIT, Bengal v Shaw Wallace & Co (6 ITC 178) Income connotes a periodical monetary return ‘coming in’ with some sort of regularity, or expected regularity, from defined sources. The source is not necessarily of one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Windfall, gambling or profits arising from speculative activities are capital gains and would not be subjected to income tax. However, according to the case Minister of Finance v Smith (1972 AC 193), Lord Haldane is of the opinion that Income Tax Acts are not necessarily restricted in their application to lawful businesses only. The ‘tree-fruit’ analogy suggested in Bengal’s decision to categorize capital-income is only useful in simple situation. Noor Rohin Binti Awalludin

7. NON-COMMONWEALTH CASE - Gambling LILLIE M. PETTY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Lilliie No evidence that she in the trade or business of gambling. Gambling Winnings $9,180 Year 2000 Gross Income $11,835≠$21,015 CIR Noor Rohin Binti Awalludin

8. NON-COMMONWEALTH CASE - Gambling The tax court found that the unreported $ 9,180 of gambling winnings was includable in the taxpayer‘s adjusted gross income for the taxable year 2000. As a result, the taxpayer's adjusted gross income was properly increased from $ 11,835 to $ 21,015. LILLIE M. PETTY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Noor Rohin Binti Awalludin

9. NON-COMMONWEALTH CASE - Gambling Thus her gambling losses were deductible only as itemized deductions, not from gross income, in arriving at adjusted gross income. Respondent's computation of the earned income credit (EIC) was correct based on the inclusion of the taxpayer‘s gambling winnings as part of her modified adjusted gross income. The tax court concluded that the increase in the taxpayer's modified adjusted gross income decreased her EIC and resulted in the deficiency in issue. OUTCOME: The tax court sustained respondent‘s determination. LILLIE M. PETTY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

10. COMMONWEALTH CASE-Dividend PA HOLDINGS LTD & KULLY JANJUAH v HMRC PA Holdings Ltd and Kully Janjuah Offshore • 24.6 million Bonuses (‘EBT’ scheme) • 24.6 million Dividends Invested in shares. Employees (rewards) Jersey Company The fact was that the payments were received as dividends in respect of the shares they held and should only be taxed as dividends. Noor Rohin Binti Awalludin

11. The Special Commissioners held that: it was possible for the payments to be characterised as both dividends and employment income and on the facts of the case it was appropriate to do so; Section 20(2) was unambiguous in providing that the tax charge on distributions (such as dividends) took precedence over the employment income charge and accordingly the payments could not be taxed as employment income and could not be subject to PAYE; and the payments would, however, be subject to NICs as the payments were earnings and there was no NIC statutory provision or case law equivalent of Section 20(2) in the context of NICs. COMMONWEALTH CASE - Dividend PA HOLDINGS LTD & KULLY JANJUAH v HMRC Noor Rohin Binti Awalludin

12. NON-COMMONWEALTH CASE - Dividend HELVERING, COMMISSIONER OF INTERNAL REVENUE, v. GRIFFITHS Not include the dividend in tax return Taxpayer Received in form of shares of stock. Dividends Income Included the dividend in tax return Sent notice of deficiency Internal Revenue Noor Rohin Binti Awalludin

13. NON-COMMONWEALTH CASE - Dividend The Supreme Court affirmed the judgment. and Treas, which stated that; some types of stock dividend were taxable, did not provide a basis on which the Court could reconsider its prior decision that a dividend in common stock paid on common stock was not income when received. did not do what the prior decision prohibited because did not state that all stock dividends were taxable and Treas. the legislative history indicated that Congress did not intend to overrule the Supreme Court's prior decision. HELVERING, COMMISSIONER OF INTERNAL REVENUE, v. GRIFFITHS Noor Rohin Binti Awalludin

14. NON-COMMONWEALTH CASE - Dividend JUDGES The judgment reversing petitioner‘s decision to include respondent's stock dividends in her income was affirmed because the Internal Revenue Code and Treasury Regulations did not overrule the Supreme Court's prior decision concerning whether the stock was taxable, and the legislative history supported that conclusion. HELVERING, COMMISSIONER OF INTERNAL REVENUE, v. GRIFFITHS Noor Rohin Binti Awalludin

15. NON-COMMONWEALTH CASE - Dividend ALEJANDRINA DE AYCARDI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Did not file to qualify interest rec. by a NR nontaxable Taxpayer (Resident of Columbia) Invested money Dividend Income Form W-8, Certificate of Foreign Status Mutual fund Investment Prepared Substitute Returns Commissioner Internal Revenue Noor Rohin Binti Awalludin

16. NON-COMMONWEALTH CASE - Dividend The CIR treated the taxpayer as a U.S. resident and calculated the tax owed based on that status. The taxpayer argued that the dividend income she received should have been reclassified as interest and treated as nontaxable for federal income tax purposes. The court concluded that the dividend income the taxpayer received on her mutual fund investment did not qualify as nontaxable interest income . As a nonresident of the U. S., the taxpayer's dividend income received on the mutual fund investment was taxable. ALEJANDRINA DE AYCARDI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Noor Rohin Binti Awalludin

17. NON-COMMONWEALTH CASE Dividend JUDGES: Held that the dividend income that the taxpayer received did not qualify as nontaxable U.S. source interest income received by a nonresident alien. ALEJANDRINA DE AYCARDI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Noor Rohin Binti Awalludin

18. CONCLUSION "........ The definition in the Act is an inclusive one. As said by Lord Wright in Raja Bahadur Kamakshya Narain Singh of Ramgarh vs. CIT (1943) 11 ITR 513 (PC) : TC 38R.293, 'Income ........... is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation'. Noor Rohin Binti Awalludin

19. REFERENCES Income Tax Act 1967 A Comprehensive Guide to Malaysian taxation, 4th Edition Advanced Malaysian Taxation, Chong Kwai Fatt Malaysian Tax Commentaries 3r Edition, Thornton’s Public Ruling, Inland Revenue Board Malaysia Website: www.hasil.gov.my Noor Rohin Binti Awalludin

20. THANK YOU Noor Rohin Binti Awalludin