Introduction to Taxation Laws Ordinary Income
Aims of Lecture After studying this you should be able to: • explain and apply the concept of ordinary income for tax purposes • distinguish between capital and income receipts • identify and explain different types of income e.g income from employment activity and income from business
Section 6-5 ITAA97 • s6-5(2)-If you are an Australian resident, your assessable income includes the ordinaryincome you derived from all sources whether in or out of Australia during the income year. • s6-5(3)-If you are a non-resident, your assessable income includes:- • (a) the ordinary income you derived directly or indirectly from all Australian sources during the income year…..
Section 6-5(1) • Ordinary Income is “Income according to ordinary concepts” • General Law concept : Scott
Ordinary Income • Per CJ Jordon • “The word income is not a term of art and what forms of receipts are to be comprehended within it and what principles are to be applied…….is to be determined in accordance with ordinary concepts and usages of mankind”
Key features of income • Income comes in to a tpr beneficially • unrealised gains on assets? • Income is money or moneys worth - FCT v Cooke and Sherden - Sec. 21A ITAA36 (over $300 - s.23L) - Sec. 26(e)
Key features of Income • Characterise receipt in the hands of the particular taxpayer • farmer sells tractor cf. sale by tractor sale yard • Federal Coke • Nexus with income earning activity • Labour, business, investment activity
Key features of income cont…. • Recurrent, periodical, and regularity • what about one-off transactions? (Myer) • Taxpayers cannot derive income from themselves • The Bohemian’s Club vs Acting FCT • Illegal or immoral receipts maybe income • Partridge vs Mallandaine
Key features of income cont…. • Accounting treatment is not determinative of tax treatment (Arthur Murray)
Key features of income cont…. • Capital receipts are not income • What are capital receipts?
Capital Receipts • General indicia of capital receipts: • received as a lump sum payment • if a regular receipt, it is in the nature of instalments of lump sum amount • payments for disposal of a capital asset • Important - 50% tax free!! New Tax System Changes.
Categories of Ordinary Income • We will look at: • Income for personal exertion • Voluntary payments • income from business
Remuneration for Services Rendered • Salary, wages and commission are income • Brent
Voluntary Payments • Examples of receipts held to be non-assessable • Hayes • Scott • Seymour • Examples of receipts held to be assessable • Kelly • Moorhouse • Dixon
Voluntary Payments • General Principles - What is payment for: • Accolade to personal qualities; Or • incident of employment. • If former, not income. If latter, income
Voluntary Payments - Not Income • Hayes • acct’t/financial advisor received $12,000 worth of shares. • Previously remunerated • held - Not income • Role of motive of the donor
Voluntary Payments - Not Income • Scott • Solicitor received $10K • had been fully remunerated in the past • Held - not income • no connection to any income earning activity • gifts made to number of people at the same time.
Voluntary Payments - Income • Kelly • footy player - $150 per game • Ch 7 Sandover Medal - $20K • Held - income • recognised incident of his occupation • irrelevant that he didn’t think he would win it • irrel came from 3P - not his employer
Voluntary Payments - Not Income • Dixon • former employer agreed to pay diff. Bt military and civil pay to encourage staff to enlist • income - incidental to employment • Fulliger J - income substitution approach • Nb- comments on 26(e)
Section 26(e) • Value of all allowances, gratuities, compensations, benefits etc. • In respect of or relating to (directly or indirectly) employment or services rendered • But does not include….. • Fringe Benefit under the FBTAA
Section 26(e) • Interaction with FBT • Nexus requirement • Valuation issue - Donaldsons case
Frequent flyer Points • Example • Sonia is a member of the Qantas frequent flyer points program. As part of her work she travels extensively. Her travel expenses are paid by the employer - she get points • She cashes them in for trip to Maldives worth $3000. Is this income
Frequent flyer Points • No • Not ordinary income • 21A not applicable • 26(e) not applicable • Refer Payne v FCT
Income from Business • Threshold issues:- • (a) is the taxpayer carrying on a business • (b) are the proceeds from business ordinary income:- • ordinary proceeds • extra-ordinary transactions
When is a person carrying on a business? • Badges of business • Profit motive/commerciality • Volume Scale of business/production • Substantial and regular effort • Continuity system and regularity • Business records • Ferguson: Walker: Thomas
When is a person carrying on a business? • Share trading activities • Dealing with land • Business of gambling - Brajokovich: IT2655
Proceeds of carrying on a business • Proceeds received in the ordinary course of business are income • eg sale of items of trading stock • London Australia investments
Proceeds of carrying on a business • Receipts that are incidental to your business activities are also income • Cooling - Lease incentive received by a firm of solicitors • Wide definition of business
Proceeds of carrying on a business • extra-ordinary transactions entered into in the course of business can give rise to income amounts • Myer Emporium - financial transactions entered into by Myer (assgm’t of income stream) with CitiCorp
Example - Savings in Liabilities • FCT v Orica • FCT v Consolidated Press Holdings