Introduction to Introduction to Taxation LawsTaxation Laws

Ordinary Ordinary IncomeIncome

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 ordinary income 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