Taxation – Ordinary Income PDF

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TAXATION – ORDINARY INCOME Section 6-5(1) of the Income Tax Assessment Act 1997 (ITAA97), any amount of remuneration which satisfies a nexus /connection between itself and an earning activity will constitute being determined as ordinary assessable income. Types of Income: (a) Assessable Incomes 6-5 Ordinary Income s 6-10 Statutory Income (E.g. Net Capital Gain) (b) Non-Assessable Incomes 6-20 Exempt income s 6-23 Non-assessable non-exempt income (NANE)

Doctrine of Constructive Receipt: ITAA97 s 6-5(4) and 6-10(3) “you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct”

How to Determine if Amount is Ordinary Income: (15 Parson’s Propositions): 1. INCOME IS DERIVED WHEN IT HAS “COME-HOME” – ILLEGALITY IS IRRELEVANT: - Must be ‘derived’- accrual vs cash accounting basis - Unrealised gains are NOT income - Partridge v Mallandaine (1856) Income from burglary classed assessable 2. DERIVED INCOME WILL BE RECOGNISED IN THE AMOUNT OF ITS REALISABLE VALUE. - Must be cash or convertible into cash - Tennant v Smith [1892] AC 150- Free accommodation was not ordinary income. 3. INCOME MUST BE JUDGED IN THE CIRCUMSTANCES OF ITS DERIVATION - FCT v McNeil (2007) Shareholder received $576.64 from participation in share buy-back scheme. Court deemed that this was ordinary income to the ‘shareholder’. 4. INCOME AN ITEM MUST BE A GAIN BY THE TAXPAYER WHO DERIVED IT - Hochstrasser v Mayes [1960]- Employer company set up scheme to compensate employees for any loss made on sale of their home when being relocated for work. Amount received by employee under the scheme was not assessable – no gain. 5. NO GAIN UNLESS AN ITEM IS DERIVED BY THE TAXPAYER BENEFICIALLY. - Zobory v CT (1995) - employee earned interest on money that he stole from his employer. The interest was NOT assessable income because he was not beneficially entitled to it and the funds were held on constructive trust for his employer.

6. INCOME MUST ‘COME IN’ / BE DERIVED FROM OUTSIDE SOURCES. - The Bohemians Club v FCT (1918) 7. THERE IS NO GAIN IF AN ITEM IS DERIVED BY THE TAXPAYER AS A CONTRIBUTION TO CAPITAL. - Foley v Fletcher (1858) 8. A GAIN WHICH IS A MERE GIFT DOES NOT HAVE THE CHARACTER OF INCOME. - Hayes v FCT (1956) - accountant received shares in company from former boss/business owner, court held it was a gift, NOT income from personal exertion. 9. A MERE WINDFALL GAIN DOES NOT HAVE THE CHARACTER OF INCOME. - Gambling/lottery winnings are not income. 10. A CAPITAL GAIN DOES NOT HAVE THE CHARACTER OF (ORDINARY) - Income= Fruit, Capital = Tree - Eisner v Macomber 252 US 189 (1920) - “The fundamental relation of ‘capital’ to ‘income’ has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream to be measured by its flow during a period of time. 11.b A GAIN WHICH IS ONE OF A NUMBER DERIVED PERIODICALLY HAS THE CHARACTER OF INCOME. - FCT v Dixon (1952)...