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TUTORIAL 4 ORDIINARY INCOME 1

Both the 1936 and the 1997 Acts are called “Income Tax Assessment Act”. The concept of income is therefore very important to determining what is taxed. Where is the definition of income for the purposes of the legislation? ITAA36 s6(1)

2

Is all money received by a taxpayer “assessable income” within the meaning of section 6-5 ITAA 1997? If not, give examples of a receipt that is income within the meaning of s6-5 and a receipt that is not. Not all money received by a taxpayer is assessable income within the meaning of section 6-5 as this section only covers ordinary income which is income in ordinary concepts Examples of ordinary income: salary, wage, business income, government benefits Examples of non-ordinary income: capital gain, gifts, inheritance.

3

In FCT v Dixon (1952) 86 CLR 540 the amount Dixon received from his ex-employer was ordinary assessable income. Why was it ordinary assessable income? What if Dixon did not know, before joining the army, he was going to get this extra amount from his exemployer. Would that change the answer? The payment was deemed to be ordinary assessable income due to its payment traits. The payment were regular, expected and could be relied on by Dixon for personal living expenses and lifestyle. If Dixon did not know before joining the army, the payments would have lost their expectability and Dixon wouldn’t have been able to rely on those for his support, then the payments may not be ordinary assessable income. However, knowledge grows with regularity, depending on frequency of payments, after a period of payments, it could be argued that Dixon has reasonable grounds to expect the payments and hence relies his lifestyle on them.

4

Was the amount received by the taxpayer in FCT v Harris (1980) 10 ATR 869; (1980) 43 FLR 36 assessable? How is this amount different to the decision in FCT v Dixon (1952) 86 CLR 540 and FCT v Blake 84 ATC 4661; (1984) 75 FLR 315?

The taxpayer in FCT v Harris did not know his exemployer would be making the payment to him and so it was unexpected. Furthermore, the payment was made in a lump sum at the end of the year and so not regular. These are primary differences to the cases of Dixon and Blake, leading to the amount received not ordinary assessable income 4

Why weren’t the amounts in Tenant v Smith [1892] AC 150 and Cooke & Sherden v FCT (1980) 10 ATR 696 assessable? How have these decisions been overcome by the ITAA? The amounts in Tenant v Smith was not assessable as the court argued that the free accommodation was not cash or cash-convertible as the taxpayer wasn’t able to sublet the accommodation provided the bank to another party and as such, not assessable income. The similar applies for Cooke & Sherden v FCT as the free holiday was not transferable and hence was not cash or cash convertible. Section 21A ITAA36 was introduced to deem that noncash business benefits that is not convertible to cash shall be treated as if it were convertible to cash on the grounds that it has got cash value attached to it. This applies for businesses so the decision in Tenant v Smith will not be altered but the once for Cooke & Sherden would probably be affected.

6

(i)

(ii)

(iii)

Are the following receipts assessable income under s. 65. Money given on a weekly basis by a parent to a child (aged 8) as spending money. No. There is no earning source for the child, i.e. the child did not need to do anything in exchange for the income Money received on a weekly basis by a religious institution, voluntarily given by members of the religious institution. This is club activity and principle of mutuality shows that funds given to a club from its members are not assessable as there is no real gain. The receipts are a type of non-assessable, non-exempt income A sale of a block of land which was to be paid for over a 20 month period in monthly instalments. The land was bought originally by the person selling it for building flats on for the purpose of renting.

(iv)

(v)

(vi)

(vii)

(viii)

(ix)

(x)

(xi)

However, lack of finance meant the flats could not be built. The question is the buyer’s intention at the time the land was purchased; was it to be a part of structure (i.e. to generate income) or to be parts of a product (i.e. to be resold for profit). In this case, the original intention is to buy the plan to build flats, i.e it has a purpose of capital. SO the gain from selling the land has a capital nature and so is not assessable under s6-5 money and gifts, such as beer or wine, left at Christmas for a person who delivered mail, by some of the people to whom the mail had been delivered to during the year. This is a gift, an unexpected remuneration to a person who had been adequately remunerated for his job and hence this is more likely to be a genuine gift and hence not assessable. A holiday taken by an employee using ‘flyer points’ awarded whilst on overseas travel for the employer. (see Payne v FCT 32 ATR 516) From Payne v FCT principles, also TE 1999/6 at 8, flight rewards received by employees from employer-paid expenditure are not assessable income. a performance bonus received by an employee Yes, this is a payment in relation to the employment relationship and hence is assessable. a tip received by a waiter This is a gift to a person who has been fairly remunerated for his service, this is also unexpected, irregular and could not be relied upon so this is a pure gift and not assessable. interest derived from a bank deposit This is regular, expected and can be relied upon. This is also in cash/cash convertible and has a nexus with the earning source (the bank deposit) and hence is assessable income rent received from an investment property This is regular, expected and can be relied upon. This is also in cash/cash convertible and has a nexus with the earning source (the investment property) and hence is assessable income a gift received under a will of a deceased relative This gift is not expected, not regular and does not have a nexus to an earning source, nor could it be relied on for the receiver’s lifestyle and hence is not assessable A gift received from a former employer who is also a close friend

(xii)

(xiii)

(xiv)

(xv)

(xvi)

(xvii)

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Similarly to Scott v FCT, this is a gift, an unexpected remuneration from a friend so it not assessable. A payment made by an employer to a former employee with an agreement that the employee not sue the employer for wrongful dismissal. This is a restrictive covenant which stops the receiver from doing something and so is capital in nature, i.e. not assessable. A cash prize received by a contestant on a quiz show This is a windfall gain not directly or indirectly related to the person’s income earning activity and so is not assessable. Proceeds from the sale of old furniture & other second hand items at a ‘garage sale’. This ‘business’ does not have profit motive, system & organization, regularity and business record so unlikely to be a business thus not assessable under s6.5 A doctor’s overseas conference and airfare costs paid by a pharmaceutical company sponsoring a conference. This is a once off payment and is not connected to the doctor’s income earning activity and does not appear to be payment for his services so is not assessable under 6.5 The return to its members of excess funds raised by a tennis club for a club house renovation. Principal of mutuality, the club represents its member and vice versa, no one is better off in this case as the club refunds what its members have paid. So this income is not assessable A payment made by a television station to a professional footballer for being named the best and fairest in the national league. The footballer got the payment because of his/her employment and so this income is assessable under s6.5 John is an employee with R & C Enterprises. He is in his final year of study at university as a full time student. Under an arrangement with his employer he was paid a ‘scholarship’ of 60% of his salary on the usual pay days while undertaking the course. The employer also reimbursed John for his compulsory fees and prescribed reference books. There was no express condition that John continue employment with the company upon completion of the course of study. Advise John whether he has derived assessable income.

In this question, the scholarship is periodic, in cash and can be relied upon by the receiver. Furthermore, John has this scholarship because he is an employee of the company and this can be viewed as a payment for his service to the company and so this income is assessable 8

Mary was a student at the Victorian College of the Arts. She was learning the piano. Her father owned a very successful restaurant in Melbourne. As part of her course Mary needed to play 30 hours of “public” performances per year. Mary played the piano at her father’s restaurant. Her father did not pay her for doing this, as she did it to satisfy the requirement to gain 30 hours public performances. However, Mary did receive amounts from customers for her excellent playing. Are the amounts Mary receives from the customers assessable? This tip is an example of a third party gift and is voluntary payments received by Mary for her quality service provided to the diners therefore establishing a nexus thus the tip is assessable....