O & S income summary pt.2

Question 1

Income from business

Answer 1

Business is defined in ITAA97 s. 995–1(1): ‘It includes any profession, trade, employment, vocation or calling but does not include the occupation as an employee.’

1.1 Indicators identifying business activity

Is there a profit making intent—what about sports people?
System and organisation employed—What about gambling?
Scale of the activity—Is the activity a hobby?
Sustained regularity and frequency of transactions.
Commercial approach to the transactions—Is advice obtained regarding the transaction.
Characteristics or quantities of property.
GP International Pipecoaters v FCT (1990) 21 ATR 1 (PTL 2019, s. 8.140)
FCT v Cooling (1990) 21 ATR 13 (PTL 2019, s. 8.240, 8.250).
FCT v GKN Kwikform Services Pty Ltd (1991) (Links to an external site.) (CCH Australia Limited 2019a).
FCT v Radnor (1991) 22 ATR 344 (PTL 2019, s. 8.90).
FCT v Stone (2005) (Links to an external site.) (CCH Australia Limited 2019b).
Ferguson v FCT (1979) 9 ATR 873 (PTL 2019, s. 8.20, 8.40, 8.50).
Reference: Chapter 3.6: Business income (Links to an external site.) (pp. 49–52) in your eText.

Question 2

ordinary income under six headings

Answer 2

Ordinary income is income according to ordinary concepts.’

Income when the receipt is regular, reliable and expected.
Income from personal services and employment.
Income from business.
Income from isolated profit making undertakings or schemes.
Income from property—rent, interest, annuities and royalties.
Income from compensation—plus exempt income.
Reference: Chapter 3.6: Business income (Links to an external site.) (pp. 49–52) in your eText.

Non-cash business benefits
Under general principles ordinary income doesn’t include receipts that are not cash or cash convertible.

ITAA36 Section 21A allows the FCT to put a value on non-cash business benefits that if received in cash would have been ordinary income.

FCT v. Dixon (1952) 86 CLR 540 (PTL 2019, s. 5.130, 6.70, 6.220, 10.20, 10.70)

Reference: Chapter 3.6: Business income (Links to an external site.) (pp. 49–52) in your eText.

Question 3

Isolated and extraordinary transactions

Answer 3

Transactions that are not within the usual activities of an ongoing business are known as ‘extraordinary transactions’ and may be ordinary income or capital.

An isolated transaction is a one-off transaction not undertaken by an existing business and may also result in the profit being ordinary income or capital.

Scottish Australian Mining Company Ltd v FCT (1950) 81 CLR 188 (PTL 2019, s. 8.140, 8.180)
FCT v Myer Emporium Ltd (1987) 163 CLR 199 (PTL 2019, s. 5.80, 8.130, 8.150, 8.170, 8.210, 8.220, 8.250, 8.260, 10.150, 10.280)
Westfield Limited v FCT (1991) 21 ATR 1398 (PTL 2019, s. 8.150, 8.170, 8.220, 8.250)
FCT v Whitfords Beach Pty Ltd (1982) 12 ATR 692 (PTL 2019, s. 8.170, 8.180, 8.190, 8.200, 8.260, 8.280, 8.290, 10.150)
Reference: Chapter 3.6: Business income (Links to an external site.) (pp. 49–52) in your eText.

Question 4

Income from property

Answer 4

Ordinary income may be earned from owning and holding property. The gain made from selling property may be ordinary income (selling trading stock) or a capital gain (selling the office furniture).

Definition ITAA 36 S6(1)

4. 1 Interest ITAA97 s. 6–5
5. 3 Dividends - this will be discussed in Week 9
6. 4 Rents ITAA97 s. 6–5
7. 5 Royalties ITAA97 s. 6–5 & s. 15–20

McCauley v FCT (1944) 69 CLR 235 (PTL 2019, s. 9.190)
Stanton v FCT (1955) 92 CLR 630 (PTL 2019, s. 9.200)
4.2 Annuities ITAA36 s. 27H

Reference: Chapter 3.7: Property income (Links to an external site.) (p. 52) in your eText.

Question 5

Compensation receipts

Answer 5

Compensation normally takes the character of the item it replaces.

5.1 Compensation of an income nature

Loss of trading stock:

FCT v Wade (1951) 84 CLR 105 (PTL 2019, s. 10.220, 17.20).

Loss of salaries and wages:

FCT v DP Smith (1981) (Links to an external site.) (CCH Australia Limited 2019).

Cancellation of employment contract:

C of T v Phillips (1936) (Links to an external site.) (CCH Australia Limited 2019).

Cancellation of trading contracts:

Heavy Minerals Pty Ltd v FCT (1966) 115 CLR 512 (PTL 2019, s. 10.170)
Dickenson v FCT (1958) 98 CLR 460 (PTL 2019, s. 9.170).
5.2 Compensation of a capital nature

Loss of capital assets:

Federal Coke Pty Ltd v FCT (1977) 7 ATR 519 (PTL 2019, s. 5.155, 5.160).

Cancellation of structural contracts:

5.3 Apportionment of payments

Reference: Chapter 3.8: Compensation and reimbursements (Links to an external site.) (pp. 53–55) in your eText.