Ordinary income & Statutory income Flashcards
What is not assessable income
ITAA97 s6-15
(1) If an amount is not *ordinary income, and is not *statutory income, it is
not assessable income (so you do not have to pay income tax on it)
(2) If an amount is *exempt income, it is not assessable income
Exempt income
ITAA97 s6-20
(1) An amount of *ordinary income or *statutory income is exempt income if it
is made exempt from income tax by a provision of this Act. For summary lists
of provisions about exempt income, see sections 11- 5, 11-10 and 11-15.
Section & example of exempt income
ITAA97 s11-5
Entities that are exempt, no matter what kind of ordinary or statutory income they have:
- charitable institution
- educational institution, public
- religious institution
- scientific institution
Allowances in relation to employment
If paid in cash would be assessed under ITAA97 s6-5
- An allowance is a predetermined amount paid to an employee which is estimated to cover an expense regardless of whether the expense will be incurred
- Contrast with a reimbursement of an actual expense incurred as part of your employment which is NOT income
If both s6-5 & s15-2 - priority is given to s6-5
Therefore
Car allowances
Entertainment allowances
If paid in cash would be assessed under ITAA97 s6-5
Statutory income
Statutory income s6-10
A receipt may be ‘Statutory Income’ if:
(1) it is not ‘ordinary income’ and
(2) it is included as assessable income by a specific provision of ITAA97
Examples:
•From services and employment ITAA97 s15-2
•Capital gains ITAA97 s100
•Reimbursement of a car expense ITAA97 s15-70
Income from business
Definition ITAA97 s.995-1(1)
“any profession, trade, employment, occupation or calling, but does not include occupation as an employee”
Normal gross earnings or proceeds from business operations are assessable as ordinary income
ITAA97 s.6-5
Business income
Ferguson commenced farming with 5 cattle with the intention of building to 200 head
The issue was whether Ferguson had commenced business
FCT argued he was simply preparing for business
Court ruling All the characteristics of business had to be evaluated and one wasn’t more important than the other.
Ferguson v FCT (1979)
Characteristics of income from business
Profit-making intent/purpose - hobby or business
Commercial approach to the activity
Scale of activities - sport persons
System and organisation - gambling
Sustained and frequent activity – occasionally selling surplus fruit from own tree
Type of activity and type of taxpayer
FCT v Radnor Pty Ltd (1991)
Non-cash business benefits
Giving a benefit not convertible into cash to a person operating a business as payment
Benefit is treated as if it is able to be convertible to cash ITAA36 s21
Exemptions (not assessable=not income )
non-deductible entertainment ITAA36 s21A(4)
If otherwise deductible to recipient in year of receipt
ITAA36 s21A(3)
If less than $300 ITAA36 s23L(2)
Summary of non cash benefits
Cooke and Sherden resulted in benefits that couldn’t be converted to cash to not be ordinary income and s6-5 could not apply
As a result the following changes were made.
ITAA36 s21A introduced to allow the ATO to put a value on business benefits.
FBT introduced to tax employers who provided a range of benefits to employees to be taxed at the highest marginal tax rate
ITAA97 s15-2 benefits provided in relation to employment or services rendered to be included in assessable income
EXCEPT if it is ordinary income such as salaries or allowances.
Or it is subject to FBT
Profit making schemes
FCT v Myer Emporium (1987)
Strand one
“An isolated business transaction will be income if entered into with the purpose of making a profit or gain from the transaction”
Strand two
If convert a future right to income into a lump sum payable immediately then the lump sum will be income
Isolated transactions
An isolated business transaction will be income if entered into with the purpose of making a profit or gain from the transaction”
Commissioner’s view – Tax Ruling 92/3 guidelines
Nature of entity undertaking the transactions
Nature and scale of other activities of the taxpayer
Amount of money involved
Magnitude of profit sought
Nature, scale and complexity of the transaction
Manner in which the transaction was entered into
Income from property
Interest - ITAA97s.6-5
Lease and rent - ITAA97s.6-5
Royalties - ITAA97s.6-5, s.15-20
Dividends (refer to topic 10)
Principles of Compensation
Compensation takes the character of what it replaces – the ‘replacement principle’
Income:
-Compensation for loss of wages or salary – ordinary income, ITAA97s6-5, FCT v Dixon
- cancellation of employment contracts C of T v Phillips (1936)
- cancellation of trading contracts Heavy Minerals (1966)
- The payment may be periodic payments or a lump sum – still income.
Capital receipts (not ordinary=not assessable): -The loss of a building or plant or other asset where the loss is covered by an insurance payment
Realisation of property
FCT v Whitfords Beach (1982)
Land originally acquired for non-commercial purpose
Held for 13 years
Change in company ownership and new articles adopted
Land rezoned & developed as residential sub-division
Held
Taxpayer had gone beyond merely realising a capital asset
Taxpayer assessable on profit from sale of land as activities constituted carrying on business of land development
Profit also assessable as from a profit making undertaking or scheme
Principles Ch 8.180 - 200
