Week 3

Question 1

Ordinary income

Answer 1

Ordinary income is “income according to ordinary concepts” and is assessable under s 6-5 Income Tax Assessment Act 1997.

Question 2

Income according to ordinary concepts

Answer 2

Gains require characterisation by the courts to determine if the gain has an income character.
Jordan CJ in Scott v Commissioner of Taxation (1935) interpreted income to be determined “… in accordance with the ordinary concepts and usages of mankind”.
E.g. Salary, rent, interest

Question 3

Income is commonly categorised into three broad areas:

Answer 3

Income from personal services and employment

Income from business

Income from property

Question 4

Central issue in the application of the Australian income tax legislation is the characterisation of a gain as:

Answer 4

Ordinary income

Capital

Not capital or ordinary income

Question 5

Prerequisites of ordinary income

Answer 5

Cash or convertible to cash

Real gain to the taxpayer

Question 6

Cash or cash convertible

Answer 6

A gain cannot be ordinary income if it is not cash or not cash convertible.
Tennant v Smith (1892): free accommodation
FCT v Cooke and Sherden (1980): free holiday
What is cash convertible?
The item must be readily convertible to cash
It must not be illegal to sell the good: Payne v FCT (1996).
E.g. Receive alcohol or cigarette – not cash convertible because need a licence to sell.
Note, statutory provision of s 21A Income Tax Assessment Act 1936 for non-cash business benefits.

Question 7

Real gain

Answer 7

If a receipt is not a genuine gain (ie, the taxpayer is better off financially), it is not ordinary income.
More likely to apply in employment situations and clubs:
Reimbursement of a work-related expense held not to be a real gain: Hochstrasser v Mayes (1960): employer required taxpayer to move cities – made a loss on sale of house – employer reimbursed him for loss – not income

Question 8

Characteristics of ordinary income

Answer 8

Regular/periodical receipts

The flow concept

Question 9

Regular/periodical receipts

Answer 9

A gain that is regular or periodic is more likely to be ordinary income than a gain that is paid as a lump sum:
Regular receipts characterised as income nature: FCT v Blake (1984). Bank made voluntary payment after retirement
One-off receipts not ordinary income: FCT v Harris (1980). Bank made voluntary payment after retirement
Lump-sum gains may also be ordinary income, for example:
One-off receipt of interest under a loan agreement
Contract to do a one-off job.
Regular gain may not be ordinary income (less common):
See, Foley v Fletcher (1843-1860) where a taxpayer received instalments for the sale of a capital asset.

Question 10

Characteristics of ordinary income:Flow – the concept

Answer 10

The flow concept is expressed in terms of ‘fruit’ and ‘tree’ in Eisner v Macomber (1920) by Pitney J (Case about assessment of Dividend):

Tree represents capital

Fruit represents income

Question 11

Flow – important traits

Answer 11

Nexus (a connection) witht the earning source

Severable from its earning source
i.e., the gain can be extracted without the affecting the underlying earnings. E.g. Rent can be derived without affecting the property

Question 12

Some gains are ordinary income despite no earnings source

Answer 12

Receipts that are regular, expected and depended upon for support can constitute ordinary income, even if they do not flow from an earnings source:
Government aged pension - income: Keily v FCT (1983)- regular, expected, depended on for support
Youth Allowance payments - income: Anstis v FCT (2010) (See Deduction Chapter 12)
“Top-up” payments offered to employees who resigned to enlist in World War II. “Top-up” is the difference between former salary and military salary: FCT v Dixon (1952). – Voluntary Payment but took on nature of income from perspective of Dixon - regular, expected,depended on for support