Week 4: Chapter 10 Ordinary Income

Question 1

What is Ordinary Income?

Answer 1

not defined in legislation and takes on its common law meaning

Question 2

What does assessable income include if you are an Australian resident?

Answer 2

ordinary income derived directly or indirectly from all sources (in or out of Australia), during the income year

Question 3

What is NOT assessable income?

Answer 3

‘Exempt income’ or ‘non-assessable non-exempt income’

Question 4

What are the 2 concepts that identify whether an item is “income”?

Answer 4

Trust and Flow Concept

Question 5

What is the Trust Concept?

Answer 5

Draws distinction between the ‘income’ of the estate and the ‘corpus’ of the estate

Note:
Under trust law, a person holding a life estate in certain property has the right to benefit from income derived from the property (eg rent) during their lifetime, but is not entitled to dispose of the property (eg the land), which is held for the benefit of the remainderman.

Question 6

What is the flow concept?

Answer 6

Income represents the flow from a particular source

‘fruit and tree’ metaphor

Question 7

Describe the flow concept in greater detail?

Answer 7

returns generated from the exploitation or use of capital assets are ordinarily of an income nature.

Question 8

What are some examples of flow concept income?

Answer 8

• rent arising from a lease of land
• interest received on a loan of money
• royalties derived from the grant of a licence to use copyright, and
• dividends received in respect of shares.

Question 9

What does it mean for income must ‘come in’ and be ‘money’ or ‘convertible into money’?

Answer 9

for something to be income it must ‘come in’ to a taxpayer and be received as money or in a form that is convertible into money—otherwise there is no ‘gain’ that can be taxed.

Question 10

What case talks about Be received as cash or in a form that is convertible into cash?

Answer 10

(Tennant v Smith)

Question 11

What is the mutuality principle?

Answer 11

taxpayers cannot derive income from themselves (The Bohemians Club)

Question 12

When will the Mutuality Principle be applied?

Answer 12

Complete identity between the contributors and participants (Municipal Mutual Insurance)

A reasonable relationship between what a member contributes and that member’s expected participation in the common fund (Coleambally Irrigation)

Question 13

What does it mean by “Quality in the recipient’s hands”?

Answer 13

Whether an amount is income ‘depends upon its quality in the hands of the recipient, not the character of the expenditure by the other party’ (McNeil)

Question 14

What relevant factors determine the “Quality”

Answer 14

Recurrence, regularity and periodicity (Keily ,Inkster)

Continuing expectation of receipt (Blake)

Profit-making objective (Myer Emporium Ltd)

Question 15

What are the 4 categories of ordinary income?

Answer 15

Income from personal exertion

Income from business

Income from profit making schemes

Income from property

Question 16

What is income from personal exertion?

Answer 16

Rewards for services and
payments incidental
to employment, but not gifts or payments for
relinquishing or restricting rights

Question 17

What is income from business?

Answer 17

Ordinary proceeds 
of a business and 
profits from  
trading
transactions, but
not gains from the
mere realisation of
capital assets

Question 18

What is income from profit-making schemes?

Answer 18

Profits from 
isolated
commercial
transactions
entered into with
the purpose of
making a profit

Question 19

What is income from property?

Answer 19

Flows from the 
use of capital 
assets
but not gains
accruing to 
capital assets

Question 20

Regarding rewards for services and payments incidental to employment what categories constitute “income”?

Answer 20

• Reward for services
• Voluntary payments to professional activities
• Payments made by 3rd parties that are ‘incidental’ to employment may be income.

Question 21

What is substitutes for income?

Answer 21

Payments that substitute or supplement income may constitute income:

-Supplementary payments from former civilian employer to ‘make up’ difference between civilian and military wage (Dixon)

Question 22

Does personal gifts constitute income?

Answer 22

Payments that are traced to some personal relationship between the payer and the recipient are generally not income:

Question 23

What are 2 examples of personal gifts that do NOT constitute income?

Answer 23

Receipt of shares by an accountant from a friend who was his former employer (Hayes)

Money received by a solicitor from a former client as a personal gift (Scott)

Question 24

Realisation of capital assets are generally ______ in nature

Answer 24

capital

Question 25

Gains Gains made from venturing an asset into a trading activity are generally _____

Answer 25

income

Question 26

What are the 3 factors that determine whether a taxpayer is carrying on a business?

Answer 26

Scale and magnitude of activities

Whether it is carried out in a systematic, commercial and regular manner

Profit motive

Question 27

A business can exist even when it involves?

Answer 27

Small scale activities (Walker)
Short term activities (Shields)
Athletic pursuits (Stone)
Illegal activities (La Rosa)

Question 28

Regarding ordinary proceeds of a business, what happens a taxpayers is carrying on a business?

Answer 28

entire ‘ordinary proceeds of the business’ are assessable even if such amounts are applied for capital purposes

Question 29

What disinction must be drawn between share trading cases?

Answer 29

Distinction must be drawn between:
Share traders (eg Shields, Case 10/2011), and 
Mere investors (eg Smith, Hartley, Devi)

Factors to consider in determining whether someone is a share trader discussed in Case X86 (eg repetition, turnover, plan etc)

Question 30

What factors does Case X86 list in determining whether a taxpayer carries on a business?

Answer 30

Read slide

Question 31

What factors does Case X86 list in determining whether a taxpayer is a share trader?

Answer 31

Read Slide

Question 32

What is the 1st Strand of Myer?

Answer 32

Gains made from extraordinary transactions may be income where they arise from commercial transactions entered into by taxpayers with the intention of making a profit

Question 33

What is the 2nd strand of myer?

Answer 33

Where a future right to interest is converted into a present lump sum amount, the present lump sum amount will be income as it replaces the future interest, which would have been treated as income

Question 34

What are the 2 methods for accounting for income?

Answer 34

Cash Basis- When cash or equivalent is received

Accruals Basis- When income is earned