Tax Law

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xTopics in this lecture
• Income
– Assessable Income

Topic 2: Income

– Ordinary Income
– Statutory Income

Australian Tax Law BFA714

– Exempt Income

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What is income?

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Key Legislative Provisions
ITAA97

• Economist View

– Division 6:






– Traditional economic view of income is that it is a
‘gain’
• Recognises both realised and unrealised gains
as income

s 6-5 Ordinary income
s 6-10 Statutory income
s 6-15 Not assessable income
s 6-20 Exempt income
s 6-23 Non-assessable non-exempt income

– Other Relevant Divisions:





• Tax View
• Only recognises realised gains as income
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Division 10
Division 11
Division 15
Division 59

Assessable income list
Exempt income list
Some items of assessable income
Non-assessable non-exempt income
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Need for assessable income

Guide to Division 6 – section 6-1

s 4 –15 ITAA97 How to work out your taxable
income:
Taxable Income = Assessable Income – Deductions
Hence it is the concept of assessable income and
deductions that determines taxable income.
Assessable income: Division 6
Deductions: Division 8

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Lecture 1 - Page 1

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(1) Ordinary income sec 6-5(1)

What is assessable income?

• s 6-5(2) ITAA97 ‘If you are an Australian
resident, your assessable income includes the
ordinary income you derive directly or
indirectly from all sources, whether in or out of
Australia during the income year’

The following analysis may be applied in
determining whether an amount is included in
assessable income:
(1) Is the amount ordinary income?
(2) Is the amount statutory income?
(3) Are the residency and source of income
requirements satisfied?
(4) Is the amount exempt income?

• No specific guidance in legislation as to what
is meant by ‘income according to ordinary
concepts’ or ‘derived’
Courts

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Tax period

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Timing of derivation

• Financial year 1 July - 30 June s 4-10(1) ITAA97

• Depends on type of income
– Salary and wages
• Derived when received Brent v FCT (1971)
– Interest
• Derived when received or credited
– Rent
• Derived when received

• Income tax is worked out by reference to your
taxable income for the income year: s 4-10(2)
ITAA97
– Income year is generally the same as financial year

• Substituted accounting period (SAP) other than 30
June may be adopted: s18 ITAA36

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Timing of derivation (cont.)

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Accounting method

– Professional income
• Need to weigh up factors such as size of
business TR98/1
• Small sole practitioners on cash basis Carden’s
Case (1938)
• Large businesses on an accrual basis
Henderson v FCT (1970)

• Non-business income
– Cash Basis Method
– Based on when income received or constructively received

• Business income
– Accruals method
– Based on when the right to receive income comes into being TR98/1, J Rowe & Son Pty Ltd v FCT (1971)
– Simplified Tax System (2001-2005) can be continued for those that elected it and hence cash basis used

• Prepaid Income
– Arthur Murray (NSW) Pty Ltd v FCT (1965)
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Lecture 1 - Page 2

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Example 1

Ordinary income: ordinary concepts

In each of the following, indicate what amount of
income, if any, has been derived during the
year ended 30 June:
1. An employee who receives $5,000 on 29 June, being in
respect of long service leave to commence on 1 July.
2. A finance company which lent $20,000 12 months ago on
the condition that the principal and interest of $2,222 are
repayable in full on 30 June. Payment of $22,222 was, in
fact, received on 3 July.
3. A dance instructor who opens a dancing school and
receives fees in advance. Fees received during the year
amount to $26,500. Of this, fees received during the year in respect of lessons still to be taught amount to $1,500.
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