Lecture 2

Topics: Income, Taxation in the United States, Income tax Pages: 36 (8601 words) Published: August 1, 2015
Queensland University of Technology
QUT Business School
School of Accountancy

ASSESSABLE INCOME:
RESIDENCY, DERIVATION AND SOURCE

1.0INTRODUCTION

1.1Section 6-5: The Pivotal Section of Assessable Income

2.0RESIDENCY

2.1Who is a Resident for Taxation Purposes?
2.2Test 1: The Resides Test
2.3Test 2: The Domicile Test
2.4Test 3: The 183 Day Test
2.5Test 4: The Superannuation Test

3.0DERIVATION OF INCOME

3.1Derivation is a Timing Concept
3.2Cash v Accruals Basis
3.3Income from Personal Exertion
3.4Trading (Business) Income
3.4.1Lay-by Sales
3.4.2Revenue Received in Advance (Unearned Income)
3.5Income from Professional Practices
3.6Income from Property

4.0SOURCE

4.1The Link between Source and Residency
4.2Income from Personal Services
4.3Trading (Business) Income
4.4Income from Property

5.0SUMMARY AND CONCLUSIONS

Objectives of Lecture 2:

At the end of this lecture, you should be able to:

understand the importance of Sections 6-5(2) and 6-5(3) of the ITAA (1997); understand the concept of residence for Australian tax purposes; deduce from a given set of facts the issues relevant for determining residence status; determine the appropriate basis upon which income is derived; determine the various sources of income; and

explain the relevance of residency, derivation and source to the taxation of individuals in Australia.

Week 2 Reading:

1. 2015 CCH Australian Master Tax Guide: Chapter 9 "Tax Accounting and Trading Stock", paragraphs 9-000 to 9-090.

2. 2015 CCH Australian Master Tax Guide: Chapter 21 "Residence, Source, Foreign Tax Credits and Accruals Taxation", paragraphs 21-000 to 21-020, 21-060 to 21-070.

3. Taxation Ruling TR 98/1: Determination of Income; Receipts versus Earnings (available on the AYN 438 Blackboard site).

4. Taxation Ruling IT 2650: Residency: Permanent Place of Abode Outside Australia (available on the AYN 438 Blackboard site).

5. Taxation Ruling TR 98/17: Residency of Individuals Entering Australia (available on the AYN 438 Blackboard site).

1.0INTRODUCTION

1.1Section 6-5: The Pivotal Section of Assessable Income

Division 6 is the key assessable income provision for the whole ITAA (1997). Sections 6-5 and 6-10 of the ITAA (1997) are the pivotal sections governing assessable income.

Section 6-5 deals with the concept of ordinary income based on common law concepts, whilst Section 6-10 deals with statutory income.

Ordinary income is also called “income according to ordinary concepts”.

Statutory income is regarded as income that is deemed to be assessable income by virtue of a specific statutory provision.

The relationship between ordinary income and statutory income is shown in Diagram 1 below.

Diagram 1: Assessable Income

Sections 6-5(2) and 6-5(3) are the main assessing provisions dealing with ordinary income. We will focus on the ordinary income for the remainder of this lecture, but please note that the statutory income provisions are exactly the same for the residency, derivation and source concepts (see Sections 6-10(4) and 6-10(5)).

Residents:

In terms of ordinary income, Section 6-5(2) states:

"If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources whether in or out of Australia during the income year."

The rates of income tax for residents are found in Schedule 7 of the Income Tax Rates Act (1986). The income tax rates for a resident individual for the year ended 30 June 2015 are as follows:

Table 1: Resident Individual Tax Rates for 30 June 2015

Taxable Income
Tax Payable
$0 - $18,200
$Nil
$18,201 - $37,000
$Nil + 19% of excess over $18,200
$37,001 - $80,000
$3,572 + 32.5% of excess over $37,000
$80,001 - $180,000
$17,547 + 37% of...
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