Objectives of Lecture : At the end of this lecture, you should be able to: understand the ordinary concepts of income;
THE ORDINARY CONCEPTS OF INCOME
What is Income?
The assessable income of an entity for a year of income includes the ordinary income of an entity and the statutory income of the entity for that year (Section 6-1 ITAA (1997)). Ordinary income is income according to ordinary concepts.
The courts have had to determine what is income according to ordinary concepts as there is no definition in the act.
Section 6-5 ITAA (1997) is the general provision capturing assessable income. This section includes the term “income according to ordinary concepts”. Section 6-5 contains rules for “resident” and “non-residents”. The rules are:
Resident - gross income derived from all sources in or out of Australia;
Non resident - gross income derived from all sources in Australia only.
In examining whether an amount is income according to ordinary concepts, the courts have tended to weigh up of a number of factors which are considered to characterise income. These concepts are discussed below:
As mentioned above, Section 6-5 is the most important section in bringing ordinary income to account as assessable income. It brings to account income in terms of the common law. There are a number of common law features that help determine whether an amount is income. They are as follows:
Ordinary income “comes in” to the recipient
Income is a form of financial gain. A gain or receipt can only be ordinary income if it has “come in” (been realised) during that year. An unrealised gain is not ordinary income. If an amount does not come to the taxpayer, it will not be ordinary income. In the terminology of Section 6-5 of the ITAA (1997), an amount has come in to an entity if it has been “derived” by the taxpayer.
It is not necessary that money actually be paid over to taxpayer. Instead, the income may be dealt with at his/her direction on his/her behalf.
This principle is recognised in Section 6-5(4) of the ITAA (1997) which states:
"You are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf as you direct."
Amount has a nexus with an earning activity
An amount is ordinary income if it has its source in an earning activity. The earning activity could be either labour or investment or both of these combined. Generally, an amount that does not have a sufficient nexus with an earning activity will not be ordinary income. Therefore, the following applies:
A prize won in a contest would not be ordinary income as it would not be the product of a taxpayers services (Kelly v FCT (1985)16 ATR 478).
Gifts are not ordinary income Hayes v FCT (1956) and Scott v FCT (1966).
Gambling winnings are not ordinary income Evans v FCT (1989)
It is Money or Money's Worth
A benefit is not considered income according to ordinary concepts unless it consists of money or is capable of being converted into money. Hence, if a taxpayer sells goods or provides services to another person and receives monetary compensation, this is clearly assessable.
The principle is acknowledged in Tennant v Smith (1892) AC 150. In this case, a bank provided an agent with a house where he lived and did business after hours. The house of lords held that the advantage of free accommodation is not income as the agent could not convert it into money. The agent could not sub-let the premises.
Similarly, if a taxpayer sells goods or provides services to another person and instead of receiving money, receives goods or services equivalent to the value of the goods or services provided, this is still assessable because it is money’s worth and can be converted into money. This is referred to as a barter transaction (see Income Tax Ruling IT 2668)....
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