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General Concepts of income (Other general principles (Constructive receipt…
General Concepts of income
General concept (5.10-5.40)
Under s 6-5 ITAA 97
3 categories of income
flows from Business: accounting firms selling accounting services
flows from Property; rent or dividends
flows from Personal services & employment : salary
Gains can be one of three categories
Captial
Not capital and not ordinary income
likes personal gifts or inheritances
ordinary income
Prerequisities & characteristics of ordinry income(5.50-5.130)
2 prerequisites ordinary income：一定有这两个前提， 但是两个没都有完全满足肯定不是O
Cash or convertible to cash
FCT V Cooke & Sherden (1980) 10 ATR 696
if a gain is a cash or cash convertible, it might be ordinary income. on the other hand , if it is not cash or cash convertible, then it definitely will not be ordinary income.
the holidays were not cash convertible they were not ordinary income.
Benefits that saves taxpayers from incurring expenditure is not ordinary income.
纳税人免于支出的好处不属于普通收入.
Payne V FCT (1996) 32 ATR 516
the courts have indicated that if it is illegal to sell a good and the receipt of that good cannot be regarded as cash convertible.
cigarettes (illegal to sell without a license)
Tennant V Smith [1892] AC 150
The House of Lords held that the accommodation was not regarded as income as it was neither cash nor cash-convertible
Def.
1) The item must be readily convertible to cash
2) Non-cash benefits ≠ ordinary income but may still be assessable under the statutory scheme
（s 15-2 ITAA 97 &
s 21a ITAA 36 or alternatively may be fringe benefits ）
A real gain（ taxpayer）
Hochstrasser V Mayes[1960] AC 376
If a receipt is a genuine gain, then it could be ordinary income.
The principle that a receipt that is not a real gain will not be ordinary income is more likely to apply in employment situations and clubs than in other situations. The taxppayer would have been compensated for a non-work-related loss.
Reimbursements VS Allowance
Reimbursement of a work-related expense held not to be a real gain （covered in FBI)
"Allowance" = Ordinary income=offset deduction to the extent that money has been spent for allowable income-producing purposes
Mutuality
Def.
If the taxpayer makes a payment to himself/herself, there is no gain and the payment will not be income
Bohemians Club V Acting FCT(1918)
If a reimbursement is for a non-work related expense it will be dealt with under FBT rules
Allowances are dealt with under Income Tax Rules
2 board areas in sufficient Characteristics
Regular / periodical receipts
FCT V Blake (1984) 15 ATR 1006 &
FCT V Harris (1980) 10 ATR 869
FCT V B identified the receipt was regular while in FCT V H it was regarded as a one-off.
The Court held that in FCT V B the receipt was of an income nature,
wheras in FCT V H the Court held that it was not ordinary income but captial.
Courts can widen their views to reflect modern day practices
FCT V Myer Emporium (1987)
The flow concept
The court stated that income "flowed" from the capital/from an earning source
For example:
For trust purpose,
the rent from an investment property= income
the value of the house = captial .
Two related traits
1) Nexus with the earning source
2) Severable from its earning source:
i.e. the gain can be extracted without the affecting the underlying earning source
Some gains are ordinary income despite having no earings source
Keily V FCT (1983) 83 SASR 494
The federal court held that a government aged pension was ordinary income. This was because of the traits it had: it was regular, expected and depended upon by the taxpayer for support.
A receipt that has income characteristics
1) Is periodic & regular
2) Expected & relied upon
Ansits V FCT (2010)
Youth Allowance payments
FCT V Dixon (1952)
Certain "top-up" Payments
Other general principles
The compensation for loss of ordinary income is ordinary and compensation for loss of capital is capital
Unrealised gains are not ordinary income
Legality of receipts does not affect their assessability
FCT V La Rosa (2003)
Ordinary income is a receipt in the taxpayer's hands.
if the salary in employee's spouse's hands= in the employee's hands
Constructive receipt
(connected to concept of "derivation" of income )
Ordinary income
someone who can receive the salary but instead chose to have it directed to others
Different from salary sacrifice
TR 2001/10
Benefits that saves taxpayers from incurring expenditure is not ordinary income.
but, If the benefit that saved received by the taxpayer, but they had chosen to redirect it elsewhere, then it would be covered by the principle of constructive receipt and so would generally be ordinary income.
The principle of mutuality
Bohemians Club V Acting FCT (1918) 24 CLR 334
funds given to a club/ association from its members and the refund of those fees back to the member are not assessable, because there is no real gain.
Most commonly apply in situations involving non-profit recreational clubs and Owner's Corporations
RACV V FCT (1973) 4 ATR 567
The distinction between mutual and non-mutual activities was made on the basis of whether the service was provided to members only or whether it was part of the RACV's trading activities