Income

AY consists of ordinary income and statutory income (amounts that are not ordinary income but are included in AY by legislation)

Assessable Income (residency): If you are an Australian residen, your AY includes ord +stat income derived directly/indirectly from ALL sources (in or out of Australia)If not resident, AY includes odd + stat derived directly/indirect from all Australian sources

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Courts have been reluctant to define income because it's difficult and you can't cover all possible situations with any definition given. Also unwise, because as soon as you define it people will try and get around it. Both legislation and courts haven't defined income. THis allows the evolution of the concept. Scott's Case (1935). No single principle can provide definitive answer to every situation

Cour

Court Developed Principles-1. Income has an income-producing sourceIf you have money received from income producing source, it can considered as income. e.g. of sources Personal exertion (employment->salary, commission bonus; business-> sales of G&S; Partnership of property or rights-> rent from land and buildings.Not all receipts of $ are income e.g. clare help from rents (think source), fred's gift from colleagues to help furnish new home (think of their intention) but if employer presented him with a cheque, then it is much more likely to be income (for buying employee services) but you have to look at the whole picture, imagine if employer and employee have been friends for agesBusiness v Hobby and Sport The business list is not exhaustive. "Business" includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.Martin's case (1953) Large race horsing gambler-> decision was he was pursuing a pastime of gore racing, derived pleasure from betting and winning, to constitute a business, there must be a profit making purpose and design to eliminate the element of chance. Ferguson's CaseStone's Case-> Javelin thrower, carrying on business of javelin or pursuing a sport? Court found once she derived sponsorship money from her success it was a business so all money (including prizes) were AY (in that year, not anything she got before) Criteria Used by theCourt-> time devoted, proportion of assets and income applied, systematic methods, business-like manner, scale of operations: frequency, volume, profit-making motive/purposet, returns expectedBusiness v Property IncomeIf an entity not carrying on a money-lending business has spare money and places the money on a term deposit or lends the money to another entity to earn interest, the interest income is income from property (passive income)If it is a financial institution  carrying on a money-lenidng business, then the interest income is income from businessEgerton-Warburton Case- In the absence of a FIXED GROSS SUM (for transfer of land), the annuity was income of the dad, not instalment of selling price

Business vs Employment incomeIf you are an accountant employed by an organisation, the source of your income is the employment; the contract between you and the employer is a contract of serviceIf you are an accountant offering accounting services to the public, the source of your income is the professional practice; the contract between you and your client is a contract for service

2. Income is Usually RecurringPeriodical receipt from one's business, land, work, investmentsSometimes it may not be considered income for example if I sell a house and you pay me back in instalments->repayment of capital is not income.However, consider the case of an artist or property developer who constructs buildings in years before they call sell the space to people but it's still income

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3. Capital Receipts and Gains are not IncomeTraditionally, income (fruit), tree (capital). Return on capital is ordinary income (e.g. dividends from shares) but when you sell, the return you get from disposal/sale is capital receipt, not ordinary income. A usual characteristic of capital is one offAcquisition of a property depends on whether you intended it to be kept and used (capital account), or disposed of for profits (revenue account) Restrictive covenants -> restricts actions of person or use of property. Amount received for entering into restrictive covenant is likely to be capital because you give up (capital) rights. Woite's Case (1982) SA professional footballer paid to not join any other VIC clubs. $10000 income or capital? capital because it is a covenant to restrict his activity, however had the contract been followed by him moving to the club,it would have been income 

4. Income may include profit or gainOrdinary income in general refers to gross proceeds (sale before deduction of COGS)Courts may interpret income to include profits or gains even though the asset sold is capital in nature e.g. London Australia Investment Case where Full High Court's decision was the purchase and sale of capital was so frequent that activities were normal for the business and so it should be income.Isolated Transactions Whitfords beach Case (1982) Developers took over company (that acquired land (on capital account) so they could access their shacks) and consequently changed the constitution of the company that their purpose was to develop land. The Full High Court held that the sale of the developed land generated ordinary income. of the three judges who held that the profit was ordinary income. Two of three judges said the the development and sale was so extensive that it had the characteristics of a business and one held that the proceeds of the sale would not have generated income had development and sale been undertaken by the original shareholders.Profit=sale proceeds-value of land on taking the first step of redevelopment and development & marketing costsExtraordinary cases FCT v Myer Emporium -> This case demonstrated that the proceeds of an isolated or extraordinary transaction will be ordinary income if the conditions of one of the two approaches followed in the decision are satisfied. The two approaches applied have become known as the "first strand of Myer" and the "second strand of Myer"First strand: 1.There was a business operation or commercial transaction (always satisfied if extraordinary transaction by business, but not isolated transaction2. There was a profit-making intention upon entering the transaction (need not be sole or dominant intention)3. The profit was made by means consistent with the original intention (if there was more than one intention upon entering the transaction, the way the profit was made nee donly be consistent with one of those intentions)Second strand: Expresses the principle that the proceeds from a transaction will be ordinary income if the taxpayer sells the right to income from an asset without selling the underlying asset 

5.Voluntary Payments may be income- depends on the character in the hands of the recipient or donee. Income, if they are made in relation to income producing activities of the recipient and for the services rendered by the recipient e.g. tips received by waiters, taxi drivers, hotel employees. Not income, if mere personal gifts [Scott's case (1966) which said this was gift because 'the character of 10000 should be assessed as receipt in the hands of the taxpayer, the receipt must be a product of the relevant activity to be ordinary income; if it's product of friendship or other personal characteristics then it's personal gift; Scott was fully remunerated for his services separately from the payment; Scott didn't expect the gift; there was a personal relationship prior to the payment and the donor made other gifts at the same time; motives of donor do not normally determine whether character of the receipt is ordinary income, although it might be one of the factors to consider]Dixon's Case (1952) Full High Court decision- Even though the donor was no longer Dixon's employer after enlistment, the make-uppay was an expected periodical payment and was regarded by Dixon as part of his income- the make up pay"acquires the character of that for which it is substituted and that to which it is added

6. Income must be money or money's worth [Tennant v Smith (1892) taxpayer was agent for bank and lived in free accommodation supplied by the bank. Taxpayer was not allowed to sublet the accommodation. House of Lords held that accommodation was not regarded as income as it was neither cash nor cash-convertibleFollowing Cooke & Sherden Case (1980) where retailers reaching certain sales targets were offered holidays, banks tried to save tax by instead of paying interest would provide free holidays. Following this S21A of ITAA 1936 was enacted in 1988to treat non-cash business benefits as if they were convertible into cash-> in direct/indirect relation to a business relationship (benefits included in assessable income at arm's length value, reduced by any contribution made by the recipient)Benefits-in-kind and Money's worth If benefit-in-kind can't be converted into money, it is not income and if it can then only the convertible value is assessable incomeNon-cash employment benefits may be statutory income under s15-2, or subject to FBT (non-assessable, non-exempt)

7. Compensation money may be income general principle is it takes on 'income' or 'capital' character of whatever it replaces (for example, these will take on income- insurance company, breach of contract, loss of income, loss of trading stock, temporary loss of use of capital asset) loss of finger is capitalHeavy Minerals' Case (1966) taxpayer had entered into four forward selling contracts with American and German customers for the sale of rutile. Subsequent to contracts, the market for rutile collapsed and the price fell. Following this turn of events the contracts were cancelled and the taxpayer received compensation by way of lump sum. High Court held that payments were ordinary income in hands of taxpayer because it stood on the same footing as profits lost, hence, incomeCompensation money may be income when compensation for permanent loss of a capital asset and compensation for loss of the whole business [Glenboig Union Fireclay Co Ltd v IR Commissioner of Inland Revenue (1922) this is where the taxpayer, the lessee of land which contained fireclay, was in business of mining clay deposits. A railway company had tracks running over part of the land and it prevented the taxpayer from working parts of the land. The taxpayer was paid compensation calculated by reference to the profits that would have been earned from the unworked part of the land, the House of Lords held that the amount was capital in nature as part of the taxpayer's company was "sterilised" and destroyed by the exercise of the statutory power.]McLaurin's Case (1961) 

8. Mutual Receipts Are Not IncomeMutuality principle: a person cannot derive income from him or herself. In applying the mutuality principle to a group of persons (eg a social club), there must be a complete identity between the contributors to the common fund and the participants of the surplus.

9.Illegal, immoral receipts can be income- income character is not affected by the fact that receipt is illegal, immoral, 

10. Windfall gains such as casual betting and lottery wins are usually not income 

Statutory Income- Statutory provisions which include certain receipts, gains and benefits in the definition of assessable income ->made by parliament to override court decisions.If a gain/receipt is both ordinary income and statutory income, unless a contrary intention appears (eg both capital gain and ordinary income then ordinary income), it is included in your AY only once as statutory income

Exempt income- exempt income given in provision of ITAA s6-20. Exempt income, though excluded from the tax base, may still affect your tax liability, e.g. a previous year tax loss is a deduction, but it must first be offset against exempt income, hence the amount of deduction is reduced by the exempt income, and he taxable income is increased accordingly

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