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Part 1.
1. Income by ordinary concepts
As per Income Tax Assessment Act 1936 and 1997, taxable income comprises of ordinary
income and statutory income but excludes the exempt income. Ordinary income is the income
other than certain capital gains. It consists of income from salaries, wages, tips, bonuses,
commissions, dividends, interest, rent, royalties, income from partnership, sole proprietorship,
LLC, gambling winning. Gain on sale of asset which is held for less than one year of capital
gains holding period is considered and taxed as ordinary income.
Dividends are of two types‟ ordinary dividends and qualified dividends. Qualified dividends are
the dividends which are paid by domestic corporations or the corporations from foreign countries
that have treaty with United States; it does not form part of ordinary income.
Leading cases, Commr of Taxation V Cooke & Sherden (1980) 10 ATR 696; 80 ATC
4140Tennant V Smith [1892] AC 150 concluded that benefit or amount is valuable in money is
not sufficient, the amount must be converted into money than only benefit or amount will be
considered as income.
To be considered an amount as ordinary income, two things needs to be fulfilled
- Amount must be in money
- Amount is capable of conversion into money
The decisions of Commr of Taxation V Cooke & Sherden (1980) 10 ATR 696; 80 ATC
4140Tennant V Smith [1892] AC 150 were vague, to overcome these decisions new sections
(Section 26 (e) and Section (21)) were introduced
Section 26 (e) states that the assessable income does not only include the amount which is in
money but also fringe benefits within the meaning of the Fringe Benefits Tax Assessment Act
1986, which is given to employees by employer in kind. Thus Section 26 (e) overcomes the
decision of Tennant v Smith [1892] AC 150 and hence now the amount which is not in money
like fringe benefits within the meaning of the Fringe Benefits Tax Assessment Act 1986 will be
included in assessable income or ordinary income. (Australian Tax Law)
Section 21 provides:
21(1) where, upon any transaction, any consideration is paid or given otherwise than in cash, the
money value of that consideration shall, for the purpose of this Act, be deemed to have been paid
or given
21(2) this section is applicable subject to Section 21A. (Australian Tax Law)
Section 21 A states that a non- cash business benefit that is not converted to cash shall be treated
as if it were convertible to cash. The benefit or amount will be recorded at the arm‟s length value
educed by the recipient‟s contribution (if any); and any condition which restrict or prevent the
conversion shall be disregarded. (Australian Tax Law)
Ordinary income does not include capital receipt. Three reasons to this are:
I. Ordinary income assessable under ITAA97 s 6-5 does not include capital. It states
that an item of capital nature must enter through statutory income if it is to be
assessable to tax.
II. There are specific rules stated under ITAA 97 Div 100 which determines the amount
of taxable capital gains and rates of tax applicable with specific exemptions.
III. Under general deduction provision ITAA97 s 8-1, Losses and outgoings of capital are
not allowable deductions. Under ITAA97 s 25-10, expenditure of a capital nature is
not an allowable deduction, there is a specific provision allowing a deduction for
epairs. (Australian Tax Law)
Earlier in Australia, Capital receipts were tax free but after the enactment of capital gain
taxation, capital receipts are taxable subject to certain exemptions. (Australian Tax Law)
The payments made under:
- Restrictive covenants- Leading Case law “MIM Holdings Ltd v FCT (1997) 36 ATR 108”
- License and know how- Leading Case law “Brent v FCT (1971) 125 CLR 418; 71 ATC
4195”
- Cancellation of agreements- Leading Case law “Heavy Minerals Pty Ltd v FCT (1966)
115 CLR 512; 10 AITR 140”
- Compensation under injury- Leading Case law “Tinkler v FCT 79 ATC 4641; Commr of
Taxation v Slaven 84 ATC 4077”
- Exchange rate gains- Leading Case law “International Nickel Australia Ltd v FCT (1977)
137 R 347; 77 ATC 4383 and AVCO Financial Services Ltd v FCT (1982) 150 CLR...