Task Refer to the relevant case law and statute law in your answer. You must read the presentation guidelines in the subject outline. Your answer must NOT 3 A4 pages, excluding the bibliography....

Introduction
Income tax in Australia is the most significant revenue stream within the Australian taxation
system. Individuals and companies are required to pay taxes to local, state and federal
governments. Taxes are collected by local, state and federal government for transfer payments
and public services. For individual taxpayers income tax will be levied upon three sources of
income and they are personal earnings i.e. salary and wages, capital gains, and business income.
There is a fixed tax rate for a company which is 30% but a tax rate for individual is not fixed and
has a progressive rates. (INCOME TAX ASSESSMENT ACT 1997)
Australia financial year runs from 1 July to 30 June of the following year. Taxable income of a
taxable entity is calculated after allowing deductions against the income of taxable entity. After
the calculation of taxable income, tax rates will be applied and tax liability or refund will be
calculated after deduction withheld tax if any.
Capital gains will be added to the taxable income but tax rate will not be same as that of the slab
ate. On capital gains marginal rates are applicable. (INCOME TAX ASSESSMENT ACT 1997)
Various kinds of taxes applicable in Australia are:” Personal income Tax”, “ Capital gain Tax” ,
“ Corporate Tax” , “ Goods and Services Tax”, “ Property Tax” , “ Excise Tax”, “ Custom
Duties”, “ Payroll Tax” , “ Fringe Benefit Tax” , “ Superannuation Tax” , “Inheritance Tax”.
Ordinary Concept
Income Tax Assessment Act 1936 and 1997, defines the concept of taxable income. Taxable
income includes ordinary income and statutory income but it does not include the income which
is not taxable i.e. the exempt income. Ordinary income is the income which is other than certain
capital gains i.e. ordinary income is the income which does not comprises of or which does not
include certain specific capital gains. It consists of income from wages, salaries, tips, royalties,
commissions, bonuses, dividends, rent, interest, income from gambling winning, sole
proprietorship, partnership, LLC. Capital gain on sale of asset which is in possession for not
more than a year of capital gains holding period is considered as ordinary income and taxed
accordingly. (INCOME TAX ASSESSMENT ACT 1997)
Dividends are divided into two type’s qualified dividends and ordinary dividends. Qualified
dividends are the dividends which are paid by corporations from foreign countries that have
agreement with United States or by domestic corporations and the qualified dividends does not
form part of ordinary income whereas ordinary dividends are part of ordinary income and taxed
accordingly. (INCOME TAX ASSESSMENT ACT 1997)
Leading Law cases, “Commr of Taxation V Cooke & Sherden (1980) 10 ATR 696; 80 ATC
4140Tennant V Smith [1892] AC 150” which decided that it is not sufficient to consider the
amount or benefit as ordinary income, only the amount or benefit which is valuable in money,
and which must be converted or transfe
ed into money will be measured, considered and taxed
as income.
To consider an amount or benefit as ordinary income, there are two things which needs to be
fulfilled “Amount must be in monetary terms i.e. it must be in money”, “Amount is capable of
transfer or conversion into money”.
The judgments of Commr of Taxation V Cooke & Sherden (1980) 10 ATR 696; 80 ATC
4140Tennant V Smith [1892] AC 150 were ambiguous, so to overcome these judgments new
sections (Section 26 (e) and Section (21)) were introduced.
Section 26 (e) states that not only the amount which is in money but non-monetary benefits i.e.
Fringe Benefits within the meaning of the Fringe Benefits Tax Assessment Act 1986, given to
employees by employer in kind will be included in assessable income. Thus the aim and purpose
of Section 26 (e) was to overcome the judgment of Tennant v Smith [1892] AC 150 and hence
after Section 26(e) the amount or benefit which is not in monetary terms like fringe benefits
within the meaning of the Fringe Benefits Tax Assessment Act 1986 started added or included in
ordinary income or assessable 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. (INCOME TAX ASSESSMENT ACT 1997)
Section 21 A states that the business benefits which is not in monetary terms and which is not
converted or transfe
ed to cash will be treated or assumed as if it were convertible to cash. The
amount or benefit will be recorded at the arm’s length price after reducing any contribution or
expenses made by the recipient’s. Any circumstance, situation or condition which prevent,
prohibit or restrict the transformation or conversion will be ignored or disregarded. (INCOME
TAX ASSESSMENT ACT 1997)
Capital receipt will not be comprised or included in the Ordinary income, thus capital receipt
does not form part of the ordinary income because of the following reasons:
I. Under ITAA 97 Division 100 there are specific rules which regulates or determines
the rates of tax applicable and the total of taxable capital gains with specific
exemptions
II. Under ITAA97 s 6-5 ordinary income assessable does not include capital. It states if
the capital...