Introduction to
Taxation Laws
Ordinary Income
Aims of Lecture
After studying this you should be able to:
• explain and apply the concept of ordinary
income for tax purposes
• distinguish between capital and income
receipts
• identify and explain different types of income
e.g income from employment activity and
income from business
Section 6-5 ITAA97
• s6-5(2)-If you are an Australian resident, your
assessable income includes the ordinary
income you derived from all sources whether
in or out of Australia during the income year.
• s6-5(3)-If you are a non-resident, your
assessable income includes: (a) the ordinary income you derived
directly or indirectly from all Australian
sources during the income year…..
Section 6-5(1)
• Ordinary Income is
“Income according to
ordinary concepts”
• General Law concept :
Scott
Ordinary Income
• Per CJ Jordon
 “The word income is not a term of art
and what forms of receipts are to be
comprehended within it and what
principles are to be applied…….is to be
determined in accordance with ordinary
concepts and usages of mankind”
Key features of income
• Income comes in to a tpr beneficially
 unrealised gains on assets?
• Income is money or moneys worth
- FCT v Cooke and Sherden
- Sec. 21A ITAA36 (over $300 - s.23L)
- Sec. 26(e)
Key features of Income
• Characterise receipt in the hands of the
particular taxpayer
 farmer sells tractor cf. sale by
tractor sale yard
 Federal Coke
• Nexus with income earning activity
 Labour, business, investment activity
Key features of income cont….
• Recurrent, periodical, and regularity
 what about one-off transactions? (Myer)
• Taxpayers cannot derive income from
themselves
 The Bohemian’s Club vs Acting FCT
• Illegal or immoral receipts maybe
income
 Partridge vs Mallandaine
Key features of income cont….
• Accounting treatment is not
determinative of tax treatment (Arthur
Murray)
Key features of income cont….
• Capital receipts are
not income
• What are capital
receipts?
Capital Receipts
• General indicia of capital receipts:
 received as a lump sum payment
 if a regular receipt, it is in the nature of
instalments of lump sum amount
 payments for disposal of a capital asset
• Important - 50% tax free!! New Tax
System Changes.
Categories of Ordinary Income
• We will look at:
 Income for personal exertion
 Voluntary payments
 income from business
Remuneration for Services
Rendered
• Salary, wages and
commission are income
• Brent
Voluntary Payments
• Examples of receipts held to be nonassessable
 Hayes
 Scott
 Seymour
• Examples of receipts held to be assessable
 Kelly
 Moorhouse
 Dixon
Voluntary Payments
• General Principles - What is payment
for:
• Accolade to personal qualities; Or
• incident of employment.
• If former, not income. If latter, income
Voluntary Payments - Not
Income
• Hayes
 acct’t/financial advisor received $12,000
worth of shares.
 Previously remunerated
 held - Not income

Role of motive of the donor
Voluntary Payments - Not
Income
• Scott
 Solicitor received $10K
 had been fully remunerated in the past
 Held - not income


no connection to any income earning activity
gifts made to number of people at the same
time.
Voluntary Payments - Income
• Kelly
 footy player - $150 per game
 Ch 7 Sandover Medal - $20K
 Held - income



recognised incident of his occupation
irrelevant that he didn’t think he would win it
irrel came from 3P - not his employer
Voluntary Payments - Not
Income
• Dixon
 former employer agreed to pay diff. Bt
military and civil pay to encourage staff
to enlist
 income - incidental to employment
 Fulliger J - income substitution approach
 Nb- comments on 26(e)
Section 26(e)
• Value of all allowances, gratuities,
compensations, benefits etc.
• In respect of or relating to (directly or
indirectly) employment or services
rendered
• But does not include…..
 Fringe Benefit under the FBTAA
Section 26(e)
• Interaction with FBT
• Nexus requirement
• Valuation issue - Donaldsons case
Frequent flyer Points
• Example
• Sonia is a member of the Qantas
frequent flyer points program. As part
of her work she travels extensively. Her
travel expenses are paid by the
employer - she get points
• She cashes them in for trip to Maldives
worth $3000. Is this income
Frequent flyer Points
•
•
•
•
•
No
Not ordinary income
21A not applicable
26(e) not applicable
Refer Payne v FCT
Income from Business
• Threshold issues: (a) is the taxpayer carrying on a
business
 (b) are the proceeds from business
ordinary income: ordinary proceeds
 extra-ordinary transactions
When is a person carrying on a
business?
• Badges of business





Profit motive/commerciality
Volume Scale of business/production
Substantial and regular effort
Continuity system and regularity
Business records
• Ferguson: Walker: Thomas
When is a person carrying on a
business?
• Share trading activities
• Dealing with land
• Business of gambling - Brajokovich:
IT2655
Proceeds of carrying on a
business
• Proceeds received in the ordinary
course of business are income
 eg sale of items of trading stock
• London Australia investments
Proceeds of carrying on a
business
• Receipts that are incidental to your
business activities are also income
• Cooling - Lease incentive received by a
firm of solicitors
• Wide definition of business
Proceeds of carrying on a
business
• extra-ordinary transactions entered into
in the course of business can give rise
to income amounts
• Myer Emporium - financial transactions
entered into by Myer (assgm’t of
income stream) with CitiCorp
Example - Savings in Liabilities
• FCT v Orica
• FCT v Consolidated Press Holdings