科技进步策略

CO5120

TaxationLaw

Module2DerivationofTaxableIncomeModuleObjectivesApplyconceptsofordinaryandstatutoryincome.Understandtheconceptof“derivation”ofincome.Understandthegenerallawprinciplesfordeterminingincome–andtheirstatutorymodifications.Understandthedifferencesbetweenincome,capitalreceipts,windfallgainsandmutualpayments.Understandtherulesgoverningnon-cashreceipts.Understandtherulesgoverningincomesubstitutionandcompensationpayments.Understandthetaxeffectofreceiptsfromillegalactivity.TheAustralianTaxSystemThreeCriticalQuestions:Whodowetax?Whatdowetax?Howmuchdowetax?TheTaxationEquationsAssessableIncome=Grossincome–(Exemptincome+Non-assessablenon-exemptincome)(sees6-1).

TaxableIncome=Assessableincome-Deductions(sees4-15).

TaxPayable=(TaxableincomexRate)-TaxOffsets(sees4-10(3)).

Grossincome=Allincome(fromanysource)

“Allincome”includesboth:‘exemptincome’;and‘non-assessable,non-exemptincome’.Therefore(becauseofs6-15)

AssessableIncome=

All“ordinaryincome”

PLUS

All“statutoryincome”

LESS

Any“exemptincome”

AND Any“non-assessable non-exemptincome”.OrdinaryandStatutoryIncomeSections6-5(1):“ordinaryincome”is“incomeaccordingtoordinaryconcepts”.Section6-10(2)“statutoryincome”includes“amountsthatarenotordinaryincomebutareincludedinyourassessableincomebyprovisions[intheAct]aboutassessableincome”.

Therefore:WhetheraparticularreceiptisINCOMEthatistaxableinthehandsofataxpayerdependsonwhetheritis:

a. INCOMEONORDINARYCONCEPTS (‘Ordinaryincome’);or

b. IncomeundersomeSPECIFICSTATUTORY PROVISION(‘Statutoryincome’).ANDWhetherithasbeenderivedIncomeonOrdinaryConceptsTheITAAdoesnotdefinetheterm“income”;Section6(1)(ITAA1936)doesdefine:incomefrompersonalexertion;Incomefromproperty;Incomefromcarryingonabusiness.TheITAAalsodeemssomereceiptstobe“income”fortaxationpurposes(egnon-cashbusinessbenefits,tipsandgratuities,post-1985capitalgainsetc).Thesereceiptsarecalled‘statutoryincome’;BUT,apartfromthosereceipts,determiningwhetheraparticularreceiptis“income”hasbeenlargelydeterminedbythecourts.Section6(1)ITAA1936Defines:Incomefrompersonalexertion;Incomefromproperty;andIncomefromcarryingonabusiness.SOsuchreceiptsare‘ORDINARYINCOME’.StatutoryIncomeReceiptsthatwouldnotbeincomeunderordinaryconceptsbutwhichareincludedinincomebecausesomeprovisionofataxingstatutemakethemincome.Majorexamplesinclude:s21A(non-cashbusinessbenefits)s15-2(allowances,gratuitiesetc);s15-15(incomefromprofitmakingundertakingsorplans)Otherexamplesinclude:Capitalgains(s102-5);Deemeddividends(varioussections-inclDiv7A);Balancingadjustments(Div40);Recoupments(s20-20);SomeETPs(‘employmentterminationpayments’).“Derivation”ofIncomeIncomebecomesassessablewhenitis“derived”–ss6-5(2)and(3)You“derive”incomewhenyoureceiveitorwhen“itisappliedordealtwithinanywayonyourbehalforasyoudirect”–s6-5(4)ands6-10(3).TaxableIncome=AssessableincomeLESSDeductionsDeductionsLossesandoutgoingsincurredingainingorproducingassessableincome–s8-1(1)(a)ORNecessarilyincurredincarryingonabusinessforthepurposeofgainingorproducingassessableincome––s8-1(1)(b)OROtheramountstheITAAallowsyoutodeduct(specificdeductions)-s8-5Question:Giveanexampleofthedifferencebetween“assessableincome”and“taxableincome”inthecontextof:a. Wageandsalaryincome;

b.Interestincome;

c.Rentalincome;

d.Businessincome.Question:Arethefollowingreceipts“income”––and,ifso,aretheyincomefrompersonalexertionorincomefromproperty?a. awagereceivedbyanemployee;b. acommissionreceivedbyasalesman;c. asign-onfeereceivedbyaprofessionalfootballer;d. abonusreceivedforbeingthefirm’s‘TopSalesman’’;

e.ashareinprofitsreceivedbya‘silentpartner’;

f.gamblingwinnings;

g. aredundancypayment;

h. apension;

i.acapitalgainfromsellingablockofland;j. royaltypaymentsreceivedforatechnologylicence;k. aloanfromaprivatecompanytoitsmanagingdirector;l. ‘keymoney’paidtoalandlordforalease.Income-GeneralLawPrinciplesItmust“comein”tothetaxpayer(Cooke&Sherden).Itmustbemoneyorsomethingreadilyconvertibletomoney.Noteverythingwhichcomesinisnecessarilyincome:CapitalreceiptsWindfallgains(the““NormalProceeds”ofpersonalexertion,propertyorbusinessareincome-WindfallGainsarenot.)“Mutualpayments”.4. Itmustbereceivedbythetaxpayerasincome;Isitincomeinthehandsofthistaxpayer?-FederalCokeHasitbeen“received”?-Brent5. Itoftenexhibitscharacteristicsofperiodicity,regularityandrecurrence.6. “IncomeSubstitution”orcompensationpaymentsmaybeincome.7. Illegal,immoralandultraviresreceiptsmaybeincome.ItMust“ComeIn”Atgenerallawameresavingofexpenditureisnotenoughtoconstituteincome(TennantvSmith;CookeandSherden);Thishasbeenstatutorilymodifiedunder:s15-2(theformer26(e))-whichtaxesthe““valuetoyou”(subjecttotheFBTlegislation–sees23L);ands21(whichdeemsamoneyequivalent);ands21A(whichdealswith“non-cashbusinessbenefits).Question:Which,ifany,ofthefollowingamountsareassessableincomeundertheITAA?

a. aholidayvaluedat$5,000awardedbya firmtoits““SalesmanoftheMonth”;b. thesameholidayawardedtoitsbestperformingnon-employeeagent?TheReceiptShouldBeMoney1. Linkedtotherequirementthat,tobeincome,thereceiptshould‘comein’andnotbeameresavingofexpenditure.Thishasbeensubstantiallymodifiedbystatuteanditcannolongerbeseenasacharacteristicof““income”.See,againinparticular:Section15-2;Section21;andSection21A(thoughnotes23L(2)).NotEverythingThatComesInisNecessarilyIncomeCapitalreceipts;Windfallgains(the““NormalProceeds”ofpersonalexertion,propertyorbusinessareincome-WindfallGainsarenot);“Mutualpayments”.CapitalReceiptsOursystemwasdesignedtotax““income”.Theconceptwasbasedonthetrustlawdistinctionbetweencapitalandincome(the““tree””andthe““fruitofthetree”analogy).Capitalreceiptswerenottaxed(andstillarenottaxed)UNLESSthearecoveredbytheCGTprovisionsWindfallGainsWindfallgainsfallintotwomaincategories:Gamblingwinnings;andGifts.Theyaregenerallynottaxableunless(inthecaseofgamblingproceeds)theyaretheresultofincomeearningrelatedactivity(ega“businessofgambling””).RuleswithGratuitiesAgiftisnotordinarily““income”;somethingreceivedforservicesrenderedprobablyis;2. Incharacterisingagift,lookatthewholeofthecircumstancessurroundingit;3. Theregularity,recurrenceandperiodicityofthereceiptmaybeimportant;4. Ifthetaxpayerreliesuponthereceiptitismorelikelytobeincome;5. Ifthetaxpayer“expects”thepayment(egasamoralright),itismorelikelytobeincome;6. Themotivesofthedonormayberelevantbutareseldomdecisive;7. Iftherecipienthasalreadybeenadequatelyrewarded,thegiftislesslikelytobeincome;8. Paymentbyathirdpartydoesnotpreventthepaymentbeingincome.MutualPaymentsTheUnderlyingPrinciple:Ataxpayercannotderivetaxableincomefrompaymentstohimself/herself.Itappliesparticularlytoincomereceivedbyclubsandsocietiesfromdealingwiththeirmembers.Ifthereis“completeidentity”betweenthosewhocontributeandthosewhobenefit(takenasaclass)thereceiptsarenotincome.Incomefrombusinessactivitiesaimedatproducingaprofit(asopposedtoa‘surplus’’)andfromnon-membersistaxable.IncomeofClubs1. Isthereceiptexemptincome?Ifnot,the"MutualityPrinciple"producesthree(3)possibilities:thereceiptiswhollyexemptbecauseitcomesfrommembers;thereceiptiswhollytaxablebecauseitcomesfromsourcesoutsidetheclub;thereceiptispartlyassessablebecauseitcomesfromthegeneraltradingactivitiesoftheclubwhichcannotbesourcedtomembersalone.Question:TheCardwellQuoitsClubwasestablishedin1980topromotequoitsintheupperHerbert.Memberspayanannualfeewhichwasusedtorentpremisesandfinancetheclub’sactivities.Toallow‘‘fellowship’afterpracticeorcompetitionmatchesarefrigeratorwasboughtandtheclubsolddrinksandsnackfoodstomembersandguests.Asquoitsgainedinpopularity,membershipincreased,theclubpurchasednewpremises,installedabarand(later)arestaurant–againformembersandguests.Therestaurantwasalsorentedoutforweddingsandotherfunctions.Withitsincreasedsizetheclubalsoinstalledpokermachinesandadded10motelunits.TheclubnowhasamembershipinthethousandsandregularlyservesadiverserangeofvisitorsfromalloverAustralia.Whatisitstaxposition?ShouldBeReceivedbytheTaxpayerasIncomeTwopoints:1. Thereceiptmustbean““incomereceipt”inthehandsofthetaxpayer;Thetaxpayermust“derive””itintermsofs6-5ors6-10.CommonCharacterist