IS THE RECEIPT INCOME?
IS THE RECEIPT INCOME ACCORDING TO ORDINARY CONCEPTS?

Answering a question

When examining if a receipt is income on ordinary concepts
You must state
(a)Which assessing provision applies to include the amount in the taxpayer's income; and
(b)What factors lead you to the conclusion that the item was of an income character

FACTORS

(a)Although income is what comes in, not all that comes in is income

(b)Income must be either a receipt of money or some item capable of being converted to money

(c)capital can produce an income return for the owner of the capital separate from a return in the capital itself

(d)It is the character of the receipt in the hands of the receipt which is derisive.

(e)Recurrence or regularity of the receipts in question.

Income from rendering personal services Section 6-5 / Voluntary Payments Section 6-5, 26(e) / Income from carrying on a business
Earnings Wages, salaries, fees
Such earnings are assessable as ordinary income under s 6-5
These amounts display a number of the common indicia of income
Regular payments upon which the taxpayer relies for his/her maintenance and livelihood
They represent a reward for services rendered Dixon
Parting with capital in return for consideration will generally stamp that consideration with the character of what it replaced that is capital / ASSESSABLE
Where the payments are a recognised incident of employment or work or are amounts to which the taxpayer is entitled pursuant to custom or the terms of his/her contract
NON-ASSESSABLE
Payments made by way of testimonial or accolade to the taxpayer's personal qualities, not income or capital. / SEE BELOW IF TAXPAYER IS CARRYING ON A BUSINESS
Compensation for contractual losses / Restrictive covenants / Income substitution payments
The approach of the courts is to identify what the compensation is paid for
If it is paid to replace lost profits, it will be of an income character
If on the other hand, the amount represents compensation for some capital losses suffered by the taxpayer, such as closure of a plant or mine, the amount will generally be of a capital nature / If the contract of employment and restrictive covenants are interdependent it is more likely that money is paid in return for the restrictive covenant is income Case D38,
If payment of a restrictive covenants are common, they are more than likely to be income as a receipt in the ordinary course of a profession Higgs v Oliver, such payments are common for professional footballer Case A14
The fact the recipient is not obliged to repay the amount although they do not perform services is relevant to indicate the receipt is capital in nature but not conclusive Waite / These amounts are usually income because they replace income amounts FCT v Dixon Fullagar J
IS THE TAXPAYER CARRYING ON A BUSINESS?

WHAT CONSTITUTES CARRYING ON A BUSINESS?

  1. A person may carry on a business though he/she does so in a small way
  2. There must be some significant commercial purpose or character in the activities to distinguish them from hobby or recreation
  3. Lack of production of income does not prevent a finding that the taxpayer is not carrying on a business. Although a profit motive is significant.
  4. Lack of business efficiency is not decisive since may inexperienced people are in business
  5. Repetition and regularity are important, but every business must begin and end and therefore an isolated activity can be the commencement of a business

YES

Where the taxpayer is conducting a business the proceeds from that business will be assessable as income Section 6-5
HAVE CAPITAL ASSETS BEEN REALISED?

YES

CAN THESE RECEIPTS BE CHARACTERISED AS INCOME?

FACTOR

Identify the scope of the business

  • What is its nature
  • How is it carried on
  • How does it generate gains
  • Was the particular sale one in the course of carrying on the business

Myer Emporium Ltd v FCT has enlarged the scope of s6-5

  1. a receipt may constitute income if it arises from an isolated business operation or commercial transaction entered into otherwise than in the course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the purpose of making a relevant profit or gain from the transaction

In Westfield the court interpreted Myer this way

  1. Where the transaction is within the ordinary business of the taxpayer or an ordinary incident of the taxpayer's business activities, identification of the business activity stamps the transaction as one having a profit making purpose and the receipts is income in nature
  2. Where the transaction is outside the scope of the taxpayer's ordinary business activities, the profit will not be assessable as income unless the transaction was commercial and at the time the transaction was entered into the taxpayer had the intention of profit, and did profit by the very means by which it was intended

IF NONE OF THE RECEIPT CAN BE CHARACTERISED AS INCOME WHAT THEN?

If Windfall gain unrelated to income may not be able to be characterised as income Scott v FCT

Capital Gains

IS THERE A LOSS OR OUTGOING THAT CAN BE DEDUCTED FROM INCOME? OR
IS THE LOSS OR OUTCOME INCURRED FROM CARRYING ON A BUSINESS?

INCOMEBUSINESS (Go to Business)

WHEN HAS THE LOSS OR OUTGOING BEEN INCURRED?

Timing of the deductibility. [Whether the year in question or spread out over a number of years] Coles Myer

YES

IS THERE A SUFFICIENT NEXUS BETWEEN DEDUCTION AND ASSESSABLE INCOME?

FACTORS

IS THE LOSS OR OUTGOING RELEVANT AND INCIDENTAL?

first limb of s8-1 mean in the course of gaining or producing assessable income

In order to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if no assessable income is produced, what would have been expected to produce assessable income

YES

IS THE LOSS OR OUTGOING OF AN ESSENTIAL CHARACTER AND NATURE?

In Charles Moore & Co (WA) Pty Ltd v FCT the High Court said in relation to losses and outgoings being deductible that "what matters is their connection with the operations which more directly gain or produce the assessable income"

YES

SHOULD THE EXPENDITURE BE APPORTIONED?

Section 8-1 thus adopts a[principle that allows dissection and apportionment of losses and outgoings

In order to obtain a deduction in these circumstances there must be an apportionment on the basis of percentage used for income producing purposes as opposed to private usage

Apportionment between years of income may also be required Coles Myer Finance Ltd v FCT

Where the expense is paid in a non-arms length transaction the courts have usually looked at how much of the expenses would be 'commercially realistic' and apportion it on this basis

BUSINESS

IS THE TAXPAYER CARRYING ON A BUSINESS?

CHARACTERISTICS OF A BUSINESS

  1. A person may carry on a business though he/she does so in a small way
  2. There must be some significant commercial purpose or character in the activities to distinguish them from hobby or recreation
  3. Lack of production of income does not prevent a finding that the taxpayer is not carrying on a business. Although a profit motive is significant.
  4. Lack of business efficiency is not decisive since may inexperienced people are in business
  5. Repetition and regularity are important, but every business must begin and end and therefore an isolated activity can be the commencement of a business
  6. Organisation, the maintenance of a system of record keeping and use of systems all serve to indicate a business

HAVE THE COST BEEN INCURRED IN CARRYING OUT THE BUSINESS?

Where the expenses are incurred prior to commencement of the business usually not deductible Softwood Pulp and Paper Ltd v FCT

Providing the occasion for the loss or outgoing is to be found in the business operations directed at gaining or producing assessable income, that loss or outgoing will e deductible unless it is capital or of a capital nature. Placer Pacific

HAVE THE COSTS BEEN NECESSARILY INCURRED?

Although the word 'necessarily' limits the operation of the second limb of 8-1 it has been said to mean no more than 'clearly appropriate or adapted for' Ronpibon Tin NL v FCT

What is meant by the qualification is that the expenditure must be dictated by the business ends to which it is directed, those ends forming part of or being truly incidental to the business FCT v Snowden & Wilson The opinion of a reasonable business person may be used FCT v Snowden & Wilson

The term 'necessarily' appears to include

  • Losses or outgoings that are obligatory or compulsory such as rates, taxes, annual registration and licence fees
  • Losses inevitably resulting from the nature of the business e.g. damages for libel by a newspaper proprietor Herald & Weekly Times Ltd v FCT
  • Expenditure incurred voluntary on grounds for commercial expediency