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Flashcards in Week 4: Chapter 10 Ordinary Income Deck (34)
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1

What is Ordinary Income?

not defined in legislation and takes on its common law meaning

2

What does assessable income include if you are an Australian resident?

ordinary income derived directly or indirectly from all sources (in or out of Australia), during the income year

3

What is NOT assessable income?

'Exempt income' or 'non-assessable non-exempt income'

4

What are the 2 concepts that identify whether an item is "income"?

Trust and Flow Concept

5

What is the Trust Concept?

Draws distinction between the 'income' of the estate and the 'corpus' of the estate

Note:
Under trust law, a person holding a life estate in certain property has the right to benefit from income derived from the property (eg rent) during their lifetime, but is not entitled to dispose of the property (eg the land), which is held for the benefit of the remainderman.

6

What is the flow concept?

Income represents the flow from a particular source
('fruit and tree' metaphor)

7

Describe the flow concept in greater detail?

returns generated from the exploitation or use of capital assets are ordinarily of an income nature.

8

What are some examples of flow concept income?

•rent arising from a lease of land

•interest received on a loan of money

•royalties derived from the grant of a licence to use copyright, and

•dividends received in respect of shares.

9

What does it mean for income must 'come in' and be 'money' or 'convertible into money'?

for something to be income it must ‘come in’ to a taxpayer and be received as money or in a form that is convertible into money—otherwise there is no ‘gain’ that can be taxed.

10

What case talks about Be received as cash or in a form that is convertible into cash?

(Tennant v Smith)

11

What is the mutuality principle?

taxpayers cannot derive income from themselves (The Bohemians Club)

12

When will the Mutuality Principle be applied?

Complete identity between the contributors and participants (Municipal Mutual Insurance)

A reasonable relationship between what a member contributes and that member’s expected participation in the common fund (Coleambally Irrigation)

13

What does it mean by "Quality in the recipient's hands"?

Whether an amount is income 'depends upon its quality in the hands of the recipient, not the character of the expenditure by the other party' (McNeil)

14

What relevant factors determine the "Quality"

Recurrence, regularity and periodicity (Keily ,Inkster)

Continuing expectation of receipt (Blake)

Profit-making objective (Myer Emporium Ltd)

15

What are the 4 categories of ordinary income?

Income from personal exertion

Income from business

Income from profit making schemes

Income from property

16

What is income from personal exertion?

Rewards for services and
payments incidental
to employment, but not gifts or payments for
relinquishing or restricting rights

17

What is income from business?

Ordinary proceeds
of a business and
profits from
trading
transactions, but
not gains from the
mere realisation of
capital assets

18

What is income from profit-making schemes?

Profits from
isolated
commercial
transactions
entered into with
the purpose of
making a profit

19

What is income from property?

Flows from the
use of capital
assets
but not gains
accruing to
capital assets

20

Regarding rewards for services and payments incidental to employment what categories constitute "income"?

- Reward for services

- Voluntary payments to professional activities

- Payments made by 3rd parties that are 'incidental' to employment may be income.

21

What is substitutes for income?

Payments that substitute or supplement income may constitute income:

-Supplementary payments from former civilian employer to 'make up' difference between civilian and military wage (Dixon)

22

Does personal gifts constitute income?

Payments that are traced to some personal relationship between the payer and the recipient are generally not income:

23

What are 2 examples of personal gifts that do NOT constitute income?

Receipt of shares by an accountant from a friend who was his former employer (Hayes)

Money received by a solicitor from a former client as a personal gift (Scott)

24

Realisation of capital assets are generally ______ in nature

capital

25

Gains Gains made from venturing an asset into a trading activity are generally _____

income

26

What are the 3 factors that determine whether a taxpayer is carrying on a business?

Scale and magnitude of activities

Whether it is carried out in a systematic, commercial and regular manner

Profit motive

27

A business can exist even when it involves?

Small scale activities (Walker)
Short term activities (Shields)
Athletic pursuits (Stone)
Illegal activities (La Rosa)

28

Regarding ordinary proceeds of a business, what happens a taxpayers is carrying on a business?

entire 'ordinary proceeds of the business' are assessable even if such amounts are applied for capital purposes

29

What disinction must be drawn between share trading cases?

Distinction must be drawn between:
Share traders (eg Shields, Case 10/2011), and
Mere investors (eg Smith, Hartley, Devi)

Factors to consider in determining whether someone is a share trader discussed in Case X86 (eg repetition, turnover, plan etc)

30

What factors does Case X86 list in determining whether a taxpayer carries on a business?

Read slide

31

What factors does Case X86 list in determining whether a taxpayer is a share trader?

Read Slide

32

What is the 1st Strand of Myer?

Gains made from extraordinary transactions may be income where they arise from commercial transactions entered into by taxpayers with the intention of making a profit

33

What is the 2nd strand of myer?

Where a future right to interest is converted into a present lump sum amount, the present lump sum amount will be income as it replaces the future interest, which would have been treated as income

34

What are the 2 methods for accounting for income?

Cash Basis- When cash or equivalent is received

Accruals Basis- When income is earned