Zobory: The tax system does not differentiate between legal and illicit activities. In this case, money was stolen and placed in a bank account, deriving interest. The court held that because the money was stolen, it was held on a constructive trust for the victim as the beneficiary, thus there was no income.

S6-5(2) – tells us assessable income includes ordinary income derived directly or indirectly from all sources whether in Australia or not.

S6-10(4) -for statutory income

Constable Case: There was a change in superannuation rules, the C wanted to argue that the receipt by the tp was assessable under s15-2, however the HC held it was not taxable because the payment was not in services, but for interest from before the change in rules. There was no connection between the payment and services, but rather it was because of a change in superannuation rules, thus not assessable.

Tagget: Earth moving business who had a deed with a property developer. He commenced legal proceedings against them to gain this land essentially. In 1998 the price was 450k but in 2006 the land was 2.5 million. Which value should be the assessable income? Court held that it is the latter year’s value that should be included as the assessable income. When was the income derived? Court decided that income is to be considered derived in 2006.

Ordinary Income Features

Flow Concept Eisner v Macomber (US Case): M gets bonus shares which were not considered a derivation of income. The question is when should these shares be assessed? Court held that it is

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taxed when the shares are sold and not when the dividend shares are received. Because when they were received, the profit was not realised. The flow concept states that income is treated as a flow from the provision of personal services, property or a business.

Income is generally received periodically Commissioner v Harris: Involved a retied bank employer who was receiving pension. The pension was set up on the basis of a very low inflation rate, but the inflation rate was in fact very high so his pension quickly eroded away. There was no way to increase the pension, so the pension fund decided to make a supplementary payment of $450 for the erosion of the pension So was the receipt of the gratuitous payment (one off) ordinary income? It was held by the court to not be ordinary income because it was not periodic. Thus, parliament enacted s27H of the 36 act to include pension top ups as assessable. (This had now become statutory income) An amount must be income in the hand of the taxpayer Gair v Commissioner: an assignee of interest was never paid and the borrower was meant to pay interest. The lender assigned the lender’s interest to another party. The interest was never paid normally, but when the borrower wanted to remove mortgage, a payment was made of income and capital. Payment was made to assignee; the payment was dissected by C into capital and income. But this was denied because the assignee was not the lender, thus the payment in his hands was not income and not taxable. Also it was not periodic, it was a lump sum.

Income must be received by a taxpayer and must belong to the tax payer Countess of Bective v F: TP was given payment for the support of daughter and the C argued the countess was the tp and not the daughter because the funds belonged to her. Court decided that the payment was not

assessable because the sum were used as directed and they were not used for the tp. The tp was not the beneficiary of the funds but rather was selected to spend the funds for the child whom owned the funds of the trust.

Income must be money or a gain convertible into money’s worth

Tennant v Smith: the tp was a bank employee and as a part of his remuneration package, he was allowed to have a residence above the bank. The tp could not sublet the premises and he couldn’t convert the benefit into income, the British tax authority assessed the tp on the basis that he didn’t have to pay rent. House of Lords said no assessable because he didn’t receive any money.

F v Cooke and Sherden: C and S carried on a business of selling house to house soft drinks and the manufacturer of the soft drinks had an award for their retailers which was a non-convertible holiday.

C and S took the holiday, but could it be assessed? Court said not convertible and it was irrelevant that the reward stopped the tps from spending money. However Parliament enacted s21A of the 36 Act where if a business (only) gets a non-convertible rewards, it is considered convertible (legal diction) and can be assessed. Value will be at arm’s length.

Capital Gains are not ordinary income

Myer: M made a loan to a subsidiary for 80 mil, but citi corp wanted to purchase the income of the loan. HC decided that the purchase of the right to the income of the loan was considered ordinary income. The tp Myer was a retailer and entered into a financing transaction with the intention of making income which makes it an ordinary income. Additionally, if the tp receives a lump sum in place of a stream of income then the lump sum will have the same nature.

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Compensation Payments

Note: compensation payments are only assessable as income if they are being compensated for lost income (as ordinary income) but if they are being compensated for lost income earning capacity then it is not ordinary income.

Payments with both income and capital character McLaurin v F: tp had a bushfire on their property so they could no longer do business. Was given money in compensation for lost income and damage to their farm. The tp was not explained how the payment was split (between capital and income), but there was records by the railway to show how the income was dissected in their minds. The HC said it could not be dissected by the commissioner because it was based on legal principles and the railway offered an undissected lump sum and cannot be based on uncommunicated dissections.

Allsop v F: A truck was unlawfully impounded and had to pay fees. The fees were refunded and was paid money to waive his rights for other claims that had a capital nature. Court held that the payment was undissected and for all claims against the NSW govt, and that no particular part could be attributed to the fees paid by the tp. Therefore entire amount was not assessable.

Note: under s20-20(3) some deduction recoupments can be considered statutory income and are assesable.

Personal Services Income

Can be taxed as ordinary income under s6-5 or as statutory income under s6-10.

S15-2 is specific and brings within the tax net the value to the taxpayer of any allowances, gratuities, compensations, benefits, bonuses and premiums provided to a taxpayer in connection with the provision of services by the taxpayer. However s6-5 has priority over s15-2 (s15-2(3)(d)).

S15-2(1): a taxpayers income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums * provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).

Elements:

• there must be a benefit provided to a tp

• there must be a nexus between receipt and the provision of services or employment

• the assessable amount is the value to the tp

S15-2 does not apply to taxpayers carrying on a business

F v Cooke & Sherden: the non-convertible benefit provided by the company was not caught under s26E(s15-2) because the benefit was only for employees, the court held that the section didn’t apply because they didn’t render services, they were buying the goods from the manufacturer and then selling them to their own customers. This section requires them to be an employee of the

manufacturer and were independent contractors.

Replacement of personal services income

F v Dixon: the tp was an employee during the outbreak of war, the employer made an offer to its employees enlisted in the army. The offer was that it would make up the difference between the military pay and their civilian pay. This was offered to all employees, no requirement except that they return to employment. The court held that the voluntary payments made by the employer were ordinary income, they looked at the patriotic motive and the inducement of getting staff to return to

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work after. These offers were incidental to military employment and if payment is incidental to employment, then it doesn’t matter who’s making the payment as long as there is a nexus. Look at the receipt in the tps hands, his family was relying on the payments and it was a top up to his military payments and tp expected the payments. Fullager J: substitution principle, the payments were a substitution of what they would have received if they remained in employment, thus it is assessable as ordinary income.

Gifts

If the gift is received from employer incidental to employment then it will be assessable under Dixon. But if the gift is received as a payment for his charming qualities, then the gift is not assessable because no nexus to employment.

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