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Topic 3: Income (sample)
General Sequence for Exam Questions 1. Ordinary Income
2. Prerequisites
o Cash/cash convertible o Real gain
3. Characteristics
o Regular or periodic
o Income flows from capital
o Ordinary with no earning source (pensions) o Constructive receipt
o Compensation o Nexus to:
▪ Personal Exertion
▪ Property
▪ Business 4. Statutory Income
o Dividends o Franking credits
Ordinary Income
Section 6-5(1): Your assessable income includes income according to ordinary concepts, which is called ordinary income
• Determined by case law
o Scott v Commissioner of Taxation (NSW)
• Not all money received is taxed
Income resembles what most people would regard as income:
• Individuals salary, interest, dividends, rent, pension, sales
• Business turnover, dividends, interest, professional service fees
• Some of it specifically dealt with in legislation statutory income, dividends Test:
For income to meet ordinary concepts it must fulfil the 2 prerequisites and display at least 1 characteristic of ordinary income
Prerequisite 1: Cash/Cash convertible
• FCT v Cooke and Sherdan Section 21A ITAA36: non-cash business receipts are ordinary income
• Payne v FCT Section 23L ITAA36: Reimbursements, non-cash employment benefits, fringe benefits are not ordinary income
Prerequisite 2: Real Gain
• Hochtrasser v Mayes FBT and/or CGT may be relevant Characteristics of ordinary income:
• Regular or periodic receipt
o Relied upon to pay expenses
• Income flows from capital
o Eisner v Macomber – tree and fruit
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Sample Case Study Summaries
Residence According to Ordinary Concepts Levene v IRC
• Taxpayer had always been a resident of the UK
• Retired from business and sold his house
• Lived in hotels in the UQ for the following 2 years
• After that, he spent 5 years living in hotels in both the UK and abroad
• During the 5 years he spent 4-5 months a year in the UK to obtain medical advice, visit relative and attend religious ceremonies
• The House of Lords held that until the taxpayer took a lease on a flat in Monte Carlo, he was a UK resident
• This is based on the fact that the purpose for going abroad was for nothing more than temporary - His ties to the UK were also taken into account
IRC v Lysaght
• Taxpayer partially retired and moved from England to an inherited estate in Ireland
• Sold his home in England but remained a non-executive director of the family company
• Travelled to England for about one week per month, staying in hotels, to attend board meetings
• It was held that the taxpayer was resident and ordinarily resident in the UK Joachum v FCT – Family Home in Australia, Travel for Work
• Taxpayer and his family migrated to Australia in 1994
• Was unable to find work in Australia so he obtained employment on various Sri Lankan vessels outside Australia for 316 days
• His family remained in Australia
• AAT concluded that the taxpayer was a resident of Australia as he maintained a home for his family in Australia and, despite his absence, his intention to treat Australia as his home had not changed
Domicile Test FCT v Applegate
• Originally employed in Sydney but sent to Vanuatu by employer
• Gave up the lease on his flat and left no assets in Sydney and took his wife with him
• Lease was obtained on a house and obtained residency status to be admitted to practice in Vanuatu
• Tax payer became ill after 7 months and returned to Sydney for medical treatment
• After returning to Vanuatu for a short period, he once again returned to Australia
• His intention was to eventually return to Australia after an unknown but substantial time
• The court concluded that he had a place of abode outside of Australia, and it was
‘permanent’ in contrast to ‘temporary’. Therefore, he was not an Australian resident FCT v Jenkins
• Taxpayer was transferred to Vanuatu for a fixed 3yr period
• Prior to leaving Australia, he attempted to sell the family home, but was unsuccessful
• He maintained a bank account but cancelled his health insurance policy