110289 Topic 4: What is Income?

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110289 Topic 4: What is Income?
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What's Income?
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  1. What is income?
    ITA '07
    BD(1) = "...is income if it's their income under provision in Part C (income)"

    Part C, Ordinary meeting = 'an amount is also income of person if it is their income under ordinary concepts"
  2. What is income - Case Law
    Not defined in tax legislation

    • Income under ordinary concepts or everyday usage
    • - "Income tax, if I may be pardoned for saying so, is a tax on income‟ (McNaughton,1901)
    • - What in one form or another goes into a man‟s pocket‟ (Lambe v IR Commrs, 1934)
  3. Reid v CIR (1985)
    Three features of income:
    1) Income is something which comes in

    2) Periodicity, recurrence or regularity

    3) Quality to the recipient

    NB: Not necessary to have all above features
  4. Three features of income:
    "Income is something which comes in"
    Income can only come in if it's money or money's worth.

    A gain in money or money's worth, derived by person for services rendered, or derived from an undertaking, property or a business.
  5. Three features of income:
    "Periodicity, recurrence or regularity"
    Income receipts are distinguishable from capital receipts on the basis of their recurrent or periodic nature.

    Give consideration to relationship between payer and payee and to the purpose of the payment.
  6. Three features of income:
    "Quality of the recipient"
    Relationship between the payer and the recipient, and for what purpose payment is made
  7. Alternative Concepts of Income
    - Economic Concept
    • • Income = increase in economic power
    • • That is net accretion in wealth plus consumption during the period in question
    • • It includes both realised and unrealised capital gains and losses
  8. Alternative Concepts of Income
    "Economic Income" example:
    • At beginning of the year has cash $1,500, but invested $1,000 in shares
    • Earned salary $15,000
    • Outside fees earned $2,000, expenses $400
    • Dividends received $900
    • Shares worth $9,800 at end of year
    • $400 in bank a/c at end of year
    • $17,600 cash spent on consumption items
    • Cash
    • = Value @ begin = $500
    • = Value @ end = $400
    • Increase or Decrease = ($100)

    • Shares
    • = Value @ begin = 1,000
    • = Vale @ end = 9,800
    • Increase or Decrease = 8,800

    • Item                                 Inc/Dec
    • Cash                                 ($100)
    • Shares                               8,800
    • Inc in net worth                 8,700
    • Consumption exp             17,600
    • Economic Income           $26,300
  9. Alternative Concepts of Income - "Accounting Income"
    Accounting Concept (Accountant‟s view)
    "inflows or other enhancements, or savings in outflows, of service potential or future economic benefits in the form of increases in assets or reductions in liabilities of an entity...result in an increase in equity‟
  10. • GAAP - income measured on basis of completed transactions
  11. Accounting income example
    • Salary                                    $15,000
    • Outside Fees earned             ($2,000) 
    • Less expenses                      ($400)
    • Net fees                                 $1,600
    • Dividends received                  $900
    • Accounting income                 $17,500
  12. Alternative Concepts of Income
    - Summary of Differences
    • ECONOMIC
    • - Needs valuation
    • - Subjectivity
    • - Unrealised gains/losses
    • - Includes gifts, inheritances, bequests

    • ACCOUNTING
    • - realisation concept
    • - historical cost
    • - conservatism
    • - objectivity
    • - matching expenses with revenue
  13. Alternative Concepts of Income
    - Legal Concept
    • • An income or inflow
    • • Convertibility into cash
    • • Periodicity or recurrence
    • • A reward from employment or vocation
    • • Realisation
  14. Employee vs. Independent Contractor
    • Employee
    • • Salary, Wages, and Income (s CE 1)
    • • PAYE must be deducted by employer
    • • Cannot register for GST
    • • Cannot deduct expenses

    • Independent Contractor
    • • May deduct expenses, if satisfying sDA1 (1) (b) - Business
    • • Must pay tax for themselves, not subject to PAYE
    • • Can register GST
  15. Employee vs Independent Contractor
    - Employment Relationship Tests
    • 1) Control test
    • 2) Independence test
    • 3) Integration / Organisation test
    • 4) Intention test
    • 5) Fundamental test / Business test / Economic reality test
  16. Control test
    The greater the control by the employer over work content, hours and methods, the more likely it is an employee
  17. Independence Test
    A worker with greater freedom to choose who to work for, where to work, the tools used and so on, is more likely to be an independent contractor
  18. Integration of organisation test
    A person is considered as an employee of the organisation if:

    • a. The type of work is commonly done by employee
    • b. Continuous (Not a one-off operation)
    • c. For the benefit of the business rather than for the benefit of the worker
  19. Intention test
    Intention is typically indicated in the written contracts.
  20. Fundamental test
    The test involves examining the total situation of the work relationship to determine its economic reality.
  21. What is not liable to Income Tax?
    "Assessable Income excludes"
    • Exempt income
    • Excluded Income
    • Non-residents foreign-sourced income
  22. Exempt income
    • - Income which are specifically legislated as not liable for income tax;
    • - Inappropriate to tax
    • - Specific government policy 

    Examples:

    • - Allowance of the Governor-General
    • - Expenditure on account, reimbursement, of an employee, if expenditure would be an allowable deduction if employment limitation did not exist
    • - Maintenance payments to a spouse for child support
    • - Scholarships and bursaries
    • - TAB and racing clubs
  23. Excluded Income
    generally items of income which are taxed under a different regime or not taxed for some other reason

    Examples

    • • Output tax on GST
    • • Fringe Benefits
    • • Specific Statutory Regimes (eg. government grants, superannuation contributions, etc.)
  24. When is Income Derived?
    For dividends, interest, rents, salaries and wages:

    • • Generally, when the income has been received, i.e. on a cash basis
    • • But this income is deemed to be derived when income is credited, reinvested, accumulated, capitalised, or used on behalf of the person,
    • • So the income may sometimes be recognised even if it has not been paid to or received by the person.
  25. Capital v Revenue
    • Capital:
    • - tree;
    • - a reservoir supplied from springs.

    • Income is
    • - fruit/crop;
    • - outlet stream to be measured by its flow over time;
    • - not a gain accruing to capital;
    • - not a growth or increment of value
  26. Capital v Revenue - Why do we need to identify the distinction? In New Zealand...
    In terms of receipts

    • • Capital is generally non-taxable;
    • • Income/revenue; liable for income tax;
    • • income generally excludes capital;
    • • some capital gains may be taxable – where asset held for resale, “circulating capital” e.g. capital gains from the sale of land purchased with intention for resale

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