Income & Capital Receipts
Lecturer: Arvin Ajay Sami
 What is income
 Character of Income
 Sources of income
 What is capital gain
 Taxable Income
 Taxpayers assessable income includes income
according to ordinary concepts
The concept of ‘ordinary income’ is not defined in the
tax legislation
Its meaning is ascertained by reference to the common
Courts are reluctant to provide a universal judicial
definition of ordinary income
In determining whether an amount is income or not,
courts usually consider various matters to characterise
the relevant amount
 Traditional economic view of income is it is a gain
 Tax law only recognised ‘realised’ gains as income
 Flows from capital assets – income
 Gains from the realisation of such assets – capital
 “Income has been compared with the fruit and capital
with the tree”
 For tax purpose, a taxpayer can make no gains from
dealing with himself
 A person’s income consists of money derived from
sources outside of the person
 Rent received by a landlord/lessor from a tenant/lessee
for the use of property or goods is typically treated as
income, as it represents the ‘fruit’ from the exploitation
of a capital asset
 Interest received on a loan will also be generally treated
as income
 ‘Premiums’ received for entering into loans has been
treated as capital in nature.
 Income - character of receipts arising from exploitation
of human capital
 Examples are wage and salary earners
 Salary and other payments received under contracts of
employment or for rendering personal services are
usually income in nature
 Voluntary payments that are linked to the provision of
service (e.g. tips received by a waiter in a restaurant )
are also viewed as income
 Payment made by third parties (eg. someone other
than the taxpayers employer) if it is sufficiently
‘incidental’ to the taxpayers employment
 Payments made by previous employers can be income
if they substitute or supplement income such as salary
or pension
 Payments made to former employees or service
providers is not income if they are traced to some
personal relationships between payer and recipient
rather than to services rendered
 (eg. personal gift rather than remuneration)
 In determining whether gains are of income or capital
nature, the courts focus on their character in the
recipients hands
 As a general rule, courts are not concerned with any
benefits obtained by third parties
 Courts will examine the features of a gain
 Income gain is periodic in nature
 Capital gain often received in the form of lump sums
 Note: do not jump into conclusions
 A birthday gift, gambling or finding something of value
results in a gain, not income
 A thief, prostitute when successful makes a again but
this does not constitute income
 Gains that accrue to us out of relations that are not
primarily economic in character but rather social or
domestic are not income
 The law in determining whether a gain is income looks
at the boundaries of commerce and economic life
Taxable Income = assessable income – deductions for tax
 Assessable income is the aggregate gross income
 Allowable deductions is expenses in earnings income
 Australian ITAA
 Total income is an artificial expression
 The taxpayers aggregate net income for the year
 ITA given as total income
 s.11 ITA – ‘For the purpose of this Act, “total income”
means the aggregate of all sources of income….’
 Is this aggregate gross income or net income?
 Net income since ITA continues by saying ‘…including
the annual net profit or gain or gratuity….’
 Remainder of s.11’s opening paragraph lists common
forms of income such as wages, salary…profits from a
trade or commercial or trade or financial or other
business… interest, dividends…’
 Other forms of income are listed
 S.11 has dual purpose; defines total income as aggregate
net and identifies income receipts
 s.19 ITA – deduction of expenses
 ‘…in determining total income, no deduction shall be
allowed in respect of ….’
 Two things to be noted; although s.11 and s.19 have been
drafted as separate sections, they really need to be read
together to get the full picture of total income
 Total income is aggregate net income
 S.11 identifies income receipts while s.19 elaborates
expenses deductible against receipts
 S.19 is expressed in the negative
 It does not specify what may be deducted but specifies
what may not
 S.19 is about total income, as in its opening words ‘… in
determining total income….’
 Since s.11 has defined total income as net income, s.19
does not need to provide that there may be deductions
 Provisions of deductions already exists in reference to
net income
 S.11 and s.19 in combination provide the principal
account of total income
 Total income is receipts less expenses and any loss
carried forward but excluding exempt income
 S.22 deals with losses
 A loss is first to be set off against other sources of
income for the year and if not fully absorbed, may be
carried forward and ‘be setoff against what otherwise
have been… total income for the next years in
succession’ (s.22(1)(b)
 s.17 deals with exempt income
 ‘…the following classes of income shall not be
chargeable to normal tax….’
 s.17 lists classes of income and makes no direct
reference to total income
 s.17 does not use the expression ‘exempt income’
 Tax under the ITA is levied on chargeable income and
not on total income
 ITA provides different definitions of chargeable income
for different classes of taxpayers such as:
 Resident individuals (s. 24)
 Non-resident individual (s.31)
 Resident companies (s.32(a)
 Non-resident companies s.32(b)
 Trusts and the estate of deceased (s.33)
 Any income tax must deal with the issues what, when
and where
 What types of receipts and expenses enter into the
calculation of income
 When are they to be aggregated
 Is any distinction to be drawn between receipts
according to where they originate
 Total income makes no reference to an income period
or any general reference to the geographic source of
 These matters are addressed by the concept of
chargeable income
 With regard to time the position is the same for all
classes of taxpayers, ie. chargeable income is ‘total
income for that year’
 For geographic source, a distinction is drawn between
resident and non-resident taxpayers
 Chargeable income for resident individual or company
is the total income for that year wherever derived
(worldwide total income)
 Chargeable income for non-resident individuals and
companies is the total income for the year derived in
 Chargeable income for trusts or deceased estate is
defined without reference to geographic source
 Under ITA tax concessions for individuals are effected
by a deduction from income, rather than a tax credit
 Hence, chargeable income for an individual is total
income less any concessionary deductions
It is well established that in all business enterprises, there is
no income unless a profit or gain is made. All costs,
expenses, allowable write-offs, and etc. are first deducted
from the gross revenue to determine the gain or profit. So it
is in business worldwide, and such is also in accordance
with the IAS rules.
However, for the wage earner, the rules change. One must
list everything coming in and pay taxes on those wages
without the benefit of the "usual business deductions." This
is unconstitutional! It gives businesses an unfair advantage
over individual citizens. Business income and citizen's
income (wages) are not taxed equally (Scott Hall)