Income & Capital Receipts Lecturer: Arvin Ajay Sami LAW 601 – Taxation Law Income & Capital Receipts Lecturer: Arvin Ajay Sami 14/04/2018

Overview What is income Character of Income Sources of income What is capital gain Taxable Income 14/04/2018

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 law 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

Income (cont’d) 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” 14/04/2018

Income (cont’d) 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

Income (cont’d) Example 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. 14/04/2018

Payment for services Income - character of receipts arising from exploitation of human capital Examples are wage and salary earners 14/04/2018

Payment for services (cont’d) 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 for services (cont’d) 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 14/04/2018

Payment of services 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) 14/04/2018

Gains 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

Gains (cont’d) 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 Taxable Income = assessable income – deductions for tax purpose. Assessable income is the aggregate gross income Allowable deductions is expenses in earnings income Australian ITAA

Total income 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….’

Total income (cont’d) 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

Total income (cont’d) 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

Total income (cont’d) 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

Total income (cont’d) 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

Losses 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)

Exempt income 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’

Chargeable 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)

Chargeable income (cont’d) 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

Chargeable income (cont’d) Total income makes no reference to an income period or any general reference to the geographic source of income 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’

Chargeable income (cont’d) 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 Fiji Chargeable income for trusts or deceased estate is defined without reference to geographic source

Chargeable income (cont’d) 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

Summary 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)