Assessable Income: Ordinary and Statutory Concepts
The two limbs
Assessable income comprises ordinary income under s 6-5 and statutory income under s 6-10. Ordinary income is characterised by case law: it must be income according to ordinary concepts, requiring a gain that is periodic, expected and derived from an income-producing source. Key distinctions are income versus capital, and revenue versus capital receipts. Statutory income captures amounts that would not otherwise be income, such as net capital gains, allowances and certain government payments.
Derivation and timing
Income is derived when it is applied or dealt with on the taxpayer's behalf, or when it is received. For professional fees, derivation generally occurs when the fee is billed, not when cash is received. Prepaid income may be spread under specific provisions. Constructive receipt rules capture income dealt with at the taxpayer's direction.
Specific inclusions and exemptions
Candidates must know the treatment of allowances (assessable unless a specific exemption applies), fringe benefits (taxed to the employer, excluded from employee assessable income), compensation receipts (characterised by what they replace), and the personal services income rules. Exempt income includes certain education and welfare payments, and some foreign-source income of residents under specific rules.
Traps
A frequent trap is treating a capital gain as ordinary income, or a capital receipt as income because it is paid periodically. Another is forgetting that a non-cash benefit provided by an employer is generally not assessable to the employee. Questions also test whether a receipt is a gift (not assessable) or a reward for services (assessable).
Worked example
A consultant receives a $10,000 lump sum from a client for signing a two-year restraint of trade. The receipt is capital because it compensates for the loss of a capital asset (the right to work in the area) and is not ordinary income, though it may be a CGT event.