Assessable Income: Ordinary and Statutory Income
Core principles
Assessable income comprises ordinary income under s 6-5 and statutory income under s 6-10. Ordinary income is identified using the characteristics of income: it is periodic, recurrent, and has the character of a gain from business, employment or property. Key cases establish that a receipt is income if it is regular and expected (for example, a regular allowance) but capital if it replaces a capital asset.
Statutory inclusions
Know the statutory inclusions: salary and wages, allowances, bonuses, directors' fees, net capital gains, and specific amounts such as royalties and interest. Understand the treatment of compensation receipts (whether they replace income or capital), prizes and gambling winnings (generally not assessable unless from a business), and the personal services income rules.
Business income and timing
Candidates must understand the derivation of income, the distinction between cash and accrual accounting, and the treatment of prepayments. Trading stock is dealt with separately but affects income timing. Know the rules for barter and non-cash benefits, and the treatment of government grants and subsidies (often assessable if revenue in nature).
Traps and worked example
A classic trap is treating a capital gain as ordinary income, or assuming a lump-sum termination payment is always capital. Another is forgetting that exempt income is excluded while non-assessable non-exempt income is also excluded but treated differently.
Worked example: an employee receives a $10,000 bonus and a $5,000 reimbursement of work expenses. The bonus is assessable; the reimbursement is not assessable if it is a genuine reimbursement of an expense incurred on the employer's behalf. Rule of thumb: ask whether the receipt is a reward for services (income) or a payment for the disposal of a capital asset (capital).