Principles of Taxation Law – 2024

Answers to Questions

CHAPTER 5 – ASSESSABLE INCOME

Question 5.1

Using the general principles discussed in this chapter, discuss whether the following are likely to be
ordinary income:

(a) Salary received by an employee.

(b) Compensation received by an injured worker for loss of salary because he was unable to work
for four weeks.
(c) A Christmas present received by a daughter from her mother.
(d) Proceeds from selling the copyright to a book. The recipient was an employee accountant who
wrote a novel in her spare time over a number of years.
(e) Proceeds from selling the copyright to a book, where the recipient is in the business of writing
books and selling his copyright.
(f) Profit realised on the sale of shares that have been held for a number of years, primarily for
their capital growth.
(g) Unemployment benefits from the government received by an unemployed person.

Answer

(a) Salary fulfils the prerequisites of ordinary income as it is cash (see [5.60]) and a real gain (see
[5.70]). Furthermore, it flows from the personal services agreement (see [5.100]) and is regular
(see [5.90]). Therefore, it is ordinary income.
(b) This an application of the general principle that compensation for ordinary income is ordinary
income (see [5.140]). As salary is ordinary income, it follows that compensation for the loss of
salary is also ordinary income.
(c) This fulfils the prerequisites of ordinary income as it is cash-convertible (see [5.60]) and a real
gain (see [5.70]). However, it does not flow from services, property or business but instead is a
personal gift (see [5.100]). Furthermore, it is not regular (see [5.90]). Consequently, it would not
be regarded as ordinary income.
(d) This fulfils the prerequisites of ordinary income as it is cash (see [5.60]) and a real gain (see
[5.70]). However, the receipt does not flow from services, property or a business (see [5.100]).
On the facts given, it is highly unlikely that the taxpayer is in the business of writing books so
the receipt cannot be said to flow from a business. Furthermore, it does not flow from services
because the taxpayer is being paid for their copyright rather than for their services. Lastly, it
cannot be said to flow from property because the payment is for the sale of the actual property
and not a return from use of the property. In other words, the payment is for the actual tree
(the copyright) rather than for any fruit flowing from the tree. Since the payment does not flow
and is not regular it is highly unlikely to constitute ordinary income.
(e) Again, this fulfils the prerequisites as it is cash and a real gain (see [5.60]–[5.70]). These
payments flow from the business as the taxpayer is in the business of writing books and selling
copyright (see [5.100]). This is because the payments have a nexus to the business and are
therefore severable in that they leave the underlying business intact (see [5.110]). Using the
fruit and tree analogy, the business is the tree and the receipt for sale of copyright is the fruit of
that tree (see [5.110]). Consequently, this receipt would be ordinary income under the general
principles. This would be the case even if the payments were not regular as regularity is

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 influential rather than a definitive factor in determining if a payment is ordinary income (see
[5.90]).
(f) This fulfils the prerequisites of ordinary income as it is cash and a real gain (see [5.60]–[5.70]).
However, the receipt does not flow from services, property or a business (see [5.100]). On the
facts given it is highly unlikely that the taxpayer is in the business of trading in shares so the
receipt cannot be said to flow from a business. The receipt clearly does not flow from services
and it also does not flow from property because the payment is for sale of shares. The payment
is for sale of the tree (the shares), not from any fruit flowing from the tree.
(g) If receipts are regular, expected and depended upon by the taxpayer for support then they will
be ordinary income despite not flowing from services, property or business: Keily v FCT (1983)
83 SASR 494 (see [5.130]). This means that unemployment benefits would constitute ordinary
income.

Question 5.2

Look up some English dictionary definitions of “income”. In what respects are these definitions of
income similar to what tax law regards as “ordinary income”? Why is there a similarity?

Answer

Many dictionary definitions of “income” will contain the term “periodical” (or something similar) and
define “income” in terms of receipts from business, land, work, investments, etc. What is interesting
to note is the similarity between most dictionary definitions of “income” and what tax law regards as
“ordinary income”. For instance, periodical receipts are more likely to constitute ordinary income and
the dictionary definition of “income” usually mentions periodicity or regularity. Furthermore, receipts
that are regarded by courts as “ordinary income” usually flow from property, business or personal
services, and dictionary definitions will often mention income being a receipt from business,
investments and work (or words to that effect).

The reason that legal and dictionary definitions are similar is because of the decision in Scott v
Commissioner of Taxation (1935) 35 SR (NSW) 215 where it was held that “ordinary income” is defined
as “in accordance with the ordinary concepts and usages of mankind”.

Question 5.3

In the High Court decision in FCT v Dixon (1952) 86 CLR 540, the taxpayer’s receipts were held to be
ordinary income. However, Dixon CJ and Williams J reached this conclusion based on different
reasoning from Fullagar J. In relation to this chapter’s analysis of what is ordinary income under s 6-5
of the ITAA 1997, outline the reasons given for concluding that the taxpayer’s receipts were ordinary
income, and discuss which you think is the most convincing, giving reasons.

Answer

This case involved an employer that had paid his employees (the taxpayer being one of these) “top-
up” payments if they enlisted in World War II so as to limit their loss of income from being unable to
earn a full salary while serving in the army. Dixon CJ and Williams J decided that the amount was
ordinary income based on the fact that the amount was regular, expected, and depended upon by the
taxpayer (see [5.130]). On the other hand, Fullagar J depended on the compensation principle, and as

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the amount was replacing their former salary, which was ordinary income, consequently, the amount
was ordinary income as well (see [5.140]).

Regarding which view is more convincing, there is no clear answer and students may argue this from
either perspective.

Question 5.4

Ten employees agree to each contribute $5 per week to a fund that is used to purchase a weekly
lottery ticket. During the year there have been sufficient winnings to pay for an end of year dinner
($100 per person) for the 10 members of the group. There was also sufficient money left over to
refund $200 to each contributor.

Using Figure 5.1 as a guide, which elements of the figure are relevant to determining whether any of
the benefits received are ordinary income under s 6-5 of the ITAA 1997?

Answer

The winnings would be considered a windfall gain and would not be ordinary income. Although they
fulfil the prerequisites of being cash and a real gain, they are unlikely to be considered regular. Further,
they would lack the characteristic of having a ‘flow’, as they do not strictly speaking have a nexus with
either personal services, business, or property.

The refund of the $200 per person would not fulfil the characteristic of being a real gain and would
not be considered real income. This is an application of the principle of mutuality (see [5.170]), even
though strictly speaking this is not a formal club or association.

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