Statutory Income - a closer examination

If the Assessment Act says it is included in assessable income, then it is Statutory income

The first place to look for items of statutory income is Division 15

15-3 Return to work payments

15-5 Accrued leave transfer payments

15-10 Bounties and subsidies

15-15 Profit-making undertaking or plan

15-20 Royalties

15-25 Amount received for lease obligation to repair

15-30 Insurance or indemnity for loss of assessable income

15-35 Interest on overpayments and early payments of tax

If you have read the topic,  Your income tax is based on your taxable income, so how do you calculate your taxable income? You will know that your taxable income is your assessable income less your allowable deductions.

assessable income=ordinary income + statutory income

If you have read the topic, Income according to ordinary concepts - a closer examination you should have a working knowledge of ordinary income.

So let's look at the second constituent of assessable income: statutory income

What is statutory income?

If the Assessment Act calls it income,

then it is assessable income!

You will find the answer to that question in section 6-10

6-10 Other assessable income (statutory income)

(1) Your assessable income also includes some amounts that are not *ordinary income.

Note: These are included by provisions about assessable income.
For a summary list of these provisions, see section 10-5.

 

Section 6-10 includes certain receipts,

which might NOT be considered to be income

according to ordinary concepts.

      1. Amounts that are not *ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.

        2. These receipts are listed in section 15-1.

        It would be worth your while to have a look at these …

        Note: Many provisions in the summary list in section 10-5 contain rules about ordinary income. These rules do not change its character as ordinary income.

      2. If an amount would be *statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.

 

Read section 6-10 (4) again, then answer this question….

An employee who has received a return to work payment as part of a settlement, which ended a strike, authorises his employer to deduct an amount as part of a union levy from his salary and pay it direct to the union. The employer never receives the money, which the employer pays to the union.

Should the employee include that money he did not receive in his assessable income? 

 

Yes No

If you are an Australian resident, your assessable income includes your *statutory income from all sources, whether in or out of Australia

Answer this question….

A resident includes statutory income from all sources in and out of Australia in his assessable income

 

Yes No

 

 

(5) If you are not an Australian resident, your assessable income includes:

(a) your *statutory income from all *Australian sources; and

    1. other *statutory income that a provision includes in your assessable income on some basis other than having an *Australian source.

The first place to look for items of statutory income is Division 15

Where a doubt as to whether a receipt qualifies as income according to ordinary concepts, it will be made statutory income, to avoid a lot of litigation. You can look at the list of such items in Division 15

15-3 Return to work payments

In 1981, the Prime Minister, who sought to demonstrate his leadership qualities by attacking the greediness of trade unions, was rather disturbed at a negotiating tactic, which had become very popular with striking union members.

The union would offer to call off the strike only on condition that it's members be compensated for going back to work before they had gained all their objectives.

These 'return to work' agreements were worded in such a way that it could be argued that the payments received by the workers were not income according to ordinary concepts.

So not only were the unionists achieving some increase in wages by going on strike, but they were also receiving a tax free bonus.

Your assessable income includes an amount you receive under an *arrangement that an entity enters into for a purpose of inducing you to resume working for, or providing services to, any entity.

This provision was added to ensure that such payments were included in the assessable income of the recipients.

 

15-5 Accrued leave transfer payments

If you employ workers, you are incurring a liability to provide them with annual and long service leave. Such liabilities are reflected in the accounts of the employer as accrued charges. However no deduction from assessable income is allowed until such time as the leave entitlements are actually taken by the employees.

If an enterprise with accrued liabilities to its employees for leave entitlements is sold, the sale price of that enterprise is usually adjusted to reflect the amount of leave payments that the purchaser will have to make when the employees take their leave entitlements.

Such payments have the look and feel of capital amounts, but they are included in assessable income because they will be allowable deductions when the employees take the leave entitlements.

 

15-10 Bounties and subsidies

Businesses sometimes receive payments from the Government or other bodies to assist them in conducting their operations.

Horse racing clubs receive amounts from Totalisator Agency Boards

Woolgrowers can qualify for emergency financial assistance

Industrial Research and Development Grants are paid to industry to encourage innovation

It might be argued that such payments are not income Such payments are not income according to ordinary concepts so they are made so by this provision, to the extent they would not otherwise have been.

Your assessable income includes a bounty or subsidy that:

(a)you receive in relation to carrying on a *business and

(b)is not assessable as *ordinary income under section 6-5.

 

15-15 Profit-making undertaking or plan

Before the advent of the capital gains provisions in 1985, the Commissioner had to rely on section 26(a) of the 1936 Income Tax Assessment Act. One part of that provision included in assessable income … profit arising from the carrying on or carrying out of a profit-making undertaking …

During the 1970's and 80's, the Courts gave a very restrictive interpretation to section 26(a). In fact the introduction of the capital gains provisions with effect from 1985 could be seen as a response to the Commissioner's apparent inability to include the appreciation in the value of assets into the tax net. (This inability was a most useful weapon in the armoury of the tax avoidance specialists who were flourishing in this era, transforming income into capital gains, and capital losses into deductions)

Section 15-15 establishes the Commissioner's rights to go after capital gains derived before 20 September 1985 using the weapons that proved so ineffective before he could use the capital gains tax provisions

15-20 Royalties

Royalties are included in assessable income by sec 15-20, if the amount...

falls within the ordinary meaning of ROYALTY

is NOT ordinary income

Royalties according to the ordinary meaning of the term

you can refer to para 10-640 of the CCH Master Tax Guide for an attempt at defining the ordinary meaning of the term 'royalty'.

The essence of the term 'royalty' is that a payment for a right to

Do some act ... Or ... use some property

Should be made in respect of particular exercises of that right and therefore should be calculated in respect of ...

The quantity or value of the property taken under the right

The number of occasions upon which the right is exercised

 

Answer this question….

Would payments under an agreement to remove standing timber from a property and to pay 30 cents for each and every superficial feet of such milling timber cut be a royalty? 

 

Yes No

 

McCauley case - for a citation and further details go to paragraph 10-640 CCH Master Tax Guide and look at the footnotes to this passage, which will give you the paragraphs of the more exhaustive treatment offered in the CCH Federal Tax Reporter. If you have access to this work, you will find further information there.

Answer this question….

Would these payments be royalties in the ordinary meaning of the term?

Payments for the right to cut and remove timber $1000 deposit and 4 quarterly instalments of $8500. In the event of the quantity of timber being less than that estimated, there was to be a proportionate rebate in the price. 

Yes No

See Stanton case - for citation - see go to para 10-640 of the CCH Master Tax Guide and refer to the footnotes to the CCH Federal Tax Reporter - you will find further information in those paragraphs of that work.

The payments represented a lump sum payment for as much timber as could be taken. Whether or not it was taken the full price remained payable without regard to the extent to which the purchaser might exercise his right to cut and remove the timber.

Answer this question….

Would the following be a royalty in the ordinary sense of the term? (Y/N)

Payments calculated as a percentage of the sales of nickel produced by a patented industrial process. The agreement under which the payments were made was for the supply of technical assistance, qualified personnel and research work, and expressly granted the right to use the process and sell all the output

Yes No

Refer para 10-640 - CCH Master Tax Guide - Sherrit Gordon mines case

In the Sherrit Gordon case the majority of the judges considered that the right to use the process and to sell the products was no more than a recognition of the consequence which automatically flowed from the assistance and information provided under the agreement. The method of calculation of the sums payable did not transform the payments into royalties

As you will appreciate from the questions posed, defining of a royalty can be a complicated matter, and determining whether it is income according to ordinary concepts can be difficult.

For this reason, section 15-20, makes it plain that it includes royalties in assessable income only if they are…

an amount that you receive as or by way of royalty within the ordinary meaning of royalty" (disregarding the definition of royalty in subsection 995-1(1))

if the amount is not assessable as *ordinary income under section 6-5.

 

15-25 Amount received for lease obligation to repair

An amount of rent received under a lease agreement is clearly income according to ordinary concepts.

But if the lessee is required to maintain the property in good condition, and fails to do this, the payment he has to make to enable the lessor to repair his property would not necessarily be income in the hands of the lessor. It would resemble the compensation payments considered in the topic on income according to ordinary concepts.

However, because the lessor will be allowed a deduction of the repairs he uses this money to effect, section 15-25 includes the amount in his assessable income.

15-30 Insurance or indemnity for loss of assessable income

Section 15-30 includes in assessable income an amount you derive by way of insurance or indemnity for the loss of an amount that would have been assessable income.

Think about this question!

Does sec 15-30 include an insurance recovery in respect of capital assets?

It's trickier than it looks at first glance!

Section 15-30 deals with loss of trading stock and profits, and these would not usually be considered to be capital. But, a right under an insurance policy can be an asset for capital gains tax purposes and so a recovery might be a capital gain. Refer CCH Master Tax Guide para 10-170 or para 2.4.5 - Assessing handbook

Let's try a more straight forward problem.

Answer this question….

Should compensation received by a poultry farmer for loss of income when his hens died due to excessive amounts of pesticide in their feed be included in assessable income?

Yes No

 

Refer CCH Master Tax Guide para 10-170

15-35 Interest on overpayments and early payments of tax

 

The Taxation (Interest on Overpayments and Early Payments) Act requires the Commissioner to pay you interest on amounts paid to him in certain circumstances.

Such interest is required to be included in assessable income by section 15-35

 

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