Tax is levied on the taxable income of the taxpayer derived during the income year. Assessable income minus allowable deductions equals taxable income.
Assessable income as defined in ITAA 1997 consists of ordinary income and statutory income.
If specially excluded or made exempt, certain types of ordinary and statutory income that will not be subject to tax.
Ordinary Income is defined to mean income according to ordinary concepts. However, no specific guidance on what is meant by “income according
to ordinary concepts” is contained in the legislation.
It is the courts that have identified a number of factors to provide guidance as to whether an amount has the character of income according to normal concepts.
These include: recurrence and regularity, provision of a service or work, as well as the carrying on of a business or profit-making undertaking or scheme.
Statutory Income applies if the amount is not ordinary income and is included by a specific provision of the Tax Act.
Examples include royalties, some capital gains, lump sum retirement payments, dividend imputation credits and allowances.
Exempt Income is any ordinary or statutory income which the Tax Act specifically exempts from taxation.
CAPITAL -V- REVENUE
The distinction between capital and revenue is a principle established in the Tax Act and extensively dealt with by numerous court findings. It applies
to both receipts and payments.
Prior to 1985, income receipts were assessable to tax and payments were deductible if they were connected with the earnings of income; however, capital
receipts were not. If no such connection existed, usually such payments were only then based on capital account and were non-deductible. The capital
gains tax regime ensured that from 20 September 1985, that many formerly non-assessable capital receipts would be subject to some form of tax.
Generally, taxpayers prefer receipts to be on capital account and payments to be on revenue (income) account. This is because:
- Prior to calculation of tax, capital gains may be subject to various discounts and exemptions
- Outgoings are deductible if they relate to the earning of income
- Outgoings related to capital assets are usually not deductible, but may be added to the cost base of the asset. There is also provision for some building
- Capital losses can be carried forward to be offset against future capital gains and cannot be claimed against income on revenue account.
Assessable income includes all proceeds from transactions carried out in the ordinary course of business. Where a business enters isolated transactions
outside normal activities, if there is a profit making undertaking or scheme, then these receipts are also assessable.
DIRECT COMPENSATION FOR SERVICES
All remuneration for personal services, whether in the capacity of an employee or in connection with employment or personal services is assessable income.
Exceptions to this include some initial living away from home allowances and fringe benefits.
Voluntary payments or gifts received, resulting from services provided, are also assessable income.
NON-CASH BUSINESS BENEFITS
These are widely defined as benefits received as property or services. Services include any right, privilege or benefit and may be provided either partly
or wholly, or directly or indirectly in a business relationship. If the annual total received is less than $300 then such payments are exempt from
tax. However, should the annual benefit exceed $300 then the total amount will be assessable.
EMPLOYMENT TERMINATION PAYMENTS (ETPs)
It is no longer possible to roll-over an ETP to superannuation.
The tax treatment of an ETP will depend on whether it is a life benefit ETP or death benefit ETP.
A life benefit ETP is only taxed on the taxable component. The tax-free component compromises the ‘pre-July 1983 segment’, the ‘concessional segment’ and
the ‘post-June 1994 invalidity segment.’ The tax-free component is not assessable income and is not exempt income – that is you do not pay tax on this
Employment Termination Payment Tax Table
|Income component derived by thepayee in the income year||Age of person at the end of theincome year in which thepayment is received||Component subject to PAYGwithholding||Rate of withholding (including the Medicare levy)||Cap to apply|
|Life benefit ETP – taxable component Payment is because of:
||Under preservation age||Up to the ETP cap amount||32%||ETP cap|
|Preservation age or older||Up to the ETP cap amount||17%||ETP cap|
|All ages||Amount above the ETP cap amount||47%||ETP cap|
|Life benefit ETP – taxable component Payment is because of:
||Under preservation age||Up to the relevant cap amount||32%||Lesser of ETP cap and whole-of-income cap (see note 2)|
|Preservation age or older||Up to the relevant cap amount||17%||Lesser of ETP cap and whole-of-income cap (see note 2)|
|All ages||Amount above the cap amount||47%||Lesser of ETP cap and whole-of-income cap (see note 2)|
|Death benefit ETP paid to non-dependants – taxable component||All ages||Up to the ETP cap amount||32%||ETP cap|
|Amount above the ETP cap amount||47%||ETP cap|
|Death benefit ETP paid to dependants – taxable component||All ages||Up to the ETP cap amount||Nil||ETP cap|
|Amount above the ETP cap amount||47%||ETP cap|
- Note the whole-of-income cap amount for the 2017-18 income year and future years is $180,000. This amount is not indexed.
- The ETP cap amount for 2017-18 income year is $200,000 (indexed).
EMPLOYMENT TERMINATION PAYMENTS TAX OFFSET
From 1 July 2012 there has been an additional $180,000 non-indexed whole of income cap based on an individual’s yearly taxable income that will work in
addition to the existing ETP cap rules on some employment termination payments.
An individual will receive an ETP cap, being the lesser of either:
- the existing lifetime benefit ETP cap
- the $180,000 ‘whole of income’ cap.
The $180,000 will be reduced by other taxable income (excluding the employment termination payment in question) that the individual may receive in that
The $180,000 whole of income cap will not apply to:
- genuine redundancy payments
- early retirement scheme payments
- invalidity payments
- compensation received due to a genuine employment related dispute relating to personal injury, harassment, discrimination or unfair dismissal
- death benefit payments.
Taxation arrangements for unused annual leave and long service leave payments were not changed.
SUPERANNUATION LUMP SUMS
Superannuation lump sums paid from a taxed source to those aged 60 and over are tax-free (i.e. non-assessable non-exempt income).
Tax is still payable on superannuation lump sums paid to someone aged less than 60. The superannuation lump sum is split into the tax-free component and
taxable component. The tax-free component comprises the ‘crystallised segment’ and the ‘contributions segment’. The taxable component is determined
by subtracting the tax-free component from the total value of the superannuation interest. The taxable component may consist of an element taxed in
the fund or an element untaxed in the fund (e.g. paid from an untaxed fund).
|Age of Recipient||Superannuation Lump Sum|
|Tax-free Component||Taxable Component 2017-18|
|Element taxed in fund||Element untaxed in fund (excluding levies)|
|60+||Tax-free||Tax-free||15%: $0 – $1,445,000 45%: $1,445,000+|
|55 – 59||Tax-free||0%: $0 – $200,000² 15%: $200,000+||15%: $0 – $200,000² 30%: $200,000 – $1,445,000 45% $1,445,000+|
|0 – 54||Tax-free||20% of entire taxable component||30%: $0 – $1,445,000 45%: $1,445,000|
1. Medicare levy of 2% is also payable.
2. The low rate cap amount of $200,000 is indexed annually.
3. The untaxed plan cap amount of $1,445,000 is indexed annually.
End benefits tax may still apply for certain untaxed superannuation funds (e.g. some public sector schemes) in respect of an element untaxed in a fund
(i.e. no contributions or earnings tax has been paid on this element).
FREQUENT FLYER AND CLUB BENEFITS
ATO accepts as a result of Payne’s case that flight rewards received by employees from an employer paid expenditure are not assessable income.
Any customer loyalty programme benefits earned as a result of private expenditure are not assessable.
ATO has indicated that it will closely scrutinise situations where the number of points accumulated in a year exceed 250,000 and arise from a business
relationship or business expenditure, whereby the arrangement has no commercial purpose other than to allow the recipient to receive reward points.
In such cases the
ATO will treat such rewards as assessable income or as a fringe benefit.
BARTER EXCHANGES AND TRANSACTIONS
ATO’s view is that barter transactions are assessable and deductible to the same extent as other cash or credit transactions. For tax purposes the
ATO considers one trade dollar (T$1) to be equal to one Australian dollar, unless it can be shown that the T$1 is being traded consistently at
a different value. Barter Exchanges and transactions are coming under increased
ATO scrutiny as it is considered that income is not being properly accounted for.
Such payments take many forms and depending on their nature can be treated as assessable income, as a capital gain, as an adjustment to the cost base of
an asset, or tax exempt.
- Periodical amounts of workers compensation are taxable
- Lump sum amounts received for personal injury or wrong doing are not taxable as these are private or capital recipients
- Personal injury cases now allow for structured settlements or orders which allow for such cases that formerly would have been settled for a lump sum
to be delivered as tax-free periodic payments to an injured person.
This complex issue is dealt with at length in Taxation Ruling TR 95/35.
REDUNDANCY AND EARLY RETIREMENT PAYMENTS
Tax planning opportunities exist as employees can receive limited bona fide redundancy and approved early retirement payments tax-free. Such payments are
not classified as Eligible Termination Payments.
Bona fide redundancy and approved early retirement payments in 2017/18 of up to $10,155 plus $5,078 for each completed year of service
with the employer are tax-free prior to turning 65.
The ATO’s view on what qualifies as genuine redundancy payments is contained in Taxation Ruling TR2009/2.
Usually a cash incentive paid to a business taxpayer to enter into a lease of premises will be assessable income.
Some non-cash incentives are tax-free as outlined in Tax Ruling IT 2631.
- Rent free period
- Interest free loan – provided it is a genuine business loan
- Free holiday (this is not deductible to landlord)
- Free fit out (if owned by landlord).
In cases where the free fit out is owned by the tenant the cash incentive will be assessable, but a deduction will normally be allowed for depreciation.
SALE OF FORMERLY LEASED EQUIPMENT
Where you or an associate make a profit on the sale of a motor vehicle informerly leased, an amount will have to be included in assessable income. There
are three choices available in determining the income (Tax Act Subdivision 20B).
If other formerly leased equipment is sold, the isolated transactions provisions may apply to make such a transaction assessable. If not the profit would
be taxed as a capital gain.
Where plant and equipment subject to depreciation is disposed of for an amount exceeding its written down value, the surplus is known as a “balancing adjustment”
and is assessable income. Low value pooled assets do not have a balancing adjustment. The value of the sale is used to reduce the value of the pool.
If the pool value becomes zero, a balancing adjustment will then occur.
CHECKLIST OF ASSESSABLE ITEMS
Accrued leave entitlements, payments received for transferring employee
Advance rent, royalties
Agency cancellation payments
Allowances connected with employment
Allowances paid to visiting fellow
Australian Defence Force (ADF) income
Austudy or ABSTUDY scheme payments
Bad debt recoveries where deduction previously allowed
Balancing adjustments (unless roll-over relief available): Depreciating assets
Barter exchange (business) transactions
Benefits (non-cash) provided to business taxpayers
Betting or gambling wins of a taxpayer who is carrying on a business of betting, etc
Bitcoin (business) transactions
Bonuses including cash bonuses on insurance policies
Books debts, sale of
Bounty in carrying on business
Cancellation of contract of service
Capital gains (net)
Clothing allowance from employer
Clubs, receipts from non-members
Commonwealth securities: Accrued interest on Special Bonds, Profit on sale or redemption of securities acquired at a discount after 30 June 1982, Surplus
on redemption, sale of non-interest bearing Treasury Notes
Compensation: Accident or disability policy payments, Cancellation, etc, ordinary contracts, Defamation, Interruption to business, Live stock loss, death,
etc, Reduction in salary (compensation), Standing timber, Tax liability, Trading stock losses, Workers Compensation
Contract adjustments for rates, land tax, etc
Damages: Compensation for loss of income
Debt defeasance arrangements
Defence Force members’ pay and allowances
Depreciable plant: broadly excess of sale price over written down value
Diesel Fuel Rebate Scheme payments
Discount employee share scheme shares
Electoral expenses reimbursed
Entertainment allowance from employer
Exceptional circumstances relief payments
Film, disposal of copyright
Financial arrangements, First Home Save Accounts: Holder’s earnings, Government contributions, withdrawals from account
Foreign income of residents: CFC income
Friendly society education fund payments
Grants for research
Income: Arrears, subject to possible tax offset, Capital asset sold for income, Interest in income under will, settlement, Periodical payments
Industrial dispute settlement payments
Industrial property (copyright, patent, etc) profit on exploitation
Interest on early payments on tax
Interest on overpayments of tax
Interest paid to non-residents
Interest: Non-accrual loans, Interest derived by body corporate
Investment income from life policy
Investments profits, where acquired for profit-making by sale or in course of business
Jury attendance fees
Know-how, payments for sale or supply of
Land sale or exchange profits
Lease income from “sale and leaseback”
Leased cars and other equipment, profit on disposal
Licence in patents, copyrights, designs, etc: Payment for grant of, Payment for use of
Liquidation distributions out of “income”
Loans to private company shareholders
Location allowance to employee
Long service leave payment
Lump sum damages or out-of-court settlement for loss of income
Lump sum for lost earnings
Luxury car lease notional finance charges
Motor vehicle allowance
Natural resource payments to non-residents
Net capital gain
No-TFN contributions income
Non-residents trust estate income
Paid parental leave
Partnership, share of net income
Pensions, social security
Premium, non-refundable, received on issue of debt securities
Prizes or awards (business connection)
Profit from business of trading in futures
Profit on disposal of car which taxpayer or an associate has previously leased
Profit on sale of other leased equipment
Profit on sale, exchange or other realisation of shares, land, houses, and businesses
Profits from isolated business or commercial transaction where profit-making purpose
Racehorse winnings including betting wins and prize money, where racing activities part of business Research grants
Rates, adjustment to vendor on sale
Refunds of rates, taxes and other items
Rents, including hire charges for plant, etc
Repayments of FMD amounts
Return to work payments
Rewards for services rendered
Royalties paid to non-residents
Securities gains on disposal or
Shares, profits on disposal
Sickness payments under disability policy, workers compensation
Social security payments
Subsidies (for inflation on pensions)
Subsidies for carrying on business
Superannuation contributions deducted from salary or wages
Superannuation fund income
Superannuation fund payments to employer-sponsor if contributions deductible
Travel allowance to employee
Trust income, adult beneficiary’s share
Tuition allowance received from employer
Uniform allowance to employee
Wheat Industry Fund, refunded levies
Wine producer rebate
Work in progress payments; Generally, Retiring partner