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 ordinary and statutory income types 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.
The courts 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 that 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, such payments were usually only 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 the 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 asset’s cost base. There is also a provision for some building capital allowances.
- 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, these receipts are also assessable.
DIRECT COMPENSATION FOR SERVICES
All remuneration for personal services, whether in the capacity of an employee or 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 lifetime 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 part.
Employment Termination Payment Tax Table
|Income component derived by the payee in the income year||Age of person at the end of the income year in which the payment is received||Component subject to PAYG withholding||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||The 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||The 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|
|The 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|
|The 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 low rate cap amount for 2021-22 income year is $225,000 (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 income year.
The $180,000 whole of income cap will not apply to:
- genuine redundancy payments
- early retirement scheme payments
- invalidity payments
- the 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 2021/22|
|Element taxed in the fund||Element untaxed in the fund (excluding levies)|
|60+||Tax-free||Tax-free||15%: $0 – $1,615,000
|55 – 59||Tax-free||0%: $0 – $225,000²
|15%: $0 – $225,000²
30%: $225,000 – $1,615,000
|0 – 54||Tax-free||20% of entire taxable component||30%: $0 – $1,615,000
- Medicare levy of 2% is also payable.
- The low rate cap amount of $225,000 is indexed annually.
- The untaxed plan cap amount of $1,615,000 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
The 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.
The ATO has indicated that it will closely scrutinise situations where the number of points accumulated in a year exceeds 250,000 and arise from a business relationship or business expenditure through which 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
The 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. Depending on their nature can be treated as assessable income, a capital gain, 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 wrongdoing 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.
Bonafide redundancy and approved early retirement payments in 2021/22 of up to $11,341 plus $5,672 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 premises lease 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 a landlord)
- Free fit-out (if owned by landlord).
If the tenant owns the free fit out, 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 formerly leased, an amount will have to be included in assessable income. There are three choices available in determining the Income (ITAA Sect 20-125).
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.
Businesses received payment for goods and services by cryptocurrency
Suppose you are a business, and you receive payment in the form of cryptocurrency for goods and services you provide. In that case, you will need to record the value of cryptocurrency in Australian dollars as part of your ordinary income. The value in Australian dollars will be the market value of the cryptocurrency on the day the transaction was made and can be obtained from a reputable cryptocurrency exchange.
Where you purchase business items using cryptocurrency (including trading stock), you are entitled to a tax deduction based on the market value of the item acquired. However, there may be capital gains tax consequences when you dispose of cryptocurrency for business purposes.
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
- Back pay
- 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
- Bonus Shares
- Bonuses including cash bonuses on insurance policies
- Books debts: sale of
- Bounty in carrying on business
- Business proceeds
- Cancellation of a contract of service
- Capital gains (net)
- Clothing allowance from the 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, the surplus on redemption, sale of non-interest-bearing Treasury Notes
- Compensation: Accident or disability policy payments, Cancellation, etc., ordinary contracts, Defamation, Interruption to business, Livestock 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 overwritten down value
- Diesel Fuel Rebate Scheme payments
- Discount employee share scheme shares
- Electoral expenses reimbursed
- Entertainment allowance from the employer
- Exceptional circumstances relief payments
- Exchange gains
- Film: disposal of copyright
- Financial arrangements, First Home Save Accounts: Holder’s earnings, Government contributions, withdrawals from an account
- Foreign income of residents: CFC income
- Friendly society education fund payments
- Grants for research
- Hire charges
- Holiday pay
- Housing allowance
- Illegal transactions
- Incentive payments
- Income: Arrears, subject to a possible tax offset, Capital asset sold for Income, Interest in Income under a will, settlement, Periodical payments
- Industrial dispute settlement payments
- Industrial property (copyright, patent, etc.) profits 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
- Investment income from a life policy
- Investments profits: where acquired for profit-making by sale or in the course of business
- Jury attendance fees
- Know-how: payments for sale or supply of
- Land sale or exchange profits
- Lay-by sales
- Lease incentives
- Lease income from “sale and leaseback”
- Leased cars and other equipment, profit on disposal
- The 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
- Meal allowances
- Motor vehicle allowance
- Natural resource payments to non-residents
- Net capital gain
- Newstart allowance
- No-TFN contributions income
- Non-cash benefits
- Non-residents trust estate income
- Overtime pays
- Paid parental leave
- Partnership: share of net income
- Pensions: social security
- Periodical receipts
- Premium, non-refundable: received on issue of debt securities
- Prizes or awards (business connection)
- Procurement fees
- Profit from the business of trading in futures
- Profit on disposal of a 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 an isolated business or commercial transaction where profit-making purpose
- Racehorse winnings including betting wins and prize money: where racing activities are part of business
- Rates adjustment to the vendor on the sale
- Refunds of rates, taxes, and other items
- Rents, including hire charges for plant, etc
- Repayments of FMD amounts
- Research grants
- 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 an employer
- Unemployment benefits
- Uniform allowance to employee
- Wheat Industry Fund: refunded levies
- Wine producer rebate
- Work in progress payments: Generally, Retiring partner
- Workers compensation
- Youth allowance