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  • Topic: Taxation, Capital gain, Capital gains tax
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  • Published : February 7, 2014
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Requirement 1
Part 1
(a) Explain what is meant by “income by ordinary concepts”. a) Ordinary income (s6-5) is an element of Assessable income. In the context of the Income Tax Assessment Act 1936 and ITAA 1997 assessable income is made up of Ordinary Income and Statutory Income. Assessable income includes income according to ordinary concepts which is called ordinary income s6-5(1).

Legislatures and courts have consistently declined to define the limits of the term “Income” and have referred to “income according to ordinary concept and usages”. Numerous tests have been defined by the courts, but “income” is not a term of art and there is no single test that meets every situation. Ordinary income is a judicial concept that emerged from trust law and has been elaborated and refined by the courts. Each case is decided on its own facts. Ordinary income is not defined so takes on its ordinary judicial meaning. The description “ordinary income” comes from the decision in Scott v CT (NSW).

Income according to ordinary concepts generally includes 3 categories: 1. Income from rendering personal services including employment income. 2. Income from carrying on a business. TR2008/1,TR2005/1, TR98/11 and TR97/11 3. Income from property such as rent, interest and dividends.

Characteristics of income by ordinary concepts are:

1. To be income, an amount must be beneficially derived- This proposition comes from the case Constable v FCT (1952): the case law states that the amount needs to be characterised at the point of its derivation. Income and derivation must co-exist. 2. Income is to be judged from the character it has in the hands of the recipient. Hayes v FCT (1956).

3. Income generally exhibits recurrence, regularity and periodicity, FCT v Stone (2005).
4. Amounts derived from employment or the provision of services are income. FCT v Blake (1984).
5. Amounts derived from carrying on a business are income.
Ferguson v FCT
6. Amounts derived from property are income,Federal Wharf Co. Ltd. v DCT (1930). 7. Amounts received as substitutes for or compensation for lost income are themselves income ,Liftronic Pty Ltd. V FCT(1996).

b) Tax consequences that arise in respect of:

“Mahler and Schubert”

Issue 1
Schubert and Mahler were awarded an Order of Australia medal by the Australian Government and $100,000 each from Lloyds of London, the insurer of SS Titan, who had been saved a billion dollar payout.

The issue is whether the Order of Australia medal and $100000 received from Lloyds of London, the insurer of SS Titan comes to Schubert and Mahler in connection with the performance of services or is a mere gift. The relevant cases would be Hayes v FCT, Scott v FCT.

Rule and Application

Mahler and Schubert were awarded an Order of Australia medal and $100,000 in relation to the voluntary services. The test in Hayes v FCT (1956) 6 AITR 248 the proposition grounded is that a “voluntary payment from A to B prima facie is not income but the presumption will not apply when the payment is in relation to product or services and from the standpoint of the recipient whether the amount accrues by virtue of an income producing activity on their part.”(Gilders et. al,2012, pg. no.108 ) Mahler and Schubert were not employed by Lloyds of London, the insurer of SS Titan nor were they employed by SS Titan therefore the payment received by them was not in relation to any income producing activity nor was it related to any services performed. They voluntarily risked their lives in boarding the vessel .Therefore the order of Australian medal and the $100,000 received is not income assessable under ordinary concepts.

In Scott v FCT it was held that the amount of £10000 was a gift. It was gratuitous, not made in discharge of an obligation and not taken by the recipient as discharging an obligation and...
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