Taxable Income

Issue: Consideration of earnings as ordinary or statutory income as part of taxable income

Law and reasons: Section 6.5 of the Income Tax Assessment Act 1997 lays out the provision where part of the assessable income that is derived on the basis of ordinary concepts would be considered as ordinary income. The Australian taxation system typically considers three elements to determine income derived from ordinary concepts. It includes income from personal exertion comprised of salary or wages, income from property comprised of rents, dividends or interests and income from business activities comprised of retail sales, farming and others. Recveivability is also an important area of discussion, where the Section 6.5(4) states that ordinary income becomes part of the taxable income when the taxpayer is taken to have received the amount. The judgement passed in “The Attorney General for the Province v Ostrum (British Columbia)” is also relevant in this context. In terms of the expression within the judgment, the intention was to include all types of gains and profits that can be considered to have been derived from personal exertions irrespective of whether the incomes are fixed, fluctuating, certain or precarious. The basis of calculation was also not factored in when determining the nature of the income derived from ordinary concepts.

Effect on taxable income and amount: Based on the specifics of the case scenario, the income received post the completion of the responsibilities as a Marketing Manager on June 30th, 2019 was found to be $46,000. It would be considered as part of the taxable income as it was derived from ordinary concepts on the basis of personal exertion, where personal exertion referred to wages received for providing services as a Marketing Manager. An additional credit amount of $20,000 would be added in terms of calculating the tax payable, bring the net taxable income to $66,000.

Issue: Receipt of investment earnings comprised of partially franked dividends (60%) amounting to $14,500 from a base rate entity named Small Co P/L

Law and reasons: Section 10.5 of the Income Tax Assessment Act 1997 provides a list of table of incomes that are to be included when calculating the assessable income but are not derived from ordinary concepts. Assessable income comprises of only ordinary income and statutory income, which implies that the items covered within the table, would constitute incomes derived from statutory concepts and part of the taxable income. Section 202-5 of the Income Tax Assessment Act 1997 provides that an entity would be considered as a franking entity if it satisfies the residency requirement during the time of the distribution and that the distribution may be considered as a frankable distribution. Additionally, a franking credit must be applied to the distribution. Furthermore, Section 207.70 of the Income Tax Assessment Act 1997 highlights that a gross up and tax offset is applicable when a franked distribution is made by an entity and no income is included within the assessable income u/s 207-20(1) and that the receiving entity is not entitled to a tax offset as provided u/s 207-20(2).

Effect on taxable income and amount: Based on the aforementioned provisions, the fully franked dividends paid by a company that fulfils the residency requirements are grossed up and to be included when calculating the assessable income. Since the receipt was $14,500 as a partially franked dividend (60%) and Small Co P/L is a base rate entity (27.5% taxation rate), the amount would stand at –

$14,500*27.5/72.5* 60% as mentioned u/s 202-5 and 202-20(1)

The resultant amount would come down to a sum of $3,300.

An entitlement to a tax offset would also be applicable for the income year in which the distribution was made in accordance to the provisions contained u/s 207-20(2) and the amount of tax that is offset would be equal to the amount of franking credit on the distribution as contained u/s 205-1.

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