Personal Income Tax Concept of Income PDF

GBC0019 PERSONAL INCOME TAX Concept of Income Capital vs Revenue Quick recap of last class  Concept of Income 1 Money/ Concept...

GBC0019 PERSONAL INCOME TAX Concept of Income Capital vs Revenue Quick recap of last class  Concept of Income 1 Money/ Concept Fixed Convertible Income Ciculating Payment of fix asset Periodicity, Recurrent, Regular 2 Payment for Nexus of activity and income Characteristics Income 3 destructions of profit profit making Capital receipt Receipts Substitution Payment in Lieu of Substantial restrictions trading Revenue Receipts Payment recurrent in nature  Physical capital (fixed asset) that is used in the production of a product. Fixed capital (Capital) Fixed assets (land, building, equipment) that stay in the business almost permanently or at least more than one “nature of the trade” accounting year. ✓ Manufacturer Concept of income car = capital asset Short-lived items that are ✓ Car Seller used in production and used car = stock up in the process of creating other goods or services. (circulating) Circulating capital Current assets’ in accounting (Revenue) term How to Determine E.g. raw materials, basic and intermediate materials. 4 Characteristics of Income 1 money or convertible into money 3 connection (nexus) between the receipt and an income earning activity  4 Characteristics of Income 1 money or convertible into money 3 connection (nexus) between the receipt and an income earning activity 4 Characteristics of Income 1 money or convertible into money 3 connection (nexus) between the receipt and an income earning activity  4 Characteristics of Income 1 money or convertible into money 3 connection (nexus) between the receipt and an income earning activity 4 Characteristics of Income 1 money or convertible into money 3 connection (nexus) between the receipt and an income earning activity  4 Characteristics of Income 1 money or convertible into money Tennant v Smith Employee was given accommodation rent free by employer. Could not sublet the accommodation to anyone else, therefore could not earn cash from this benefit. Court said it was not income since the value of the accommodation was not convertible into money. Unfortunately, under the current legislation, housing benefits is regarded as taxable Benefits-In-Kind (s.13(1)(b))  4 Characteristics of Income FCT v Dixon Taxpayer left his job to enlist in the armed forces. Former employer topped up his pay on a regular basis. Payments were incidental to army service. No obligation to return to work for the employer once he left the army. The payment was not made for employment service. The payments were considered ordinary income because they were periodic. The taxpayer expected a periodic payment. It formed part of the receipts upon which he depended for the regular expenditure upon himself and his dependents and was paid to him for that purpose.  4 Characteristics of Income Bowen CJ said -.... The regularity and periodicity of the payment will be a relevant though generally not decisive consideration.... A generally decisive consideration is whether the receipt is FCT v Harris the product in a real sense of any employment of, or services rendered by the recipient, or of any business, or, indeed, any Ex-gratia received by a retired bank manager from former employer (the revenue producing activity carried on by him Bank) to offset effects of inflation on [emphasis added]. his pension. The taxpayer was not expecting that payment, thus not depending on it. Full Federal Court found the payment was not income in nature. 3 connection (nexus) between the receipt and an income earning activity  4 Characteristics of Income The payment substituted lost salary (a replacement for lost income). Receipt takes on the character (income or capital) of what it substitutes for.  Capital or Revenue Receipts Payment receive for Payment for the imposition Payment for sale of fixed destruction of recipient of substantial restrictions asset profit making apparatus on the activities of a trader When the owner of an asset, like Cancelled agreement A trader may take in "know-how," gives away the whole thing so that he doesn't get it back or affect framework one of two forms : deals with it in a way that makes it and structure of worth much less to him, the money he business agree not to exploit gets for selling the asset or giving or use the asset to away the rights to use it in a way that makes this happen must be considered generate profit capital receipt. Agree not to pursue The owner's rights to the assets must his trade or not significantly affect the potential return of the assets. If they do, the profession for a owner will be considered to have period of time received revenue. The fact that the payment is a lump sum instead of regular instalments also doesn't change the fact that the receipt is a revenue item.  Capital or Revenue Receipts Payment receive for Payment for the imposition Payment for sale of fixed destruction of recipient of substantial restrictions asset profit making apparatus on the activities of a trader When the owner of an asset, like Cancelled agreement A trader may take in "know-how," gives away the whole thing so that he doesn't get it back or affect framework one of two forms : deals with it in a way that makes it and structure of worth much less to him, the money he business agree not to exploit gets for selling the asset or giving or use the asset to away the rights to use it in a way that makes this happen must be considered generate profit capital receipt. Agree not to pursue The owner's rights to the assets must his trade or not significantly affect the potential return of the assets. If they do, the profession for a owner will be considered to have period of time received revenue. The fact that the payment is a lump sum instead of regular instalments also doesn't change the fact that the receipt is a revenue item.  Capital or Revenue Receipts Payment receive for Payment for the imposition Payment for sale of fixed destruction of recipient of substantial restrictions asset profit making apparatus on the activities of a trader When the owner of an asset, like Cancelled agreement A trader may take in "know-how," gives away the whole thing so that he doesn't get it back or affect framework one of two forms : deals with it in a way that makes it and structure of worth much less to him, the money he business agree not to exploit gets for selling the asset or giving or use the asset to away the rights to use it in a way that makes this happen must be considered generate profit capital receipt. Agree not to pursue The owner's rights to the assets must his trade or not significantly affect the potential return of the assets. If they do, the profession for a owner will be considered to have period of time received revenue. The fact that the payment is a lump sum instead of regular instalments also doesn't change the fact that the receipt is a revenue item.  Capital or Revenue Receipts Payment receive for Payment for the imposition Payment for sale of fixed destruction of recipient of substantial restrictions asset profit making apparatus on the activities of a trader When the owner of an asset, like Cancelled agreement A trader may take in one of "know-how," gives away the whole thing so that he doesn't get it back or affect framework two forms : deals with it in a way that makes it and structure of worth much less to him, the money he business agree not to exploit or use gets for selling the asset or giving the asset to generate profit away the rights to use it in a way that makes this happen must be considered capital receipt. Agree not to pursue his trade or profession for a period of The owner's rights to the assets must time not significantly affect the potential return of the assets. If they do, the owner will be considered to have received revenue. The fact that the payment is a lump sum instead of regular instalments also doesn't change the fact that the receipt is a revenue item.  Capital or Revenue Receipts Payment in lieu of trading Payment of a recurrent receipts are revenue in nature are more likely nature treated as revenue Compensation for the Recurrent payment receive taxpayer’s trading profit from series of transaction lost during the period the carried on the course of asset could not be use trading Differentiate between compensation for the loss of the use of an asset vs compensation for loss or disposal of an asset To fill a ‘hole’ in the profits  Capital or Revenue Receipts Payment in lieu of trading Payment of a recurrent receipts are revenue in nature are more likely nature treated as revenue Compensation for the Recurrent payment receive taxpayer’s trading profit from series of transaction lost during the period the carried on the course of asset could not be use trading Differentiate between compensation for the loss of the use of an asset vs compensation for loss or disposal of an asset To fill a ‘hole’ in the profits  Other Receipts Insurance Recoveries Unclaimed Balances/Money Interest Income Sum receive in particular Unclaimed money is capital in Should be treated source of income in terms of nature. Example :Bad Debt under S.4(c), unless insurance, recoveries, S.24(5) applies. indemnity, reimbursement However, should the debtor release back the payment Full amount of recovery Section 4 of the Income Tax Act 1967 (as amended) previously allowed as [ITA]: Tax is chargeable under the ITA on income in Example : If business premises were insured RM95,000. However, deduction, it is an to be respect of: owner only spent RM85,000 on included in gross income (a) Gains or Profits from a Business; repair the building. The full (b) Gains or Profits from an Employment; RM95,000 would be included as (c) Dividends, Interest or Discounts; gross income (d) Rents, Royalties or Premium; (e) Pensions, Annuities or other periodical receipts; (f) Gains or Profits not falling under any of the above.  Other Receipts Insurance Recoveries Unclaimed Balances/Money Interest Income Sum receive in particular Unclaimed money is capital in Should be treated source of income in terms of nature. Example :Bad Debt under S.4(c), unless insurance, recoveries, S.24(5) applies. indemnity, reimbursement However, should the debtor release back the Full amount of recovery Section 4 of the Income Tax Act 1967 (as amended) payment previously allowed [ITA]: Tax is chargeable under the ITA on income in Example : If business premises were insured RM95,000. However, as deduction, it is an to be respect of: owner only spent RM85,000 on included in gross income (a) Gains or Profits from a Business; repair the building. The full (b) Gains or Profits from an Employment; RM95,000 would be included as (c) Dividends, Interest or Discounts; gross income (d) Rents, Royalties or Premium; (e) Pensions, Annuities or other periodical receipts; (f) Gains or Profits not falling under any of the above.  Other Receipts Insurance Recoveries Unclaimed Balances/Money Interest Income Sum receive in particular Unclaimed money is capital in Should be treated source of income in terms of nature. Example :Bad Debt under S.4(c), unless insurance, recoveries, S.24(5) applies. indemnity, reimbursement However, should the debtor release back the Full amount of recovery Section 4 of the Income Tax Act 1967 (as amended) payment previously allowed [ITA]: Tax is chargeable under the ITA on income in Example : If business premises were insured RM95,000. However, as deduction, it is an to be respect of: owner only spent RM85,000 on included in gross income (a) Gains or Profits from a Business; repair the building. The full (b) Gains or Profits from an Employment; RM95,000 would be included as (c) Dividends, Interest or Discounts; gross income (d) Rents, Royalties or Premium; (e) Pensions, Annuities or other periodical receipts; (f) Gains or Profits not falling under any of the above.