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STATUTORY INCOME & EXEMPT INCOME

Topic Objectives 2

Suggested reading 2

INTRODUCTION 2

Statutory income 5

Introduction 5

Specific provisions 6

Sections which prevail over section 6-5 6Section 44(1) (dividends) and Section 207-20 (franking credits) 6Section 15-3 (employment—return to work payments) 8Section 15-35 (interest—on overpaid tax) 8Section 15-70 (reimbursed car expenses) 8Section 83-10 and 83-80 (leave payments received) 9

Sections which do not prevail over section 6-5 9Section 15-2 (allowances etc. re: employment or services rendered) 9Section 15-10 (bounties, subsidies) 11Section 15-15 (profits) 11Section 15-20 (royalties) 12Section 15-30 (compensation—insurance for loss of income) 12Subdivision 20-A (recoupment for deductible losses) 13

How to answer questions about statutory income 17

Exempt income 18

Non-assessable non-exempt income 27

How to answer questions about exempt income 28

Statutory & Exempt Income

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TOPIC OBJECTIVES

Upon completion of this topic, students should be able to:

Determine whether a receipt is statutory income (versus ordinary income) and which provision of the Acts operates to assess it.

Determine whether a taxpayer or a receipt is exempt from tax and which provision of the Acts grants the exemption.

Write reasonably argued positions citing all relevant sections and cases to support the above objectives using the ‘cite, describe, apply’ method.

SUGGESTED READING None for this topic (apart these study notes)

INTRODUCTION

As you are aware by now, assessable income includes amounts other than ordinary income. These amounts are called statutory income which is defined in s 995-1(1) as having the meaning given by s. 6-10.

The income tax Acts also contain various exemptions which operate on taxpayers to fully exempt them from the income tax system or to make specific receipts exempt. Many of these have special conditions that must be satisfied for the exemption to apply.

In certain cases, there may be an overlap between statutory income and ordinary income because some items of statutory income may also constitute ordinary income; the two types of assessable income are not completely exclusive. This fact is recognised in s. 6-25(1), which also recognises that the same amount may be included in assessable income by more than one statutory income provision. In either of these two cases, s. 6-25(1) precludes double-counting by providing that any such amount is included only once in assessable income. Where both a statutory provision and the

6-10 Other assessable income (statutory income)

(1) Your assessable income also includes some amounts that are not*ordinary income.

(2) Amounts that are not*ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.

(3) If an amount would be *statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.

(4) If you are an Australian resident, your assessable income includes your *statutory income from all sources, whether in or out of Australia.

(5) If you are a foreign resident, your assessable income includes:(a) your *statutory income from all *Australian sources; and(b) other *statutory income that a provision includes in your assessable income on

some basis other than having an *Australian source.


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ordinary income provision apply to an amount, the specific statutory provision prevails over the rules of ordinary income: s. 6-25(2).

You will notice, however, that a number of the provisions on statutory income in the 1997 Act expressly defer to s. 6-5; that is, the statutory income provision only applies where the amount is not also ordinary income assessable under s. 6-5. We will see how this operates further below.

Certain amounts which would otherwise be assessable as ordinary income or statutory income are excluded from assessable income by virtue of being classed as exempt income which is defined in s 995-1(1) as having the meaning given by s. 6-20.

As provided in s. 6-15(2), if an amount is exempt income, it is not assessable income, and therefore, as you are reminded in s. 6-15(1), you do not have to pay income tax on it.

6-25 Relationships among various rules about ordinary income

(1) Sometimes more than one rule includes an amount in your assessable income:

the same amount may be *ordinary income and may also be included in your assessable income by one or more provisions about assessable income; or

the same amount may be included in your assessable income by more than one provision about assessable income.

However, the amount is included only once in your assessable income for an income year, and is then not included in your assessable income for any other income year.

(2) Unless the contrary intention appears, the provisions of this Act (outside this Part) prevail over the rules about *ordinary income.

6-20 Exempt income

(1) An amount of *ordinary income or *statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another *Commonwealth law.

(2) *Ordinary income is also exempt income to the extent that this Act excludes it (expressly or by implication) from being assessable income.

(3) By contrast, an amount of *statutory income is exempt income only if it is made exempt from income tax by a provision of this Act outside this Division or another *Commonwealth law.

(4) If an amount of *ordinary income or *statutory income is *non-assessable non-exempt income, it is not exempt income.


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Subsection 6-20(1) states that an amount of ordinary income or statutory income is exempt income if it is made exempt by a provision of the Act and the signpost directs the reader to ss. 11-5 and 11-15 for lists of these exempting provisions which are from both Acts. In the 1936 Act, the exemption provisions are contained in the paragraphs of s. 23 and in following sections. Section 6-23 identifies an additional class of income: non-assessable non-exempt income. This income is not assessable, but also is not classed as exempt income.

Section 6-1 of the 1997 Act depicts the relationship between ordinary income, statutory income, exempt income and non-assessable non-exempt income. Please note that section 6-1 is not operative law. Instead it is a guide. Guides and lists are not considered operative sections of the 1997 Act, but exist merely to provide guidance to taxpayers seeking to apply the law to their own affairs (refer to the introduction to the tax system notes for further details about guides and lists). The specifics of non-assessable non-exempt income are beyond the scope of this course.

6-15 What is not assessable income

(1) If an amount is not*ordinary income, and is not*statutory income, it is not assessable income (so you do not have to pay income tax on it).

(2) If an amount is *exempt income, it is not assessable income.

* the amount may be taken into account in working out the amount of a tax loss (see section 36-10);

* you cannot deduct as a general deduction a loss or outgoing incurred in deriving the amount (see Division 8);

* capital gains and losses on assets used solely to produce exempt income are disregarded (see section 118-12).

6-23 Non-assessable non-exempt income

An amount of *ordinary income or *statutory income is non-assessable non-exempt income if a provision of this Act or of another *Commonwealth law states that it is not assessable income and is not *exempt income.


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STATUTORY INCOME

Introduction

In the preamble above, the relationship between statutory income and ordinary income is addressed in terms of the 1997 Act. A similar relationship existed between these two kinds of assessable income in the 1936 Act without being made explicit. In the 1936 Act, the statutory provisions are contained in the paragraphs of s. 26 and in other sections. In examining the relationship between s. 25(1) and s. 26 of that Act, Gibbs J said in Reseck v. FCT 75 ATC 4213 at 4215:

Speaking generally, section 26 does not limit section 25, but includes as assessable income some receipts that might not ordinarily have been regarded as income. In other words, a receipt may be included in assessable income either because it is income in the ordinary understanding of the word or because it comes within the provisions of one of the paragraphs of section 26. When a receipt which is income in accordance with ordinary concepts also falls within section 26 ... the receipt forms part of the assessable income and it is immaterial whether section 25 or section 26 brings about that result.

In a similar vein, Dixon CJ and Williams J said in FCT v. Dixon (1952) 86 CLR 540 at 555:

6-1 Diagram showing relationships among concepts in this Division

Non-assessable

Exempt income

Assessable income

Ordinary income Statutory income

non-exempt income

(1) Assessable income consists of ordinary income and statutory income.

(2) Some ordinary income, and some statutory income, is exempt income.

(3) Exempt income is not assessable income.

(4) Some ordinary income, and some statutory income, is neither assessable income nor exempt income.

(5) An amount of ordinary income or statutory income can have only one status (that is, assessable income, exempt income or non-assessable non-exempt income) in the hands of a particular entity.


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It [the 1936 Act] begins with the general conception of income and specifies in section 23 what is exempt and in section 26 and other sections particular classes of income that are to be included. Sometimes these classes of income appear to be specified simply for greater certainty, sometimes because they do not fall within the natural understanding of gross income ... .

Specific provisions

As indicated above, sometimes a receipt may satisfy the characteristics of ordinary income and be assessable under s 6-5(1) as well as satisfying the requirements of another section in this topic. The Acts are clear that a receipt may only be assessed once: s. 6-25(1). Thus, unless the contrary intention appears, the statutory income provision will prevail over ordinary income: s. 6-25(2). The contrary intention is expressed in numerous sections, meaning that those sections will not prevail.

Sections which prevail over section 6-5

If the requirements section 6-5 and one of the following provisions are met, then the statutory provision will prevail.

Sections 44(1) (dividends) and 207-20(1) Franking CreditsDividends paid by a company to a shareholder are included in the shareholder’s assessable income under s. 44(1) of the 1936 Act. (Dividends also qualify as ordinary income, ie ‘income from property’.) Subsection 6(1) provides an expanded definition of ‘dividend’ beyond the common law, but the dividends covered in this course will be the normal distributions of company profits. Dividends are derived when paid or credited, not when declared.

Resident shareholders in receipt of dividends from resident companies may be entitled to a franking credit (tax offset) in respect of these dividends under the dividend imputation system. Broadly, these shareholders are entitled to a credit for tax paid by a resident company on its income out of which the dividend is paid. This is to avoid double taxation on dividends paid to shareholders. This is discussed in further in a later topic, but for the moment recognise that franking credits that are associated with dividends are assessed as statutory income to the shareholder under s. 207-20(1) and then taxpayer receives a reduction in taxable via a corresponding tax offset for the amount of those credits under s. 207-20(2). As an aside, please note that this is an example where subsections within a section perform separate functions, therefore it is important that you be precise in your citation of the relevant law.


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44 Dividends

(1) The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) includes:

(a) if the shareholder is a resident:(i) dividends (other than non-share dividends) that are paid to the

shareholder by the company out of profits derived by it from any source; and

(ii) all non-share dividends paid to the shareholder by the company; and … [rest of section is omitted].

6 Interpretation

dividend includes:(a) any distribution made by a company to any of its shareholders, whether in

money or other property; and(b) any amount credited by a company to any of its shareholders as shareholders;

but does not include:(d) moneys paid or credited by a company to a shareholder or any other property

distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; or

(e) moneys paid or credited, or property distributed, by a company for the redemption or cancellation of a redeemable preference share if:

(i) the company gives the holder of the share a notice when it redeems or cancels the share; and

(ii) the notice specifies the amount paid-up on the share immediately before the cancellation or redemption; and

(iii) the amount is debited to the company’s share capital account;except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or

(f) a reversionary bonus on a life assurance policy.

207-20 General rule—gross-up and tax offset

(1) If an entity makes a *franked distribution to another entity, the assessable income of the receiving entity, for the income year in which the distribution is made, includes the amount of the *franking credit on the distribution. This is in addition to any other amount included in the receiving entity’s assessable income in relation to the distribution under any other provision of this Act.

(2) The receiving entity is entitled to a *tax offset for the income year in which the distribution is made. The tax offset is equal to the *franking credit on the distribution.


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Section 15-3 (employment—return to work payments)Payments made to induce a resumption of work are included in assessable income by s. 15-3 (formerly s. 26(eb)).

Section 15-35 (interest—on overpaid tax)Where a taxpayer overpays tax and an amount is refunded or makes an early payment of tax, the Taxation (Interest on Overpayments and Early Payments) Act 1983 provides for the payment of interest on these amounts. This interest is rendered assessable under s. 15-35. Overpayments of tax can occur when a taxpayer received a substantial tax refund for a relevant year (due to having paid high Pay As You Go (PAYG) instalments during the year) or has amended their tax return (the form taxpayers submit to the ATO outlining their assessable income, allowable deductions and other matters) for a prior year which has resulted in a reduction in taxable income.

Section 15-70 (reimbursed car expenses)Where an employee is reimbursed for car expenses, the amount received is to be included in the employee's assessable income under s. 15-70, which has replaced s. 26(eaa) and is effective from 14 September 2006. These expenses are calculated on the basis of the distance travelled by the car. (It is then the employee’s responsibility to substantiate and claim any offsetting deduction.) The section specifies reimbursements mentioned in section 22 of the Fringe Benefits Tax Assessment Act 1986, however that section is beyond the scope of this course. If this section is relevant, you will be told that a taxpayer has received a reimbursement of car expenses.

15-3 Return to work payments

Your assessable income includes an amount you receive under an *arrangement that an entity enters into for a purpose of inducing you to resume working for, or providing services to, any entity.

15-35 Interest on overpayments and early payments of tax

Your assessable income includes interest payable to you under the Taxation (Interest on Overpayments and Early Payments) Act 1983. The interest becomes assessable when it is paid to you or applied to discharge a liability you have to the Commonwealth.

15-70 Reimbursed car expenses

Your assessable income includes a reimbursement mentioned in section 22 of the Fringe Benefits Tax Assessment Act 1986 (about exempt car expense payment benefits) that, but for that section, would be a *fringe benefit *provided to you.


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Section 83-10 and 83-80 (leave payments received)There are statutory income provisions which include in assessable income lump sum payments of unused annual leave (Subdiv. 83-A) and unused long service leave (Subdiv. 83-B) made to employees on termination of their employment. Section 83-10 applies to the payment of unused annual leave, with s. 83-10(2) including the payment in assessable income. Where the annual leave has accrued after 17 August 1993 (which should be the usual situation now), the payment is subject to normal marginal tax rates. Subsection 83-80(1) includes the full amount of unused long service leave payment in assessable income where that leave has accrued from 16 August 1978 (and only 5% of any amount attributable to leave accrued before that date and which is taxed at normal rates). However, long service leave accrued from 16 August 1978 to 17 August 1993 is subject to a maximum rate of 30% (plus 2% Medicare levy): s. 83-85(1). Long service leave accrued after 17 August 1993 is fully assessable at normal rates of tax.

Sections which do not prevail over section 6-5

With respect to the following sections, if the requirements of s 6-5 and a section below have been met, then s 6-5 will operate. This is specifically stated within each section. The exception to this is Subdivision 20-A for which all other sections of the Acts prevail in addition to s 6-5. In other words, Subdivision 20-A operates to assess a recoupment as defined in s 20-25 where the requirements of the section have been met and when no other section of the Acts operates (s. 20-20(1)).

Section 15-2 (allowances etc. re: employment or services rendered)Subsection 15-2(1) includes in assessable income the value to the taxpayer of all allowances, gratuities, compensation, benefits, bonuses and premiums provided directly or indirectly to the taxpayer in respect of any employment of or services rendered by that taxpayer. These allowances etc need not be in the form of money: s. 15-2(2). (Contrast this with the ordinary concept of

83-10 Unused annual leave payment is assessable

(2) Your assessable income includes an *unused annual leave payment that you receive.

83-80 Taxation of unused long service leave payments

(1) If you receive an *unused long service leave payment, your assessable income includes the part of the payment shown in this table:

*Unused long service leave paymentsItem To the extent the payment is

attributable to the …Your assessable income includes this part of it …

1 *pre-16/8/78 period 5%

2 *pre-18/8/93 period 100%

3 *post-17/8/93 period 100%

(2) The remainder of that part (if any) of an *unused long service leave payment that is attributable to the *pre-16/8/78 period is not assessable income and is not *exempt


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income.) Certain amounts in s. 15-2(3) are excluded from the operation of this provision because they are included under other provisions. Note that ordinary income is excluded under s. 15-2(3)(d).

Section 15-2, effective from 14 September 2006, has replaced s. 26(e) of the 1936 Act. As discussed below, there were deficiencies in s. 26(e) where it came to assessing employment benefits. In fact, the fringe benefits tax (FBT) system was enacted in response to these deficiencies. As a result of FBT, s. 26(e) was left with limited effect in respect of non-cash employment benefits, but still applied to other areas of income, overlapping to a significant extent with s. 6-5. However, the application of s. 15-2 is even more limited because it excludes ordinary income under s, 15-2(3)(d), as noted above. (Section 23L of the 1936 Act exempts fringe benefits from income tax.) FBT is beyond the scope of this course and this information is provided for your interest only.

One of the deficiencies in s. 26(e) was that it assessed the subjective ‘value to the taxpayer’ of any allowance, benefit etc, rather than an objective market value. This was the implication, for example, in Case P46, 82 ATC 218 where the Board of Review asked ‘how much has the employee saved in his own pocket by accepting the benefit?’ The subjective nature of the valuation of the benefit made it difficult to assess. Surprisingly, this subjectivity remains in s. 15-2.

Another deficiency in s. 26(e) arose from the need for the benefit to be allowed, given or granted to the taxpayer, notwithstanding that it need not be received directly. For example, in Case L54, 79 ATC 399, concerning school fees for the taxpayer’s son paid directly to the school, the Board held that the amount of fees paid was assessable to the taxpayer under s. 26(e) ‘since the taxpayer was relieved of his previous burden, and his obligations which he had undertaken, to pay the college fees, and thus in essence received a financial benefit.’ Nonetheless, the provision was vulnerable to circumvention by means of the provision of benefits to a party other than the taxpayer, eg. to a spouse instead.

With regard to the source of the benefit, it is immaterial who makes the payment so long as it is incidental to employment or services rendered. In FCT v. Dixon (1952) 86 CLR 540 at 556, Dixon CJ and Williams J said that ‘it is clear that if payments are really incidental to an employment, it is unimportant whether they come from the employer or from somebody else and are obtained as of right or merely as a recognised incident of the employment or work.’ A ready illustration of this principle may be found in the case of tips (gratuities) paid to waiters and taxi drivers, for example.

15-2 Allowances and other things provided in respect of employment or services

(1) Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).

(2) This is so whether the things were *provided in money or in any other form.

(3) However, the value of the following are not included in your assessable income under this section:

(a) a *superannuation lump sum or an *employment termination payment;(b) an *unused annual leave payment or an *unused long service leave payment;(c) a *dividend or *non-share dividend;(d) an amount that is assessable as *ordinary income under section 6-5;(e) *ESS interests to which Subdivision 83A-B or 83A-C (about employee share

schemes) applies.


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Typically, tips are paid by other than an employer for services provided in the course of employment. These payments were clearly incidental to employment and were therefore rendered assessable by s. 26(e). Now, of course, such payments would be excluded from the application of s. 15-2 per s. 15-2(3)(d), as they are ordinary income assessable under s. 6-5,

For s. 26(e) to apply, benefits must have been granted in respect of employment or services rendered by the taxpayer, as is the case now with s. 15-2. The term ‘employment’ refers to a contract of service, ie a master-servant relationship to use that old-fashioned expression. But what does the term ‘services rendered’ mean? This question was addressed in FCT v. Cooke & Sherden 80 ATC 4140 where the Federal Court was required to consider whether services were rendered in the circumstances of this case for the purpose of s. 26(e). You will remember from the ordinary income topic that the issue involved whether the prizes awarded by the soft-drink manufacturers to the retailers were assessable under s. 25(1) or s. 26(e). The Court found that s. 25(1) did not apply for reasons considered earlier and also that s. 26(e) did not apply because the facts indicated that no services were rendered in terms of that provision. (It had been agreed by the parties to the case that there was no employment relationship between the manufacturers and the retailers.) The Court said (at 4151):

The businesses were conducted for the benefit of the retailers, and the advantages which thereby accrued to the manufacturers were not the product of services rendered to the manufacturers. Advantages accrued to the manufacturers because the retailers, independently of any obligation owed to the manufacturers, conducted their businesses in a way which yielded advantages to both ... .

The relationship was essentially one of seller and buyer. The taxpayers did not render services to the companies with which they had contracted. The provision of holidays was not part of any contractual relationship and in our view the provision of holidays could not be said to have been directly or indirectly for services rendered by the taxpayers.

Section 15-10 (bounties, subsidies)Section 15-10 (previously s. 26(g)) includes in assessable income a bounty or subsidy received in relation to carrying on of a business where the amount is not ordinary income assessable under s. 6-5. A bounty or subsidy in general is an amount paid by a government agency or the like to assist in the carrying on of a business. Usually such amounts would be expected to be of an income character caught by s. 6-5, but some may be capital and thus caught by s. 15-10.

Section 15-15 (profits)Profit arising from the carrying on or carrying out of a profit-making undertaking or plan is included in assessable income under s. 15-15(1), except where the profit is ordinary income assessable under s. 6-5 or where it arises from the sale of property acquired on or after 20 September 1985: s. 15-15(2). In the case of the latter exception, the profit would be expected to be a capital gain under the capital gains taxing provisions of the 1997 Act. (Capital gains are the subject of another topic.) The corresponding provision of the 1936 Act was s. 25A which ceased to apply to profits earned from

15-10 Bounties and subsidies

Your assessable income includes a bounty or subsidy that:(a) you receive in relation to carrying on a *business; and(b) is not assessable as *ordinary income under section 6-5.


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1 July 1997. In view of the application of other provisions, there would seem to be little scope for the application of s. 15-15.

Section 15-20 (royalties)Section 15-20 (formerly s. 26(f)) includes royalties in assessable income where the amounts are not assessable as ordinary income under s. 6-5. The royalty in question must come within the ordinary meaning of ‘royalty’, not the definition in s. 995-1(1) which refers to the meaning provided in the definition in s. 6(1) of the 1936 Act. There the meaning of ‘royalty’ is extended beyond the ordinary meaning to encompass certain amounts which would not ordinarily be understood to be royalties. The effect of s. 15-20, therefore, is to render assessable ordinary royalties of a capital nature.

As to the ordinary meaning of ‘royalty’, two leading Australian cases are:

McCauley v. FCT (1944) 69 CLR 235—sums paid for the right to cut timber where such sums were based on quantity cut were found to be royalties

Stanton v. FCT (1955) 92 CLR 630—quarterly instalments paid for timber cut, due independently of amount taken, were held not to be royalties.

Section 15-30 (compensation—insurance for loss of income)Included in assessable income under 15-30 is any amount received by way of insurance or indemnity for the loss of an amount (the lost amount) where that lost amount would have been included in assessable income and the amount received is not ordinary income assessable under s. 6-5. In the 1936 Act, such an amount was included by s. 26(j) which also included amounts received for loss of trading stock (now see s. 70-115).

15-15 Profit-making undertaking or plan

(1) Your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan.

(2) This section does not apply to a profit that:(a) is assessable as *ordinary income under section 6-5; or(b) arises in respect of the sale of property acquired on or after 20 September

1985.

15-20 Royalties

(1) Your assessable income includes an amount that you receive as or by way of royalty within the ordinary meaning of “royalty” (disregarding the definition of royalty in subsection 995-1(1)) if the amount is not assessable as *ordinary income under section 6-5.


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Subdivision 20-A (recoupment for deductible losses)This Subdivision includes an amount received by way of insurance, indemnity or other recoupment in assessable income where that amount is for a deductible expense and is not otherwise assessable income. Amounts of this nature are referred to as assessable recoupment, being received as recoupment of expenses which have been allowed as deductions in the current or a prior year. They are included in assessable income under s. 20-35 where the original deduction was claimed in a single year and s. 20-40 where the deduction was claimed over many years. The provisions of Subdivision 20-A assess only those amounts which are neither ordinary income nor statutory income under a provision outside it. This is why the Subdivision defines assessable recoupment and recoupment separately in ss. 20-20 is and 20-25 respectively.

Please refer the next page for the legislation in Subdivision 20-A relevant for this course.

15-30 Insurance or indemnity for loss of assessable income

Your assessable income includes an amount you receive by way of insurance or indemnity for the loss of an amount (the lost amount) if:

(a) the lost amount would have been included in your assessable income; and(b) the amount you receive is not assessable as *ordinary income under

section 6-5.


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What is an assessable recoupment?

20-20 Assessable recoupments

(1) An amount is not an assessable recoupment to the extent that it is *ordinary income, or it is *statutory income because of a provision outside this Subdivision.

(2) An amount you have received as *recoupment of a loss or outgoing is an assessable recoupment if:

(a) you received the amount by way of insurance or indemnity; and(b) you can deduct an amount for the loss or outgoing for the *current year, or you

have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act.

(3) An amount you have received as *recoupment of a loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if:

(a) you can deduct an amount for the loss or outgoing for the *current year; or(b) you have deducted or can deduct an amount for the loss or outgoing for an

earlier income year;under a provision listed in section 20-30.

20-25 What is recoupment?

(1) Recoupment of a loss or outgoing includes:(a) any kind of recoupment, reimbursement, refund, insurance, indemnity or

recovery, however described; and(b) a grant in respect of the loss or outgoing.

(2) If some other entity pays an amount for you in respect of a loss or outgoing that you incur, you are taken to receive the amount as recoupment of the loss or outgoing.

(2A) If:(a) you have incurred expenditure that consists of *general interest charge or

*shortfall interest charge; and(b) the Commissioner remits any of that charge;

then you are taken to receive the remitted amount as recoupment of that expenditure.


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20-30 Tables of deductions for which recoupments are assessable

(1) This table shows the deductions under the Income Tax Assessment Act 1997 for which recoupments are assessable.

Note: References are to section numbers except where otherwise indicated.

Provisions of the Income Tax Assessment Act 1997Item Provision Description of expense

1.1 8-1 (so far as it allows you to deduct a bad debt, or part of a debt that is bad)

bad debts

1.2 8-1 (so far as it allows you to deduct rates or taxes)

rates or taxes

1.3 25-5 tax-related expenses1.4 25-35 bad debts1.5 25-45 embezzlement or larceny by an employee1.9 Division 40 capital allowances

How much is included in your assessable income?

20-35 If the expense is deductible in a single income year

(1) Your assessable income includes an *assessable recoupment of a loss or outgoing if:(a) you can deduct the whole of the loss or outgoing for the *current year; or(b) you have deducted or can deduct the whole of the loss or outgoing for an

earlier income year.

Note 1: The operation of this section may be affected if a balancing charge has been included in your assessable income because of a deduction for the loss or outgoing: see section 20-45.

Note 2: Recoupment of a loss or outgoing for which you can deduct amounts over more than one income year is covered by section 20-40.

Note 3: Recoupment of a loss or outgoing that is only partially deductible is covered by section 20-50.

Total assessed not to exceed the loss or outgoing

(2) The total of all amounts that subsection (1) includes in your assessable income for one or more income years in respect of a loss or outgoing cannot exceed the amount of the loss or outgoing.

Recoupment received before income year of the deduction

(3) If:(a) you can deduct the whole of a loss or outgoing for the *current year; and(b) before the current year you received an *assessable recoupment of the loss or

outgoing;your assessable income for the current year includes so much of the recoupment as subsection (1) would have included if you had instead received the recoupment at the start of the current year.


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20-40 If the expense is deductible over 2 or more income years

(1) This section includes an amount in your assessable income if:(a) you receive in the *current year an *assessable recoupment of a loss or

outgoing for which you can deduct amounts over 2 or more income years; or(b) you received in an earlier income year an *assessable recoupment of a loss or

outgoing of that kind (unless all of the recoupment has already been included in your assessable income for one or more earlier income years by this section or a *previous recoupment law).

(This section applies even if the recoupment was received before the first of those income years.)

Note: Recoupment of a loss or outgoing that is only partially deductible is covered by section 20-50.

(2) Work out as follows how much is included in your assessable income for the *current year because of one or more *assessable recoupments of the loss or outgoing.

Note: The method statement ensures that assessable recoupments are included: only so far as they have not already been included for an earlier income year; and only to the extent of your total deductions to date for the loss or outgoing.

Method statement

Step 1. Add up all the *assessable recoupments of the loss or outgoing that you have received (in the *current year or earlier). The result is the total assessable recoupment.

Step 2. Add up the amounts (if any) included in your assessable income for earlier income years, in respect of the loss or outgoing, by this section or a *previous recoupment law. The result is the recoupment already assessed. (If no amount was included, the recoupment already assessed is nil.)

Step 3. Subtract the recoupment already assessed from the total assessable recoupment. The result is the unassessed recoupment.

Step 4. Add up each amount that you can deduct for the loss or outgoing for the *current year, or you have deducted or can deduct for the loss or outgoing for an earlier income year. The result is the total deductions for the loss or outgoing.

Note: The total deductions may be reduced if an amount has been included in your assessable income because of a balancing adjustment: see section 20-45.

Step 5. Subtract the recoupment already assessed from the total deductions for the loss or outgoing. The result is the outstanding deductions.

Step 6. The unassessed recoupment is included in your assessable income, unless it is greater than the outstanding deductions. In that case, the amount of the outstanding deductions is included instead.

Example: At the start of the 2002-03 income year, a company incurs $100,000 to start to hold a depreciating asset. The company uses the prime cost method, and the effective life is 10 years. $10,000 is deductible for the 2002-03 income year and for each of the following 9 income years under section 40-25.

[continued next page]


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HOW TO ANSWER QUESTIONS ABOUT STATUTORY INCOME

If you believe that a receipt is statutory income then your answer must cite the relevant section, briefly describe the requirements of the relevant section and address each one of those requirements on the facts by using the facts to explain or illustrate whether the requirements of the section have been met.

If the statutory provision prevails over s. 6-5 (ordinary income), then it is irrelevant as to whether the receipt is ordinary income. In such cases your focus should be on the statutory income provision only.

If the statutory provision does not prevail over ordinary income, then you ought to argue first whether or not the receipt is ordinary income. If it is not, then one of the requirements of the statutory provision has been satisfied

While, Subdivision 20-A only applies when no other section outside of that subdivision applies, it will be mainly relevant to show that section 6-5 does not apply first since it will be highly unlikely that any other items of statutory income will.

In the 2002-03 income year, the company receives $20,000 as recoupment. How much is assessable for the 2002-03 income year?

Applying the method statement:

After step 1: the total assessable recoupment is $20,000.

After step 2: the recoupment already assessed is nil.

After step 3: the unassessed recoupment is: total assessable recoupment minus recoupment already assessed,i.e. $20,000 minus 0 = $20,000.

After step 4: the total deductions for the loss or outgoing are $10,000.

After step 5: the outstanding deductions are: total deductions for the loss or outgoing minus recoupment already assessed, i.e. $10,000 minus 0 = $10,000.

After step 6: the unassessed recoupment (step 3) is greater than outstanding deductions (step 5), so the amount of the outstanding deductions is included in assessable income, i.e. $10,000.

Applying the method statement to the 2003-04 income year: a further $10,000 is included in the company’s assessable income.


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EXEMPT INCOME

Exempt income can be divided into two main classes, entire entities that are exempt from income tax and specific receipts that are exempt.

Exempt entitiesThese entities are exempt regardless of the nature of the income they receive. This is an exemption which is accorded to the entity or the organisation rather than to the income. An example of such an entity is the University of SA which qualifies as a public educational institution listed under the first heading in s. 11-5, namely, ‘charity, education or science’. There reference is made to s. 50-5 which provides for the exemption in accordance with s. 50-1. Section 50-5 is contained in Division 50 which lists various exempt entities in its sections. (See item 1.4 of s. 50-5 for reference to ‘public educational institution’.) Apart from several exceptions, you will notice that s. 11-5 refers to sections in Division 50. Relevant legislation is provided below.

50-1 Entities whose ordinary income and statutory income is exempt

The total *ordinary income and *statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.

50-5 Charity, education and science

Charity, education, science and religionItem Exempt entity Special conditions

1.1 registered charity see sections 50-50 and 50-521.3 scientific institution see section 50-551.4 public educational institution see section 50-551.6 fund established to enable scientific

research to be conducted by or in conjunction with a public university or public hospital

see section 50-65

1.7 society, association or club established for the encouragement of science

see section 50-70

50-10 Community service

Community serviceItem Exempt entity Special conditions

2.1 society, association or club established for community service purposes (except political or lobbying purposes)

see section 50-70


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50-15 Employees and employers

Employees and employersItem Exempt entity Special conditions

3.1 (a) employee association; or(b) employer association

the association:(a) is registered or recognised under

the Fair Work (Registered Organisations) Act 2009or an *Australian law relating to the settlement of industrial disputes; and

(b) is located in Australia, and incurs its expenditure and pursues its objectives principally in Australia; and

(c) complies with all the substantive requirements in its governing rules; and

(d) applies its income and assets solely for the purpose for which the association is established

3.2 trade union the trade union:(a) is located in Australia, and incurs

its expenditure and pursues its objectives principally in Australia; and

(b) complies with all the substantive requirements in its governing rules; and

(c) applies its income and assets solely for the purpose for which the trade union is established

50-25 Government

GovernmentItem Exempt entity Special conditions

5.1 (a) a municipal corporation; or

(b) a *local governing body

none

5.2 a public authority constituted under an *Australian law

none

5.3 a *constitutionally protected fund none


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50-30 Health

HealthItem Exempt entity Special conditions

6.1 public hospital see section 50-556.2 hospital carried on by a society or

associationnot carried on for the profit or gain of its individual members, see also section 50-55

6.3 private health insurer within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015

not carried on for the profit or gain of its individual members

50-45 Sports, culture and recreation

Sports, culture, film and recreationItem Exempt entity Special conditions

9.1 a society, association or club established for the encouragement of:(a) animal racing; or(b) art; or(c) a game or sport; or(d) literature; or(e) music

see section 50-70

9.2 a society, association or club established for musical purposes

see section 50-70

9.3 ICC Business Corporation FZ-LLC both of the following:

(a) the entity is a *wholly-owned subsidiary of International Cricket Council Limited;

(b) only amounts included as *ordinary income or *statutory income:

(i) on or after 1 July 2018; and

(ii) before 1 July 2023

50-50 Special conditions for item 1.1

(1)An entity covered by item 1.1 is not exempt from income tax unless the entity:(a) has a physical presence in Australia and, to that extent, incurs its expenditure

and pursues its objectives principally in Australia; or(b) is an institution that meets the description and requirements in item 1 of the

table in section 30-15; or(c) is a prescribed institution which is located outside Australia and is exempt from

income tax in the country in which it is resident; or


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(d) is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia;

and the entity satisfies the conditions in subsection (2).

(2) The entity must:(a) comply with all the substantive requirements in its governing rules; and(b) apply its income and assets solely for the purpose for which the entity is

established.

50-52 Special condition for item 1.1

(1) An entity covered by item 1.1 is not exempt from income tax unless the entity is endorsed as exempt from income tax under Subdivision 50-B.

(3) This section has effect despite all the other sections of this Subdivision.

50-55 Special conditions for items 1.3, 1.4, 6.1 and 6.2

(1) An entity covered by item 1.3, 1.4, 6.1 or 6.2 is not exempt from income tax unless the entity:

(a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

(b) is an institution that meets the description and requirements in item 1 of the table in section 30-15; or

(c) is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident;


Note: Certain distributions may be disregarded: see section 50-75.


established.

50-65 Special conditions for item 1.6

(1) A fund covered by item 1.6 is not exempt from tax unless the fund is applied for the purposes for which it was established and is:

(a) a fund that is located in, and which incurs its expenditure principally in, Australia and that is established for the purpose of enabling scientific research to be conducted principally in Australia by or in conjunction with a public university or public hospital; or

(b) a scientific research fund that meets the description and requirements in item 1 or 2 of the table in section 30-15;

and the fund satisfies the conditions in subsection (2).

(2) The fund must:(a) comply with all the substantive requirements in its governing rules; and(b) apply its income and assets solely for the purpose for which the fund is

established.


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Exempt incomeIn this case, the exemption applies to the income, ordinary income or statutory income, rather than to the entity receiving it. Of course, if the entity itself is exempt then this section is rendered superfluous; its relevance is to non-exempt entities.

For example, see under the heading, ‘credit unions’, that interest is exempted by s. 23G of the 1936 Act. Interest is generally assessable as ordinary income (income from property) under s. 6-5, but is exempt where it is derived by a credit union as defined in s. 23G and falls into the category of interest from loans to non-corporate members.

As another example, under the second heading, ‘defence’, pay and allowances to Reserve Defence Force members are listed in s. 51-5, item 1.4 and thereby exempted in accordance with s. 51-1. You will note, however, that this exemption is subject to an exception, ie any pay and allowances for continuous full time service, which will therefore be assessable under s. 6-5 as ordinary income from employment.

Of particular relevance to this course are the ‘non-cash benefits’ which are exempted in whole or in part: s. 23L(2) exempts non-cash business benefits up to $300 in total. Relevant legislation is provided below.

50-70 Special conditions for items 1.7, 2.1, 9.1 and 9.2

(1) An entity covered by item 1.7, 2.1, 9.1 or 9.2 is not exempt from tax unless the entity is a society, association or club that is not carried on for the purpose of profit or gain of its individual members and that:

(a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

(b) is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15; or

(c) is a prescribed society, association or club which is located outside Australia and is exempt from income tax in the country in which it is resident;



established.

51-1 Amounts of ordinary income and statutory income that are exempt

The amounts of *ordinary income and *statutory income covered by the following tables are exempt from income tax. In some cases, the exemption is subject to exceptions or special conditions, or both.


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51-5 Defence

Defence

Item If you are:

... the following amounts are exempt from income tax:

... subject to these exceptions and special conditions:

1.1 a member of the Defence Force

(a) payments of allowances or bounty of a kind prescribed in the regulations; and

(b) the *market value of rations and quarters supplied to you without charge

none

1.1A a member of the Defence Force

compensation payments for loss of deployment allowance for warlike service

see section 51-32

1.2 a recipient of a payment in respect of a member of the Defence Force

payments of allowances or bounty of a kind prescribed in the regulations

none

1.4 a member of:(a) the Naval

Reserve; or(b) the Army

Reserve; or(c) the Air Force

Reserve

pay and allowances as a member

except pay and allowances for continuous full time service

1.5 a former member of:(a) the Naval

Reserve; or(b) the Army

Reserve; or(c) the Air Force

Reserve

compensation payments for loss of pay and/or allowances as a member

see section 51-33

1.6 a recipient of an ex-gratia payment from the Commonwealth known as the F-111 Deseal/Reseal Ex-gratia Lump Sum Payment

the ex-gratia payment none


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1.7 a recipient of a reparation payment or an additional payment from the Commonwealth in relation to a recommendation by the Defence Force Ombudsman performing a function conferred by section 14or 14B of the Ombudsman Regulations 2017

the reparation payment or additional payment

none

51-10 Education and training

Education and training

Item If you are:



2.1A a full-time student at a school, college or university

a scholarship, bursary, educational allowance or educational assistance

see section 51-35

2.1B (a) a student; or(b) a recipient of a

payment in respect of a student

a payment under a Commonwealth scheme for assistance of:(a) secondary education; or(b) the education of isolated

children

see section 51-40

2.1 a recipient of a grant made by the Australian-American Educational Foundation

the grant the grant is from funds made available to the Foundation under the agreement establishing it

2.2 an employer payments under the CRAFT Scheme (the Commonwealth Rebate for Apprentice Full-Time Training Scheme)

each payment is for an apprentice who most recently started work with you before 1 January 1998

2.3 a recipient of a scholarship known as a Commonwealth Trade Learning Scholarship

the scholarship none

2.4 a recipient of a payment known as the Apprenticeship Wage Top-Up

the payment none


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2.5 a recipient of:(a) a research

fellowship under the Endeavour Awards; or

(b) an Endeavour Executive Award

the fellowship or award none

2.6 a recipient of a bonus for early completion of an apprenticeship

so much of the bonus as does not exceed $1,000

see section 51-42

2.7 a recipient of a payment under the program known as Skills for Sustainability for Australian Apprentices

the payment none

2.8 a recipient of a payment under the program known as Tools for Your Trade (within the program known as the Australian Apprenticeships Incentives Program)

the payment none


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51-30 Welfare

Welfare

Item If you are:



5.1 an individual in receipt of periodic payments in the nature of maintenance

the payments see section 51-50

5.2 an individual in receipt of an ex-gratia payment from the Commonwealth known as disaster recovery payment for special category visa (subclass 444) holders for a disaster:(a) that occurred in

Australia during the 2014-15 *financial year or a later financial year; and

(b) for which a determination under section 1061L of the Social Security Act 1991 has been made

the payment

5.6 an individual in receipt of a payment from the Thalidomide Australia Fixed Trust

the payment the payment must be:(a) made to you,

or applied for your benefit, as a beneficiary of the Trust; or

(b) made to you in respect of a beneficiary of the Trust


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NON-ASSESSABLE NON-EXEMPT INCOME

Section 6-23 identifies another class of income, non-assessable non-exempt income, which is neither assessable income nor exempt income. This is a class of income which is not assessable, but also is not treated as exempt income in situations where exempt income is taken into account for specific purposes such as in calculating and deducting tax losses under Div. 36.

51-35 Payments to a full-time student at a school, college or university

The following payments made to or on behalf of a full-time student at a school, college or university are not exempt from income tax under item 2.1A of the table in section 51-10:

(a) a payment by the Commonwealth for assistance for secondary education or in connection with education of isolated children;

(b) a *Commonwealth education or training payment;(c) a payment by an entity or authority on the condition that the student will (or

will if required) become, or continue to be, an employee of the entity or authority;

(d) a payment by an entity or authority on the condition that the student will (or will if required) enter into, or continue to be a party to, a contract with the entity or authority that is wholly or principally for the labour of the student;

(e) a payment under a scholarship where the scholarship is not provided principally for educational purposes;

(f) an education entry payment under Part 2.13A of the Social Security Act 1991.

51-50 Maintenance payments to a spouse or child

(1) This section sets out the conditions on which a periodic payment, in the nature of maintenance, that:

(a) is made by an individual (the maintenance payer); or(b) is attributable to a payment made by an individual (also the maintenance

payer);is exempt from income tax under item 5.1 of the table in section 51-30.

(2) The maintenance payment is exempt from income tax only if it is made:(a) to an individual who is or has been the maintenance payer’s *spouse; or(b) to or for the benefit of an individual who is or has been:

(i) a *child of the maintenance payer; or(ii) a child who is or has been a child of an individual who is or has been a

*spouse of the maintenance payer.

(3) The maintenance payment is not exempt if, in order to make it or a payment to which it is attributable, the maintenance payer:

(a) divested any income-producing assets; or(b) diverted *ordinary income or *statutory income upon which the maintenance

payer would otherwise have been liable to income tax.


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Section 11-55 lists the provisions of both Acts which make amounts non-assessable non-exempt income. Students are not expected to study these provisions specifically, but a few come up in other topics, eg s. 17-5 relating to the GST component in an amount of income, s. 23L(1) concerning receipts in the form of fringe benefits, and s. 26-35(4) relating to certain amounts paid to related entities.

Note also the listing of s. 128D of the 1936 Act concerning income subject to withholding tax. (See under ‘foreign aspects of income taxation’.) In general, payments of interest, dividends and royalties made by residents to non-resident recipients are subject to withholding tax at source; that is, the resident paying institution, eg a bank paying interest, is required to deduct or withhold a certain percentage of the payment and remit it to the Commissioner of Taxation. This withholding tax is a final tax and therefore, to ensure that the same amount of income is not also subject to assessment for income tax, that income is rendered non-assessable under s. 128D.

HOW TO ANSWER QUESTIONS ABOUT EXEMPT INCOME

If you are of the view, after consideration of all the possibilities, that an item is exempt you must cite all relevant sections regarding that exemption, including details of the relevant table, such as an item number, as well as the general exempting provision in either Division 50 or 51 (whichever is relevant) and explain how the special conditions, if any, of the exemption have been met on the facts provided.

Sometimes an item would be exempt if it were not for it failing to meet one of the special conditions. In these situations, you must still address the exemption in detail (since that legislation is relevant for that item) as discussed above and explain how and why the condition has not been met.

If you conclude that a receipt is not exempt after consideration of the most relevant exemption provisions, then you cannot simply conclude that it is assessable. Lottery winnings are not exempt, but that are not assessable either since there is no connection to an earning activity per Harris. Instead you must show using a reasonably argued position that the item is either ordinary or statutory income.


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