QUESTION The word “Income” is not limited to

“gains” or “profits”. A receipt may be taxable as income eventhough there is no element of gain or profit.

Q: Illustrate the above statement with cases elaborating how judges have determined “income” that is subject to tax.

You must look at cases in countries where income is defined in the ACT and where it is not. Also look at both Commonwealth and Non Commonwealth countries.

TAX 715 PRESENTER :NURALAMI MOHD NAWI2008349119

PRESENTATION OUTLINE Definition of Income from Articles Commonwealth Countries :a. Malaysia Perspectiveb. UK Perspectivec. Australia Perspective Non-Commonwealth Countriesa. USA Perspectiveb. Japan Perspective Conclusions Reference

ARTICLE DEFINITION:

ARTICLE DEFINITION:

ARTICLE DEFINITION:

COMMONWEALTH COUNTRIES

Section 3 ITA 1967No specific definition of income2 conditions where income tax liability

arises:a) the transaction must be ‘income’ in nature and is accrued in or derived from Malaysiab) the transaction must be ‘income’ in nature and it is received in Malaysia from outside Malaysia (foreign source income)

MALAYSIA PERSPECTIVE

MALAYSIA cont’dSection 4 ITA 1967 Classes of income: a)Gains and profits from business

activityb)Gains and profits from salaryc) Dividend, interest and discountd)Rental, royalty and premiume)Pension, annuityf) Gains and profits from sources other

than said above

WHAT IS INCOME?

The issue of income determination would be resolve by determining the pertinent facts of particular case using the standard of a reasonable man

UK CASE CASE : CIT & Shaw Wallace (6 ITC 178)

Income…a periodical monetary return “coming in” with some sort of regularity or expected regularity from define sourcesThe source is not necessarily of one which is expected to be continuously productivity but it must be one whose object is the production of define return, excluding anything in the nature of a mere windfall

The about definition can be shown as follows:

Fruits (Income)

Tree (Source of Income is Capital)

Field (Source of Income is Capital)Crop (Income)

UK Case cont’d “Income” is more general term than “gain”

or “profits” CASE : Mersey Dock & Harbour Board v Lucas (2 TC

25)- “gain” is really the equivalent of “profit”- the profit of a trade or business is the surplus by the receipts exceeded the expenditure incurred in earning those receipts. - tax is upon income, profits and gains, it is not on gross receipts

MALAYSIA CASE CASE : Ketua Pengarah Hasil Dalam Negeri v Hock Lee Holdings

Sdn BhdIssue :

- Whether there is the intention of the appellant to dispose it at a profit at the moment of the acquisition of the asset- whether it was acquired as a permanent investment- Whether disposal of properties fall under business income, and can be chargeable under Section 4(a) ITA 1967- distinction between income and capital receipt

MALAYSIA cont’dJudge consideration :

- the investment in properties were made as a long term investment- the appellant was not in properties trading- the investment was not undertaken as an ‘adventure in the nature of trade’, for profit selling motive- thus, the gains or the sale of the properties wouldbe a capital realization and not subject to income taxunder the Income Tax Act 1967.

THE CONCEPT OF INCOME

Important to distinguish income and capital receipts which a receipt or gain is capital in nature is not taxable

Income has a characteristics of repetitive, flow from a source of income an received in ordinary course of business

Income is usually the result of an activity which involves labor or investment or both

THE CONCEPT OF INCOME

Factors to be considered determining tax liability

Receipt of

income

nature is

taxable

Quality

TimeSource

of income

Incidence

Received by or arise or accrue

to a taxpayer

for particular period

oWhere did it arise or derive fromo what did taxpayer do to earn the income

On whom would the

liability tax fall

AUSTRALIA PERSPECTIVEThe term "income" has no definition in the tax legislation.

S.6-5 of the ITAA 1997 does say that "assessable income" includes income according to ordinary principles, i.e. "ordinary income". The definition of "ordinary income" in the Act goes nowhere.

“Ordinary income" follows the judicial definition of income, as found in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215

The word ‘income’ is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts.

Australian: FC of T v Myer Emporium Ltd

MYER EMPORIOUM

LTD

MYER FINANCE

CITICROPCANBERRA

PTY LTD

Retail tradingProperty dev bussFinancing activity….until 20/2/81…transfer this activity to

On 6/3/8 lent A$80m term 7 years repayment amount A$82,192 (including 3 day interest on loan)

On 9/3/81 assign interest due/become due to for consideration of A$45.37m

Represent the Present value of interest under

the loan

AUSTRALIA cont’d CASE :

FC of T v Myer Emporium Ltd 87 ATC 4363

Issue:Whether the A$45.37m received by Myer was the nature of income under Para 25(1)(a) Income Tax Act (the Australian Act) which reads as follows:

“The assessable income of a taxpayer shall include…the gross income derived directly or indirectly from all sources…”

Arguments of Supreme Ct and Full Federal Ct that the A$45.37 was a capital nature (non-taxable) :

a) The purpose of arrangement was to obtain working capital for diversify not making profit

b) The assignment of the right to the interest payments was a transaction which was in nature to be distinguished from the payment of interest itself, thus not an income

c) Outside of normal business (retailing), was not recurrent and the first and only

AUSTRALIA cont’d

On the other hand, High Ct held that the A$45.37m was assessable as income for the following reasons:

a) Myer entered into the loan and assignment transactions in course of carrying business

b) The intention in entering into the transaction was to make profit/gain, the profit or gain will be income even the transaction was extraordinary in term of taxpayer business

AUSTRALIA cont’d

AUSTRALIA cont’d

c) The contractual right to receive interest income that was served from the debt was not capital structure

Conclusion: If the transaction occurs in the course of

carrying business and a profit making motive exists even it is unusual to the normal business activities, the income are taxable.

NON-COMMONWEALTH

COUNTRIES

USA PERSPECTIVE To address what is income, the U.S.

tax law employs the concept of "gross income”.

S 61 Internal Revenue Title (which is Title 26 of United States Code),  provides a definition of "gross income."Except as otherwise provided in this title, Gross income means all income from whatever source derived, including (but not limited to) the following items:

USA cont’d(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;(2) Gross income derived from business;(3) Gains derived from dealings in property;(4) Interest;(5) Rents;(6) Royalties;(7) Dividends;(8) Alimony and separate maintenance payments;(9) Annuities;(10) Income from life insurance and endowment contracts;(11) Pensions;(12) Income from discharge of indebtedness;(13) Distributive share of partnership gross income;(14) Income in respect of a decedent; and(15) Income from an interest in an estate or trust."

USA cont’d CASE : Southern Pac Co. v lowe, 247 U.S. 330

the broad content submitted in behalf of the government that all receipts-everything that comes in-are income within the proper definition of the term 'gross income,' and that the entire proceeds of a conversion of capital assets, in whatever form and under whatever circumstances accomplished, should be treated as gross income.

USA cont’d CASE : Eisner v Macomber

not a gain accruing to capital; not a growth or increment of value in the investment;but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being 'derived'-that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal- that is income derived from property

USA cont’d CASE : Eldorado Coal & Mining Co. v Harry W.Mager

'income' as used in the Sixteenth Amendment and in the Income Tax Act does not include the gain from capital realized by a single isolated sale of property, but that only the profits realized from sales by one engaged in buying and selling as a business-a merchant, a real estate agent, or broker- constitute income which may be taxed.

JAPAN cont’d Income Tax Act (Act No. 33 of 1965)

(Limited to the provisions related to nonresidents and foreign corporations)

Detail out the income: Part I General Provisions

Chapter III Scope of Taxable Income* Article 7 (Scope of Taxable Income)* Article 8 (Scope of Taxable Income in the case of Change of Category of Taxpayer)

JAPAN cont’d Part III Tax Liabilities of Nonresidents and

CorporationsChapter I Domestic Source Income* Article 161 (Domestic Source Income) i-xii* Domestic Source* Article 162 Income Subject to the Provisions of Tax Conventions)* Article 163 (Details of Scope of Domestic Source Income) In addition to what is specified in the preceding two Articles, necessary matters concerning the scope of domestic source income shall be specified by a Cabinet Order.

ISSUE

RECEIPT BUT NO ELEMENT OF GAIN OR PROFIT

The receipt is not itself income : Gift

A) Property from a decedent The recipient is not taxable when receives the property from a decedent but taxable when the recipient sells the property

B) Property from a donor (living donor) The donee is not taxed for the gift from a

living person but taxable for gain when the donee disposes the property

The receipt is not itself income : Salary, Wages and other compensation This argument asserts that wages, tips, and other

compensation received for personal services are not income, because there is allegedly no taxable gain when a person "exchanges" labor for money. Under this theory, wages are not taxable income because people have basis in their labor equal to the fair market value of the wages they receive; thus, there is no gain to be taxed.

However Court Held:- U.S Case: Commissioner v. Kowalski, 434 U.S. 77 (1977) - the

Supreme Court found that payments are considered income where the payments are undeniably accessions to wealth, clearly realized, and over which a taxpayer has complete dominion.

CONCLUSION In most of the countries in, especially in

commonwealth countries does not clearly stated the exact definition of income

The justification of income, usually based on cases and judges point of view

The existing of income tax act or revenue act or any other related laws normally only specifically tell about classification of income

Reference Malaysian Taxation C:\Users\user\Documents\SEMESTER2\TAX715\Assgmt3\US\What is gross

income - US.mht C:\Users\user\Documents\SEMESTER2\TAX715\Assgmt3\US\What is federal

income tax on individuals - a knol by Byeongju Park.mht Ketua Pengarah Hasil Dalam Negeri v Hock Lee Holdings Sdn Bhd (2008) 2

MLJ 547