Principle Essay

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Other general principles • Compensation takes on the character of the loss being compensated – compensation for loss of ordinary income is ordinary income, and compensation for loss of capital is capital. Allowance will generally constitute ordinary income, through an offsetting deduction will be allowed to the extent that money has been spent for allowable income-producing purpose. • Unrealised gains are not ordinary – related to the flow principle as unrealised gains are not yet regarded as a fruit flowing from a tree • Legality of receipts does not affect their assessability - Receipts from illegal activities are still assessable. (eg. drugs) • Whether a receipt is ordinary income is to characterised in the taxpayer’s hands – if the salary paid to the employee’s spouse instead, the salary would still be regarded as ordinary income in the hands of the employee due to the principle of a constructive receipt (p123) – income is treated as being derived by a person when that income has been dealt with as that person directs. Federal Coke Co Pty Ltd v FCT (1977) – ATO loses because it did not use principle of constructive receipt • Benefits that saves taxpayer from incurring expenditure is not ordinary income • Principle of mutuality – if a taxpayer makes a payment to herself or himself, there is no gain and the payment will not be income Bohemians Club v Acting FCT (1918) – funds given to a club from its member and refund to the members are not assessable – a type of non-assessable non-exempt income RACV v FCT (1973) – p125 Capital gains are not ordinary income – the distinction between capital and income is often considered through the application of the “flow concept”. Distinctions:Ordinary Income → Assessable Income →Taxable Income → Full amount taxed at marginal rates of tax. Capital → If CGT applies only the net gain is statutory income. If CGT

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