Question 1
A shopping centre operations business pays $100,000 for a call option on a parcel of land intending to build and operate a new centre. However, it abandons its plans to own a new centre and sells the option to a land investment company for $250,000.
Whis is the better view?
- The entire $250,000 is a capital receipt and not ordinary income. This is an extraordinary transaction outside the ordinary course of business and lacked a profit motive at the beginning.
- The entire $250,000 is ordinary income from a business of trading in land.
- The $150,000 profit is ordinary income. This is profit from an isolated commercial transaction that had a profit motive from the start.
- All commercial gains are ordinary income.
Question 1
A shopping centre operations business pays $100,000 for a call option on a parcel of land intending to build and operate a new centre. However, it abandons its plans to own a new centre and sells the option to a land investment company for $250,000.
Whis is the better view?
Correct Answer:
The entire $250,000 is a capital receipt and not ordinary income. This is an extraordinary transaction outside the ordinary course of business and lacked a profit motive at the beginning.
Response Feedback:
Not every commercial gain is ordinary income. In Wesfield Ltd v FC of T, the taxpayer’s isolated transaction lacked a profit intention when the option was first purchased.
Question 2
A retail business has recorded the following receipts:
Sales of stock: $500,000
Forfeited deposits by customers: $2,000
Sale of obsolete forklift truck: $25,000
Credit charges received from customer late payments:
$5,000
How much will be included as ordinary income?
- $507,000
- $500,000
- $505,000
- $532,000
Question 2
A retail business has recorded the following receipts:
Sales of stock: $500,000
Forfeited deposits by customers: $2,000
Sale of obsolete forklift truck: $25,000
Credit charges received from customer late payments:
$5,000
How much will be included as ordinary income?
- $507,000
- $500,000
- $505,000
- $532,000
Correct Answer:
$507,000
Response Feedback:
Ordinary income excludes the proceeds for the disposal of the forklift truck which represents a capital asset. (note that disposal of depreciating assets may result in statutory income under Div 40 - a later topic)
Question 3
Which scenario will most likely result in ordinary income?
- Betting winnings on horse races by a retired bookmaker
- Lottery winnings
- A school student wins a cash prize for writing the best poem in their English class
- Prizes from a casual appearance on a general knowledge TV quiz show
Question 3
Which scenario will most likely result in ordinary income?
- Betting winnings on horse races by a retired bookmaker
- Lottery winnings
- A school student wins a cash prize for writing the best poem in their English class
- Prizes from a casual appearance on a general knowledge TV quiz show
Correct Answer:
Betting winnings on horse races by a retired bookmaker
Question 4
Which restrictive covenant is least likely to be ordinary income?
- A coal miner is paid a lump sum by a railway company. The railway lies over the mining tenement and the company pays the amount for the miner to refrain from mining within 1km of the railway.
- A professional football player receives a lump sum from his current club in consequence of agreeing to refrain from also playing for other clubs after he leaves
- An employee is paid a lump sum for agreeing to alter existing working conditions by reducing the length tea breaks
- An IT specialist is approached by a bank offering a new employment position. It is conditional that he also agrees to not disclose confidential information while working for the bank, for which he receives an additional lump sum.
Question 4
Which restrictive covenant is least likely to be ordinary income?
- A coal miner is paid a lump sum by a railway company. The railway lies over the mining tenement and the company pays the amount for the miner to refrain from mining within 1km of the railway.
- A professional football player receives a lump sum from his current club in consequence of agreeing to refrain from also playing for other clubs after he leaves
- An employee is paid a lump sum for agreeing to alter existing working conditions by reducing the length tea breaks
- An IT specialist is approached by a bank offering a new employment position. It is conditional that he also agrees to not disclose confidential information while working for the bank, for which he receives an additional lump sum.
Correct Answer:
A coal miner is paid a lump sum by a railway company. The railway lies over the mining tenement and the company pays the amount for the miner to refrain from mining within 1km of the railway.
Response Feedback:
The mining tenement is a capital asset. Payment for agreeing to partially give up the right to exploit the capital asset is a capital receipt and consequently not ordinary income, The Glenboig Union Fireclay Co Ltd v IRC
Question 5
Kelly opens a bank term deposit account with an initial balance of $10,000.
During the year, her account has been credited with $1,000 of interest from the bank.
Kelly then closed the account by withdrawing $11,000.
How much is Kelly’s ordinary income?
- $2,000
- $10,000
- $11,000
- $1,000
Question 5
Kelly opens a bank term deposit account with an initial balance of $10,000.
During the year, her account has been credited with $1,000 of interest from the bank.
Kelly then closed the account by withdrawing $11,000.
How much is Kelly’s ordinary income?
- $2,000
- $10,000
- $11,000
- $1,000
Correct Answer:
$1,000
Response Feedback:
The interest is a payment by the bank for the use of Kelly’s money, it represents the return on her investment. The $1,000 is ordinary income.
Question 6
Which one of the following circumstances is the least likely to result in share sale proceeds being ordinary income?
- A share trading business sells shares from its trading stock
- A finance company shorts shares in a target company that it thinks will decline in value
- A passive investor sells some non-performing shares from their investment portfolio
- An insurance company sells some shares from its liquid reserves in order to pay a policy claim
Question 6
Which one of the following circumstances is the least likely to result in share sale proceeds being ordinary income?
- A share trading business sells shares from its trading stock
- A finance company shorts shares in a target company that it thinks will decline in value
- A passive investor sells some non-performing shares from their investment portfolio
- An insurance company sells some shares from its liquid reserves in order to pay a policy claim
Correct Answer:
A passive investor sells some non-performing shares from their investment portfolio
Response Feedback:
Insurance companies holding shares as liquid reserves will be turning over these assets in the ordinary course of a business and the proceeds are ordinary income, RAC Insurance Pty Ltd v FC of T
Similarly share traders will be selling their stock in the ordinary course of a business.
Question 7
Which of the following items may be ordinary income? (multiple answers)
- Salary and wages
- The government age pension
- Lottery winnings
- Capital gains
Question 7
Which of the following items may be ordinary income? (multiple answers)
- Salary and wages
- The government age pension
- Lottery winnings
- Capital gains
Correct Answers:
Salary and wages
The government age pension
Response Feedback:
Salary is a payment for services and is ordinary income, Brent’s case
The age pension is regular, expected and relied upon in the nature of an income stream, Keily’s case
Question 8
Which statement in relation to providing personal services is the most complete?
- All cash, and other benefits that are convertible to cash, that are directly or indirectly received in respect of services is ordinary income
- All cash directly received in respect of services is ordinary income
- All cash directly or indirectly received in respect of services is ordinary income
- All cash and benefits directly or indirectly received in respect of providing services is ordinary income
Question 8
Which statement in relation to providing personal services is the most complete?
- All cash, and other benefits that are convertible to cash, that are directly or indirectly received in respect of services is ordinary income
- All cash directly received in respect of services is ordinary income
- All cash directly or indirectly received in respect of services is ordinary income
- All cash and benefits directly or indirectly received in respect of providing services is ordinary income
Correct Answer:
All cash, and other benefits that are convertible to cash, that are directly or indirectly received in respect of services is ordinary income
Response Feedback:
Ordinary income may include indirect receipts related to services rendered such as gratuities from third parties (e.g. tips).
However, non-cash benefits will only be ordinary income if they are convertible to cash, Cooke & Sherden’s case
Question 9
An individual receives an insurance claim in respect of their small business that has been destroyed by fire. The proceeds are allocated as follows:
Fixtures & shelving: $200,000
Trading stock: $100,000
Lost trading profits: $50,000
How much will be included as ordinary income?
- $350,000
- $100,000
- $150,000
- $50,000
Question 9
An individual receives an insurance claim in respect of their small business that has been destroyed by fire. The proceeds are allocated as follows:
Fixtures & shelving: $200,000
Trading stock: $100,000
Lost trading profits: $50,000
How much will be included as ordinary income?
- $350,000
- $100,000
- $150,000
- $50,000
Correct Answer:
$150,000
Response Feedback:
Compensation takes the form of the asset is replaces.
Compensation for lost trading profits will be ordinary income, Heavy Minerals Pty Ltd v FC of T
Compensation for loss of assets held on the revenue account such as trading stock is ordinary income, FC of T v Wade
Question 10
A business is required to relocate to new commercial premises. A prospective landlord offers the following lease incentive and no other options:
Cash: $10,000
Free fitout with carpet, furniture, etc: $25,000
Three months rent-free occupancy: $12,000
How much will treated as ordinary income?
- $35,000 cash & property
- Nil, it is all capital
- $47,000 cash, property & occupancy
- $10,000 cash
Question 10
A business is required to relocate to new commercial premises. A prospective landlord offers the following lease incentive and no other options:
Cash: $10,000
Free fitout with carpet, furniture, etc: $25,000
Three months rent-free occupancy: $12,000
How much will treated as ordinary income?
- $35,000 cash & property
- Nil, it is all capital
- $47,000 cash, property & occupancy
- $10,000 cash
Correct Answer:
$10,000 cash
Response Feedback:
A cash lease incentive to a business is ordinary income, FC of T v Cooling
However, ordinary income excludes non-cash benefits which cannot be converted to cash, FC of T v Cooke and Sherden
(Note that these amounts may be statutory income)
