Taxation for Accounting Studies

Taxation for Accounting Studies
Introduction
As per the analysis laid down by Hannan and Farnsworth, the term “income” cannot
have a specific definition for the same to be considered in meeting the requirements of the
government and the regulators including the legislation.1 The purpose of this essay is to
analyse Hannan and Farnsworth statement regarding an income definition. Therefore, this
essay will consist of a discussion on the concept of income for income tax purposes and the
distinction between income and capital. The analysis will be referred to as relevant
legislation, the Income Tax Act 2007 (ITA 2007),2 and New Zealand (NZ) and international
cases defining different types of income.
1. The concept of income
1.1 Defining Income
In general, income is the revenue a business earns from selling its goods or/and
services or the money an individual receives in compensation for his or her labour, services
or investments. The concept of income serves as a touchstone against which the rules of the
current income tax can be evaluated.3 Once the distribution of income is measured the effects
of various proposed policy changes on income distribution can be analysed.4 Given the
importance of the uses of the income concept, how income is defined can make a difference.5
For instance, if it considered desirable for the income tax to approximate the ideal concept of
income as closely as possible, it becomes crucial whether that ideal treats gifts and
inheritance as income. Moreover, the pattern of income distribution and the effects of a
change in tax or other policy on that distribution may vary significantly depending on how
income is defined.6
Under statutory basis, section CA 1 provide the list of taxable income and sCA 2 provide a
list of exempt income and excluded income.7 Furthermore, sCB shows an income for
businesses and trade-like activities.8 Besides, the term “income” means different
things to different groups. For example “In economic terms, income and
1 John Peter Hannan and Albert Farnsworth. Principles of Income Taxation (Stevens & Sons, London, 1946).
2 Income Tax Act 2007 (ITA 2007).
3 James Coleman and others New Zealand Taxation (12th ed., Thomson Reuters, Wellington 2018).
4 Victor Thuronyi. The concept of Income. Tax Law Review 46(1), at 45.
5 Victor Thuronyi n 4 at 46.
6 Victor Thuronyi n 4 at 46.
7 ITA 2007 n 2 section CA.
8 ITA 2007 n 2 section CB.

Taxation for Accounting Studies
gain are interchangeable terms”9 and are equivalent to increases in
wealth.10
1.3 Income under Ordinary Concepts
Income in NZ includes income according to ordinary concepts and statutory income
that is defined in tax legislation.11 Income according to the ordinary concepts includes income
from employment, running a business and from performing services.12 Receipts from one-off
prize such as winning a cash windfall from undertaking a hobby are not considered income
under the ordinary concept.13 Literally, the word means “what comes in” but it does not
follow that everything that comes in is income for income tax purposes.14
In Scott v Commissioner of Taxation, Jordan CJ observed that “.... the word ‘income’ is not a
term of art, and what form 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 usage 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 receipts.”15
1.4 Characteristics of Income
The following basic principles are used to determine whether a receipt is “income” in its
ordinary sense, case law:16
9 W Chan, “Income – A Subjective Concept” (2001) Vol 7:1 New Zealand Journal of Taxation Law and Policy
26 as cited in Clinton Alley and Andrew Maples (2006). The concept of Income within the New Zealand
taxation system. (Department of Accounting Working Paper series, Number 87). Hamilton, New Zealand:
University of Waikato.
10 S Ross and P Burgess, Income Tax: A Critical Analysis, (Sydney, The Law Book Co Ltd, 1996), p 40 as cited
in Clinton Alley and Andrew Maples (2006). The concept of Income within the New Zealand taxation system.
(Department of Accounting Working Paper series, Number 87). Hamilton, New Zealand: University of
Waikato.
11 James Coleman and others n 3 at ch 3.
12 Braedon Clark. The meaning of income: the implications of Stone v FCT [online]. Revenue Law Journal, Vol.
14, 2004: 178-189.
13 Braedon Clark n 12 at 179.
14 Mapp v Oram (1969) 45 T.C. 651 as cited in Andrew Alston, “Concepts of Capital and Income,” Canterbury
Law Review vol. 1, no 2 (1981): p.146-154.
15 Scott v Commissioner of Taxation (NSW) (1935) 35 SR (NSW) 215 (NSWSC).
16 CCH Commentary NZ: Updating Master Tax Guide [¶5 – 021].

Taxation for Accounting Studies
1.4.1 Income is something that comes in, and it should be in money or money’s worth.17
Referring to the Lambe v Inland Revenue Commissioners case, the appellant
taxpayer had lent out a loan on which interest was due but he never received it and
is unlikely that he would receive it in the future.18 Nevertheless, the commissioner
argued that the interest should be included in the taxpayer’s total income however,
the court held that income was something that actually comes in.19
There are situations where something does not come in, but assessable income
still results from the transaction.20 According to the ITA 2007 sCC 7(1), when the
money is borrowed for use in business that is carried on in NZ and the
consideration is not interest, relief from an obligation or convertible into money.21
The commercial transaction is still income to the lender despite not coming in or
being in money or money’s worth.22
1.4.2 Income generally has the features of periodicity, recurrence and regularity23. In
Federal Commissioner of Taxation v. The Myer Emporium Ltd case, both the
Victorian Supreme Court and the Full Federal Court held lump payment from
selling any property, plant & equipment is not deemed to be an income.24
In Reid, the Court of Appeal observed that if the transaction has the quality of
regularity or recurrence, then payment become part of the receipts, which a
recipient spend on his/her living expenditure. However, the relationship between
payer and payee must be considered in order to determine the quality of the
payment, whether it is taxable income or not.25
1.4.3 The character of a receipt may depend on its quality in the hands of the hands of
the recipient26. In Scott v Federation Commissioner of Taxation case, the client
gives a gift of 10,000 pounds to the taxpayer, but the High court held that the
17 CCH Commentary n 16.
18 Lambe v Inland Revenue Commissioners [1934] 1 KB 178.
19 Lambe v Inland Revenue Commissioners n 17.
20 James Coleman and others n 3.
21 ITA 2007 n 2.
22 James Coleman and others n 3.
23 CCH Commentary n 16.
24 Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) ATC 4363.
25 Reid v Commissioner of Inland Revenue [1986] 1 NZLR 129 (CA).
26 CCH Commentary n 16.