ITAA 1997 Section 6-5 – Income According to Ordinary Concepts (Ordinary Income)

Summary

Section 6-5 is the foundational provision that includes ordinary income in a taxpayer's assessable income. It provides that assessable income includes income according to ordinary concepts, and establishes the rules for when such income is derived by residents and non-residents.

Section Text

Explanation

Section 6-5 is the primary charging provision for ordinary income in the Australian tax system. It operates by including in a taxpayer's assessable income any amount that qualifies as 'income according to ordinary concepts' — a phrase that draws its meaning from the general law and judicial precedent rather than a statutory definition.

The section distinguishes between Australian residents (who are taxed on worldwide ordinary income) and foreign residents (who are taxed only on Australian-sourced ordinary income). This distinction is fundamental to Australia's jurisdictional tax framework.

Technical Interpretation

The phrase 'income according to ordinary concepts' has been the subject of extensive judicial consideration. The High Court in Scott v Commissioner of Taxation (1935) established that income is to be determined according to the ordinary concepts and usages of mankind. Key characteristics include periodicity, regularity or recurrence, and a connection to an income-producing activity.

The timing of derivation is also governed by this section: income is derived when the taxpayer has earned it, which for employment income is typically when services are rendered, and for business income when the earning process is complete.

When This Section Applies

Section 6-5 applies to every Australian taxpayer (individuals, companies, trusts, partnerships, and superannuation funds) in respect of every income year. It is the starting point for determining assessable income before considering statutory income under section 6-10.

Practical Examples

• •Salary and wages received by an employee are ordinary income derived from the employment relationship.
• •Interest earned on a bank deposit is ordinary income derived from property (the deposit).
• •Business profits from selling goods in the ordinary course of a retail business are ordinary income.
• •Rent received from a tenant is ordinary income derived from property.

Common Traps

• ⚠Failing to include foreign-sourced income for Australian residents — section 6-5(2) taxes residents on worldwide income.
• ⚠Incorrectly treating amounts as capital when they arise from a profit-making scheme — the income/capital distinction requires careful analysis.
• ⚠Assuming that non-cash benefits are not ordinary income — benefits received in money's worth can be ordinary income.
• ⚠Overlooking constructive receipt — income can be derived even when not physically received if the taxpayer has control over it.