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 (Excerpt)

Explanation

Section 6-5 includes income according to ordinary concepts in assessable income. The character of a receipt is informed by the legislation and judicial authorities.

The section distinguishes Australian residents' worldwide ordinary income from foreign residents' Australian-source income and other income included on a statutory basis. Read the complete provision, relevant exemptions and applicable rules for the taxpayer.

Technical Interpretation

Whether a receipt is ordinary income depends on its character and the relevant authorities. Regularity and a connection with income-producing activities can be relevant, but an isolated commercial transaction can also produce income.

Timing depends on the appropriate receipts or earnings method. ATO TR 98/1 explains that employment remuneration is normally assessable on receipt, including constructive receipt; trading business income commonly uses the earnings method. Check the taxpayer's circumstances and applicable provisions.

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.