1 “ INCOME ” HOW JUDGES DETERMINED? Noor Rohin Binti Awalludin.

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““INCOMEINCOME””HOW JUDGES DETERMINED?HOW JUDGES DETERMINED?

Noor Rohin Binti Awalludin

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PRESENTATIONPRESENTATION

The word “Income” is not limited to “gains” or The word “Income” is not limited to “gains” or “profits”. A receipt may be taxable as income “profits”. A receipt may be taxable as income eventhough there is no element of gain or profit.eventhough there is no element of gain or profit.

Q: Illustrate the above statement with cases Q: Illustrate the above statement with cases elaborating how judges have determined “income” elaborating how judges have determined “income” that is subject to tax.that is subject to tax.

You must look at cases in countries where income is You must look at cases in countries where income is defined in the ACT and where it is not. Also look at defined in the ACT and where it is not. Also look at both Commonwealth and Non Commonwealth both Commonwealth and Non Commonwealth countries.countries.


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OUTLINEOUTLINE

IntroductionIntroduction Related CasesRelated Cases

Commonwealth v Non-CommonwealthCommonwealth v Non-Commonwealth ConclusionConclusion ReferencesReferences


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INTRODUCTIONINTRODUCTIONWhat income is subject to tax?What income is subject to tax?

Section 3, ITA ACT 1967; Section 3, ITA ACT 1967;

Subject to and in accordance with Act, a tax to be known as Subject to and in accordance with Act, a tax to be known as income tax shall be charged for each YA upon the income of any income tax shall be charged for each YA upon the income of any person accruing in or derived from Malaysia or received in person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia.Malaysia from outside Malaysia.

All income is subject to tax. Income is very broadly defined - All income is subject to tax. Income is very broadly defined - "gross income means all income from whatever source derived" –"gross income means all income from whatever source derived" –

Such as compensation for services (wages, fees, commissions, Such as compensation for services (wages, fees, commissions, etc.), income from business, interest earned, rents, royalties, and etc.), income from business, interest earned, rents, royalties, and dividends received, receipt of alimony, annuity or income from life dividends received, receipt of alimony, annuity or income from life insurance and endowment contracts, pensions, discharge of insurance and endowment contracts, pensions, discharge of debts, income in respect of a decedent, and income from an debts, income in respect of a decedent, and income from an interest in an estate or trust. interest in an estate or trust.


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INCOME- BY JUDGESINCOME- BY JUDGES Australia - Australia - Scott v Commissioner of TaxationScott v Commissioner of Taxation

Held : Held :

the word “income” is not a term of artthe word “income” is not a term of art, and what , and what forms of receipts are comprehended within it, and forms of receipts are comprehended within it, and what principles are to be applied to ascertain how what principles are to be applied to ascertain how much of those receipts ought to be treated as much of those receipts ought to be treated as incomeincome, , must be determined in accordance with the must be determined in accordance with the ordinary concepts and usage of mankindordinary concepts and usage of mankind, except in , except in so far as the status state or indicate an intention so far as the status state or indicate an intention that receipts which are not income in ordinary that receipts which are not income in ordinary parlance are to be treated as income”parlance are to be treated as income”


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COMMONWEALTH CASE-GamblingCOMMONWEALTH CASE-Gambling

IncIncome is defined by Sir George Lowndes in ome is defined by Sir George Lowndes in CIT, Bengal v CIT, Bengal v Shaw Wallace & Co (6 ITC 178)Shaw Wallace & Co (6 ITC 178) Income connotes a periodical monetary return ‘coming in’ with some Income connotes a periodical monetary return ‘coming in’ with some

sort of regularity, or expected regularity, from defined sources.sort of regularity, or expected regularity, from defined sources. The source is not necessarily of one which is expected to be The source is not necessarily of one which is expected to be

continuously productive, but it must be one whose object is the continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a production of a definite return, excluding anything in the nature of a mere windfall. mere windfall. Windfall, gambling or profits arising from speculative Windfall, gambling or profits arising from speculative activities are capital gains and would not be subjected to income tax.activities are capital gains and would not be subjected to income tax.

However, according to the case However, according to the case Minister of Finance v Smith (1972 Minister of Finance v Smith (1972 AC 193), AC 193), Lord Haldane is of the opinion Lord Haldane is of the opinion that Income Tax Acts are not that Income Tax Acts are not necessarily restricted in their application to lawful businesses only.necessarily restricted in their application to lawful businesses only.

The ‘tree-fruit’ analogy suggested in Bengal’s decision to categorize The ‘tree-fruit’ analogy suggested in Bengal’s decision to categorize capital-income is only useful in simple situation.capital-income is only useful in simple situation.


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Lilliie

Gross Income$11,835≠$21,015 CIR

Gambling Winnings $9,180 Year 2000


NON-COMMONWEALTH CASE - NON-COMMONWEALTH CASE - GamblingGambling

LILLIE M. PETTY, Petitioner v. COMMISSIONER OF LILLIE M. PETTY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent INTERNAL REVENUE, Respondent

No evidence that she in the trade or business of gambling.

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The tax court found that the unreported $ 9,180 of The tax court found that the unreported $ 9,180 of gambling winnings was includable in the taxpayer‘s gambling winnings was includable in the taxpayer‘s adjusted gross income for the taxable year 2000. adjusted gross income for the taxable year 2000.

As a result, the taxpayer's adjusted gross income was As a result, the taxpayer's adjusted gross income was properly increased from $ 11,835 to $ 21,015. properly increased from $ 11,835 to $ 21,015.



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Thus her Thus her gambling losses were deductible only as itemized deductions, gambling losses were deductible only as itemized deductions, not from gross incomenot from gross income, in arriving at adjusted gross income. , in arriving at adjusted gross income. Respondent's computation of the earned income credit (EIC) was correct Respondent's computation of the earned income credit (EIC) was correct based on the inclusion of the taxpayer‘s gambling winnings as part of her based on the inclusion of the taxpayer‘s gambling winnings as part of her modified adjusted gross income. modified adjusted gross income.

The tax court concluded that The tax court concluded that the increase in the the increase in the taxpayer's modified taxpayer's modified adjusted gross income decreased her EIC and resulted in the adjusted gross income decreased her EIC and resulted in the deficiency in issuedeficiency in issue..

OUTCOME: The tax court sustained respondent‘s OUTCOME: The tax court sustained respondent‘s determination.determination.


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COMMONWEALTH CASE-DividendCOMMONWEALTH CASE-Dividend

PA Holdings Ltd and Kully Janjuah

Jersey Company

Invested in shares. Employees(rewards)

£24.6 million Dividends

£24.6 million Bonuses (‘EBT’ scheme)

The fact was that the payments were received as dividends in respect of the shares they held and should only be taxed as dividends.

PA HOLDINGS LTD & KULLY JANJUAH v HMRC

Offshore


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The Special Commissioners held that:The Special Commissioners held that:

it it was possible for the payments to be characterised as both was possible for the payments to be characterised as both dividends and employment income and on the facts of the dividends and employment income and on the facts of the case it was appropriate to do so;case it was appropriate to do so;

Section 20(2) was unambiguous in providing that the tax Section 20(2) was unambiguous in providing that the tax charge on distributions (such as dividends) took precedence charge on distributions (such as dividends) took precedence over the employment income charge and accordingly the over the employment income charge and accordingly the payments could not be taxed as employment income and payments could not be taxed as employment income and could not be subject to PAYE; andcould not be subject to PAYE; and

the payments would, however, be subject to NICs as the the payments would, however, be subject to NICs as the payments were earnings and there was no NIC statutory payments were earnings and there was no NIC statutory provision or case law equivalent of Section 20(2) in the provision or case law equivalent of Section 20(2) in the context of NICs.context of NICs.

COMMONWEALTH CASE - DividendCOMMONWEALTH CASE - Dividend

PA HOLDINGS LTD & KULLY JANJUAH v HMRC


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NON-COMMONWEALTH CASE - NON-COMMONWEALTH CASE - DividendDividend

HELVERING, COMMISSIONER OF INTERNAL REVENUE, HELVERING, COMMISSIONER OF INTERNAL REVENUE, v. GRIFFITHSv. GRIFFITHS

Taxpayer

Dividends

Internal Revenue

Received in form of shares of stock.

Income

Not include the dividend in tax return

Included the dividend in tax return

Sent notice of deficiency


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The Supreme Court affirmed the judgment. The Supreme Court affirmed the judgment. and Treasand Treas, , which stated that;which stated that;

some types of stock dividend were taxable, did not some types of stock dividend were taxable, did not provide a basis on which the Court could reconsider its provide a basis on which the Court could reconsider its prior decision that a dividend in common stock paid on prior decision that a dividend in common stock paid on common stock was not income when received. common stock was not income when received.

did did not do what the prior decision prohibited because not do what the prior decision prohibited because did not state that all stock dividends were did not state that all stock dividends were taxable and taxable and

Treas. Treas. the legislative history the legislative history indicated that Congress did not indicated that Congress did not

intend to intend to overrule the Supreme Court's prior decision.overrule the Supreme Court's prior decision.



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JUDGES JUDGES

The judgment reversing petitioner‘s decision to include The judgment reversing petitioner‘s decision to include respondent's stock dividends in her income was respondent's stock dividends in her income was affirmed because the Internal Revenue Code and affirmed because the Internal Revenue Code and Treasury Regulations did not overrule the Supreme Treasury Regulations did not overrule the Supreme Court's prior decision concerning whether the stock Court's prior decision concerning whether the stock was taxable, and the legislative history supported that was taxable, and the legislative history supported that conclusion.conclusion.



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ALEJANDRINA DE AYCARDI, Petitioner v. ALEJANDRINA DE AYCARDI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent COMMISSIONER OF INTERNAL REVENUE, Respondent

Taxpayer(Resident of Columbia)

Mutual fund Investment

CommissionerInternal Revenue

Invested money

Form W-8,Certificate of Foreign Status

Prepared Substitute Returns

Dividend Income

Did not file to qualify interest rec. by a NR nontaxable


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The CIR treated the taxpayer as a U.S. resident and The CIR treated the taxpayer as a U.S. resident and calculated the tax owed based on that status.calculated the tax owed based on that status.

The taxpayer argued that the dividend income she The taxpayer argued that the dividend income she received should have been reclassified as interest and received should have been reclassified as interest and treated as nontaxable for federal income tax purposes.treated as nontaxable for federal income tax purposes.

The court The court concluded that the dividend income the concluded that the dividend income the taxpayer received on her mutual fund investment did taxpayer received on her mutual fund investment did not qualify as nontaxable interest income .not qualify as nontaxable interest income .

As a As a nonresident of the U. S., the taxpayer's dividend nonresident of the U. S., the taxpayer's dividend income received on the mutual fund investment was income received on the mutual fund investment was taxable.taxable.



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NON-COMMONWEALTH CASE NON-COMMONWEALTH CASE DividendDividend

JUDGES:JUDGES:

Held that the dividend income that the taxpayer received Held that the dividend income that the taxpayer received did not qualify as nontaxable U.S. source interest income did not qualify as nontaxable U.S. source interest income received by a nonresident alien.received by a nonresident alien.



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CONCLUSIONCONCLUSION

"........ The definition in the Act is an inclusive "........ The definition in the Act is an inclusive one. As said by Lord Wright in Raja Bahadur one. As said by Lord Wright in Raja Bahadur Kamakshya Narain Singh of Ramgarh vs. CIT Kamakshya Narain Singh of Ramgarh vs. CIT (1943) 11 ITR 513 (PC) : TC 38R.293, (1943) 11 ITR 513 (PC) : TC 38R.293, 'Income ........... is a word difficult and perhaps 'Income ........... is a word difficult and perhaps impossible to define in any precise general impossible to define in any precise general formula. It is a word of the broadest connotation'. formula. It is a word of the broadest connotation'.


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REFERENCESREFERENCES

Income Tax Act 1967Income Tax Act 1967 A Comprehensive Guide to Malaysian taxation, 4A Comprehensive Guide to Malaysian taxation, 4 thth

EditionEdition Advanced Malaysian Taxation, Chong Kwai FattAdvanced Malaysian Taxation, Chong Kwai Fatt Malaysian Tax Commentaries 3r Edition, Thornton’sMalaysian Tax Commentaries 3r Edition, Thornton’s Public Ruling, Inland Revenue Board MalaysiaPublic Ruling, Inland Revenue Board Malaysia Website:Website:

www.hasil.gov.my


2020

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1 “ INCOME ” HOW JUDGES DETERMINED? Noor Rohin Binti Awalludin.

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