Lease Incentives and the Gain Theory of Income

Abstract

The failure by Parliament to define the meaning of income in our income tax laws left the task to the judiciary. Traditionally legalistic trust law distinctions between income and capital have prevailed, requiring an analysis in terms of the source of the flow of the benefit.

Proponents of an alternative view, based on the economic concept of a gain, have rallied in recent years. Such a view, it is argued, would avoid arbitrary distinctions, improve equity and simplify our tax system.

This view has not gone unnoticed by an increasingly active judiciary. Gradually the gain view has infiltrated the more traditional principles. No more evident is this development than the recent decisions dealing with the assessability of lease incentives.

Whilst these decisions demonstrate an amalgam of the two approaches to the meaning of income, inherent conceptual issues presented by the gain view are evident. In particular, in determining the existence of a gain to what degree is it necessary or permissible to trace the application of the benefit received?

It is suggested that a theoretical foundation for reconciling these decisions and resolving the conceptual issues can be drawn from propositions previously expounded by Professor Parsons. This foundation provides an opportunity for the judiciary to restore some integrity to the principles dealing with the identification of "ordinary income".