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Conceptual definition of income
Components of income
Income and its relationship to the broader framework for household economic resources
15. This section provides the ABS standard conceptual definition of income for use in micro level statistics in the household sector, including a description of its components and exclusions. It outlines how the components of income are aggregated to produce the various measures of income required (i.e. private, gross, disposable and final income). The definition can be applied to a range of statistical units e.g. households, income units and persons, provided transfers between units are appropriately treated in each case.
CONCEPTUAL DEFINITION OF INCOME
16. The ABS conceptual definition of household income is based on the definition of household income set out in the international standards (ICLS 2004). The ABS has followed the ICLS wording except where improvements were identified or changes were required to satisfy Australian requirements.
17. The standard ABS conceptual definition of household 'income' is:
Household income consists of all current receipts, whether monetary or in kind, that are received by the household or by individual members of the household, and which are available for, or intended to support, current consumption by the household.
Household income includes receipts from:
- employment (employee income and income from self employment)
- investment (interest, dividends, rents and royalties)
- production of household services for own consumption (owner-occupied dwellings, unpaid domestic services)
- current transfers (pensions, annuities, benefits and allowances; transfers from non-profit institutions and other households).
Household income excludes capital transfers received and certain current transfers treated as offsets against expenditures. It excludes receipts that reduce the net worth of the household, through a reduction of its cash reserves, the disposal of its other financial or non-financial assets, or an increase in its liabilities. It also excludes holding / gains losses resulting from changes in the value of assets and liabilities.
COMPONENTS OF INCOME
- capital transfers e.g. inheritances, lump-sum retirement benefits, life insurance claims (except annuities), compensation (except for foregone earnings), loan repayments
- certain current transfers offset against expenditures e.g. lottery and other gambling winnings, non-life insurance claims, government reimbursements of expenditure such as Medicare and child care rebates
- receipts that result from a reduction in net worth e.g. sale of assets, withdrawals from savings and loans obtained.
- holding gains / losses resulting from changes in the value of financial and non-financial assets and liabilities e.g. the value of shares held.
18. Income includes:
19. Conceptually, all of these components and the elements that make them up are included in income. However, in practice, some elements cannot be included in the operational measures of income because they cannot be readily captured or modelled.
(i) income from employment;
(ii) investment income;
(iii) income from production of household services for own consumption; and
(iv) current transfers received.
(i) Income from employment
Income from employment comprises receipts from participation in economic activities in a strictly employment-related capacity. It consists of employee income and income from self-employment.
Employee income comprises direct wages and salaries for time worked and work done, cash bonuses and gratuities, commissions and tips, directors’ fees, profit-sharing bonuses and other forms of profit-related pay, remuneration for time not worked, free or subsidised goods and services from an employer, severance and termination pay and employers' social insurance contributions. An employee may receive income from an employer or from their own incorporated business (company). It may be received in cash (monetary) or in kind.
Income from self-employment consists of the profit or loss that accrues to owners of, or partners in, their own unincorporated businesses. Profit or loss is the value of the gross output of the enterprise after the deduction of operating expenses, including depreciation and operating costs, but before income tax. Income from self-employment excludes profits from capital investments of partners who do not work in these enterprises i.e. "silent" partners. Income from self-employment includes the estimated value of goods and services produced for barter as well as goods produced for own consumption, less expenses.
(ii) Investment income
Investment income, also commonly referred to as property income, is defined as receipts that arise from the ownerships of assets (return for use of assets) that are provided to others for their use. These are returns from:
- Financial assets - interest and dividends
Interest receipts are payments from banks and other financial institutions (e.g. credit unions), for the use of funds held in accounts with them, certificates of deposit, government bonds, securities, debentures and loans to non-household members (excluding repayments of the principal). Dividends are receipts from investment in an enterprise in which the investor does not work. Dividends should be recorded net of any expenses incurred in earning them.
- Non-financial assets - rents
Rents are payments received for the use of both unproduced assets (i.e. natural resources), such as land, and for produced assets, such as houses. Rents should be included in income net of expenses.
Royalties are receipts received from writings, rights to make use of inventions, etc. (i.e. patented or copyright materials).
(iii) Income from household production of services for own consumption
Income from household production of services for own consumption consists of the net estimated value of:
- housing services provided by owner-occupied dwellings and subsidised rentals (i.e. imputed rent);
- unpaid domestic services; and
- services from household consumer durables (such as cars, washing machines, fridges, etc.).
(iv) Current transfers received
Transfers are receipts for which the recipient does not provide anything to the donor in direct return for the receipts. Transfers can consist of money, of goods or of services.
Current transfers include:
- Government pensions and allowances
Includes cash receipts from welfare support provided through a range of programs at all levels of government. Some government payments are excluded as they are considered to be either a capital transfer or a reimbursement of expenditure.
In deciding whether a government payment is a capital or current transfer, both the intent of the government payment and the associated eligibility criteria are considered. For example, receipts from the First Home Owner Grant Scheme are regarded as capital transfers as they are designed to help first home buyers purchase their own home while the Baby Bonus is considered a current transfer as the intention of the payment is to offset some of the extra consumption costs incurred with the birth of a child.
Government payments that are reimbursements of approved expenditures (such as the Medicare rebate, the Private Health Insurance Rebate, the Child Care Benefit and the Child Care Tax Rebate) should not be treated as current transfers in cash, rather as social transfers in kind (see 'Other current transfers' below).
- Superannuation pensions and annuities
Includes superannuation pensions and annuities. It excludes retirement lump sum benefits.
Pensions received from contributory or private-funded schemes may represent a running down of the household's assets where the underlying capital is consumed (e.g. an allocated pension). They are, however, included as income as they are considered to be income by the households receiving them, especially retired households, and are used to support consumption. Otherwise the analysis of income distribution would be affected since these households would then have little or no income.
- Other current transfers
- Transfers from non-profit institutions, including charities
- Workers compensation and payments from accident/sickness insurance, i.e. income protection insurance or life insurance annuities
- Transfers from other households in cash or in-kind. Includes alimony, child support and financial support such as between family members not living in the same household
- Social transfers in kind. Non-cash benefits and services provided by the government to households for education, health, housing, social security and welfare. It includes reimbursements of approved expenditures such as the Medicare rebate, the Private Health Insurance Rebate, the Child Care Benefit, the Child Care Tax Rebate and Commonwealth Rent Assistance.
(i) Capital transfers
Capital transfers refer to the acquisition of, or disposal of, assets. Capital transfers received are considered an addition to capital, even though they may subsequently be dissaved. A household may receive capital transfers from other households, private institutions and enterprises, and from government. Capital transfers include inheritances, lump-sum retirement benefits, life insurance claims (except annuities), compensation (except for foregone earnings) and loan repayments (the principal component only).
(ii) Certain current transfers offset against expenditures
Lottery and other gambling winnings and payments received from any non-life insurance claims made are excluded from the definition of income. The household sector overall incurs net expenditure on these items and, by convention, the transfers received are offset against expenditures. In respect of lottery and other gambling winnings, the stakes (expenditure) are included as part of household consumption which is then offset by any winnings which are effectively considered negative expenditures. A similar treatment is applied to non-life insurance claims, with premiums paid included in household consumption expenditure and offset by any payments received in respect of any claims made.
(iii) Holding gains or losses
Holding gains or losses refer to changes in the value of financial and non-financial assets and liabilities over a reference period. A holding gain, the result of an increase in the value of assets or a reduction in the value of liabilities, increases the net worth of the owner's assets while a holding loss has the opposite effect. All holding gains and losses are excluded from income whether they are realised (if the owner sells the asset) or remain unrealised.
(iv) Other receipts that result from a reduction in net worth
Receipts that represent a running down of assets are excluded from income and may include the sale of assets, withdrawals from savings and loans obtained. Reductions in net worth can be used to support consumption, at least for a time, just as income is.AGGREGATION
21. The components of income can be aggregated in a hierarchy to produce selected measures of income for particular analytical purposes. Gross and disposable income are the main income aggregates produced.
Total or gross income is the sum of income from all sources before income tax or the Medicare Levy is deducted. It is the most commonly used measure across ABS household collections.
Disposable income is derived by deducting taxes on income from gross income. It is the remaining income which is available to support consumption and / or saving. Disposable income generally better represents the economic resources available to meet the needs of households than gross income. It is the main measure produced from the specialised ABS income surveys.
22. For some purposes, private income and final income measures may be produced.
Private income is the most restricted concept of income, and relates to total income less all benefits received from government i.e. government benefits in cash and in kind.
Final income is the most extensive concept of income, being equal to household disposable income, including government social transfers in kind, less taxes relevant to households (also referred to as taxes on production). Final income is used to study the effects of taxation and government expenditure on the distribution of income among private households in Australia. INCOME AND ITS RELATIONSHIP TO THE BROADER FRAMEWORK FOR HOUSEHOLD ECONOMIC RESOURCES
23. The conceptual definition of income relies on some discussion about the boundaries between income and capital flows and about household consumption. The Canberra Group report illustrated how the various concepts can be brought together in an integrated manner (The Canberra Group 2001, pp18, 30). The following figure summarises the key measures and their relationships, as outlined in the Canberra Group Report.
1The Canberra Group recommend the deduction of employer and employee social contributions, regular taxes on wealth, regular interhousehold cash transfers and regular cash transfers to charities.
2 The ABS use the terminology 'Final Income' which is equal to disposable income plus social transfers in kind less taxes on production.
3 Household consumption expenditure in defined by the ICLS (2004) as the value of consumer goods and services acquired, used or paid for by a household through direct monetary purchases, barter or as income in-kind for the satisfaction of needs and wants of its members.
4Household actual consumption is defined by the ICLS (2004) as the sum of household consumption expenditure and the value of consumer goods and services acquired or used by the household through transfers from government non-profit institutions or other households. STATISTICAL UNITS
24. This section outlines the main statistical units used for income data in household collections and the reference period to which the statistics refer.
Statistical units are the basic units for which information is sought and for which statistics are compiled and analysed. Income data may be collected, compiled and analysed in respect of the following statistical units: persons; income units; families; and households.
25. A short description of each of the statistical units is provided below. The nominal definitions are detailed in the ABS standards for 'Family, Household and Income Unit Variables' (cat. no. 1286.0).
(i) Person unit
The person level relates to the individual members of households.
Income of persons is not usually a good proxy indicator or measure of economic well-being. This is because there is usually some sharing of income within families and households and the income of each member will affect the standard of living of the whole group to some extent.
(ii) Income unit
The ABS nominal definition for 'income unit' is 'Two or more people who live together, are related by either a 'couple' or a 'parent/dependent child' relationship and are assumed to be pooling income and sharing consumption and savings; or, any other person who is assumed to have sole command over his or her income, consumption and savings.' The income unit is similar to the unit used in determining the eligibility of people for many government pensions and allowances.
(iii) Family unit
The ABS nominal definition of 'Family' is 'Two or more related people who usually live together.' This definition is more restrictive than the usually accepted notion of the term 'family' which includes relatives whether they live together or not. This is because for statistical purposes it is necessary to place some physical boundary around the extent of family for the purely pragmatic purpose of being able to collect family data.
(iv) Household unit
The ABS nominal definition of a 'household' is 'One or more persons usually resident in the same private dwelling'.
26. Household income, rather than personal or income unit income, is generally the preferred measure for analysis of people's economic well-being as the major determinant of economic wellbeing for most people is the level of income they and other family members living in the same dwelling receive. While income is usually received by individuals, it is normally shared between partners in a couple relationship and with dependent children. To a lesser extent, it may be shared with other children, other relatives and possibly other people living in the same household, for example through the provision of free or cheap accommodation. Even when there is no transfer of income between members of a household, nor provision of free or cheap accommodation, members are still likely to benefit from the economies of scale that arise from sharing a dwelling.
27. When the household is used as the unit of analysis for income, adjustments to the actual incomes of households should be made to enable analysis of the relative wellbeing of households of different sizes and composition (see Equivalised total household income for further information). REFERENCE PERIOD
28. The international standards state that household income statistics should relate to a full-year accounting period to take into account seasonal variations in incomes. Annual income includes income obtained from all sources over a period of a year. It has the advantage of being less sensitive to short term variations in income, such as a person having little or no current income for a short period of unemployment but adequate resources from past employment or prospective employment to avoid economic hardship. There are, however, some major disadvantages and practical difficulties in using annual income in practice:
- given that it is necessary to collect annual income for the previous financial year (after records have been finalised for taxation purposes), the data may be quite old by the time it is released;
- respondents to surveys may have difficulty recalling the income received over a period as long as a year, in particular those with periods of employment and unemployment, casual work and part-time work; and
- income received in the previous financial year may not relate directly to the socio-economic and other characteristics of the household at the time a particular survey is run.
29. Therefore, for most purposes, the ABS prefers to collect 'current' income, that is, income being received at the time the data is collected from respondents. Current income provides the most up to date information available and in some cases the most accurate information available. It also relates most closely to the characteristics of persons and households at the time of the collection.