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5216.0 - Australian National Accounts: Concepts, Sources and Methods, 2000  
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 15/11/2000   
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Income

4.43 The economic concept of income is generally understood as the maximum amount a household or other unit can consume without reducing its wealth. However, wealth can be changed by events (such as holding gains and losses, natural catastrophes, etc.) that do not constitute income as measured in the national accounts. In the national accounts, income is broken down into several components. These include primary incomes such as factor incomes, property income and taxes on production and imports, and secondary incomes such as social benefits, social contributions, taxes on income and wealth, and other current transfers. The composition of incomes varies considerably between sectors, because the income receivable by one sector is payable by other sectors (e.g. taxes are income receivable by the general government sector and are payable by the other sectors).

4.44 In SNA93, for individual units and sectors, the net primary income receivable (i.e. primary income receivable less primary income payable) is called the balance of primary incomes. The total of the balance of primary incomes of all domestic sectors is called gross national income. Net national income is equal to gross national income less consumption of fixed capital. Some primary incomes, such as property income and compensation of employees, can be received from and paid to non-residents. Gross national income can therefore be derived as the total balance of all (resident and non-resident) primary incomes less the balance of primary incomes receivable from non-residents.

4.45 For individual units and sectors, disposable income is the net result of all primary and secondary incomes. The total of disposable income for all domestic sectors is called gross disposable income. Some components of secondary incomes, such as taxes on income and wealth and other current transfers, can be received from, or paid to, non-residents. Gross disposable income can therefore be derived as the total balance of all (resident and non-resident) income flows less the net result of flows to non-residents. Disposable income less social transfers in kind gives adjusted disposable income. Social transfers in kind are explained in the discussion of the major elements of income in paragraph 4.71.

Factor incomes

4.46 Gross value added at purchasers' prices, less taxes on production and imports plus subsidies on production and imports (conventionally combined as taxes less subsidies on production and imports) represents the amount available as factor incomes. Factor incomes consist of compensation of employees (the income of the labour factor of production), operating surplus (the income of the entrepreneurship factor of production), or mixed income (a combination of compensation of employees and operating surplus - see paragraph 4.53 for an explanation of operating surplus and mixed income).

4.47 The sum of factor incomes plus taxes less subsidies on production and imports gives GDP at market prices.

Compensation of employees

4.48 SNA93 (paragraph 7.21) defines compensation of employees as follows:

        "The total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period."

Compensation of employees comprises wages and salaries (in cash and in kind) and employers' social contributions.

4.49 Wages and salaries paid in cash include the values of any social contributions (e.g. to superannuation funds), income taxes, etc., payable by the employee even if withheld by the employer for administrative convenience, such as direct payment to a superannuation fund or the taxation department. Also included are penalty payments (e.g. overtime, hazardous work allowances), supplementary allowances such as housing and meal allowances (unless paid as social benefits - see discussion in paragraphs 4.51 and 4.52), holiday pay, payment while on sick leave, bonuses, and commissions, tips and gratuities paid directly to the employee by a third party. Excluded from wages and salaries are reimbursements for expenses incurred (e.g. transportation and accommodation expenses incurred on business travel, and removal expenses) and for equipment or clothing purchased (the reimbursements are treated as intermediate consumption of the employer).

4.50 Wages and salaries paid in kind can include meals, housing, uniforms that can be worn away from work, vehicles available for personal use, goods and services produced by the employer enterprise, recreational facilities, transportation, car parking, child care and low interest loans. Some of these benefits may appear more like intermediate consumption, but are included in compensation of employees because they are benefits that employees often have to provide themselves and are designed to attract employees.

4.51 Employer social contributions are amounts paid by employers (or imputed as payments by employers) to provide social benefits for employees. The social benefits can include retirement benefits (e.g. superannuation), sickness benefits, dependants' benefits in the event of the employee's death, and severance benefits. Employer social contributions are usually paid directly by the employer into investment funds (called 'social insurance schemes' in SNA93) operated by a separate financial institution, but can be paid into a fund set up within the employer enterprise. However, in some cases, employers pay the benefits directly from general revenue - where this occurs the employers are said to operate an unfunded social insurance scheme. In such cases, the system calls for employer social contributions to be imputed as the amount that would have had to be invested to pay for future benefit payments (the methods used to impute contributions to unfunded schemes are described in Chapter 22).

4.52 Although employer contributions to funded social insurance schemes are usually paid by employers to the scheme operators, in the national accounts all employer social contributions (including imputed contributions) are treated as having been paid to employees, who are then treated as having made the payments to the schemes. This treatment is considered more realistic from an economic viewpoint in that the contributions are seen as part of the compensation and income of the employees, who are then seen as using the contributions to acquire access to social insurance schemes (to which they may also contribute directly). The treatment also means that social contributions add to GDP.

Operating surplus and mixed income

4.53 Operating surplus is the income from production of corporate enterprises, while mixed income is the term used to denote the income from production of unincorporated enterprises. The term 'mixed income' is used because the surplus arising from the productive activities of unincorporated enterprises can comprise returns to the capital of the proprietors (representing operating surplus), and an element akin to wages and salaries accruing to the proprietors or other members of the household as payment for their labour input to the enterprise (even though they may not receive explicit payment for their work). Descriptions of the methods used to estimate operating surplus and mixed income in the ASNA are contained in Chapter 20.

4.54 Operating surplus and mixed income can be measured on a gross or net basis. Gross operating surplus and gross mixed income are equal to gross value added at basic prices less compensation of employees and taxes less subsidies on production and imports other than net taxes on products (or gross value added at factor cost less compensation of employees). Net operating surplus is equal to gross operating surplus less consumption of fixed capital, and net mixed income is equal to gross mixed income less consumption of fixed capital.

Taxes less subsidies payable on production and imports

4.55 Taxes payable on production and imports are part of primary income receivable by the general government sector (and, where applicable, non-resident governments) and are payable by other sectors and non-residents. All other current taxes are included in secondary income. Taxes on production and imports include: (i) taxes that are payable on goods and services when they are produced, delivered, sold, transferred or otherwise disposed of by their producers; (ii) taxes and duties on imports payable when goods enter the economic territory or when services are delivered to residents by non-residents; and (iii) other taxes on production such as taxes on ownership or use of land, buildings, or other assets used in production, or on the labour employed, or on labour costs. For individual units and sectors, taxes in category (i) are not recorded with income when output is valued at basic prices. However, the taxes are recorded with income for the economy as a whole to derive GDP at purchasers' prices.

4.56 Subsidies are unrequited payments that government units (including, if applicable, non-resident government units) make to resident producers or importers on the basis of the levels of their production activities or the quantities or values of the goods or services which they produce, sell or import. Subsidies are paid to influence producers' level of output, the prices at which outputs are sold or the remuneration of the producers. Subsidies can be thought of as negative taxes because their impact on producers' incomes is the opposite of taxes on production. Subsidies are not payable to households; current government transfers to households are treated as social benefits and as part of secondary income.

Property incomes

4.57 Property incomes are received by the owners of financial assets and tangible non-produced assets such as land and subsoil assets (the various types of assets are discussed in paragraphs 4.84 to 4.97). Property income accrues when an assets' owner puts the asset at the disposal of other institutional units. Units with surplus funds lend or provide equity finance to other units and derive property income in the form of interest, dividends, etc. Owners of land and subsoil assets arrange leases or other contracts with other units who pay rent to the owners. Regular payments made by lessees of subsoil assets are sometimes known as royalties but are treated as rents in the system. A distinction is made between rent, which is a form of property income derived from non-produced assets, and rentals payable under operating leases relating to produced assets, including dwellings and other buildings. As discussed in paragraph 4.29, under operating leases rentals are treated as output of the lessor and purchase of a service by the lessee. The various items of property income are discussed in the following paragraphs.

Interest

4.58 Interest is receivable by the owners of financial assets such as deposits, loans and accounts receivable, and securities other than shares. Interest is defined in paragraph 7.93 of SNA93 as:

        "Under the terms agreed between them, interest is the amount that the debtor becomes liable to pay the creditor over a given period of time without reducing the amount of the principal outstanding."

However, interest that accrues and is not paid may be added to the principal amount. In the system, the addition of outstanding interest to the principal constitutes a separate financing transaction.

4.59 Under the accrual basis of recording used in the system, interest which, under the terms of the contract, does not have to be paid until the asset matures, nevertheless must be attributed to the accounting periods over which it accrues. Methods used to attribute interest to accounting periods are discussed in Chapter 22.

4.60 As discussed in paragraph 4.29, under a financial lease the lessor is treated as making a loan to the lessee. Interest on such loans is a component of the lease payments, which have to be broken down between interest and repayment of principal.

4.61 Interest is recorded after allowing for FISIM, the interest component that represents charges for financial intermediation services rendered, as discussed in paragraphs 4.22 and 4.23. As customers of financial intermediaries, institutional units may deposit money with the intermediaries, in which case FISIM is added to the actual interest receivable by the customer and interest payable by the financial intermediary. FISIM is also shown as intermediate or final consumption of the customer and as output of the intermediary. Institutional units also borrow from intermediaries, in which case FISIM is deducted from interest payable by the customer and from interest receivable by the financial intermediary, and also shown as intermediate or final consumption of the customer and output of the intermediary.

Dividends

4.62 Corporations raise equity capital through the issue of shares, and shareholders become entitled to dividends as a form of property income for having placed funds at the disposal of the corporations. Dividends include all distributions of profits by corporations, whether or not the distributions are called dividends. Issues of bonus shares in lieu of dividends are not included.

Withdrawals from income of quasi corporations

4.63 Quasi corporations are unincorporated enterprises that behave as if they were corporations. They are discussed in detail in Chapter 5. Because they are not corporations, quasi corporations cannot distribute profits by way of dividends. Nevertheless, the owner of a quasi corporation may choose to withdraw some or all of the entrepreneurial income of the quasi corporation. Such withdrawals are the conceptual equivalent of dividends and are distinguished in order to separate the income of the quasi corporation from the income of the owner.

4.64 Because quasi corporations must, by definition, keep a full set of accounts, withdrawals of income should be explicitly identified in the accounts. Such withdrawals must be distinguished from withdrawals of funds realised as a result of the disposal of assets, which constitute capital disposal by the quasi corporation and withdrawal of equity (a financing transaction) by the owner. Withdrawals financed by liquidating large amounts of accumulated retained earnings are treated in the same manner. Conversely, funds provided by the owner so that the quasi corporation can acquire assets or reduce liabilities are treated as equity injections - there is no concept of negative withdrawals of income.

Reinvested earnings on foreign direct investment

4.65 A foreign direct investment enterprise is either a branch (including unincorporated joint ventures) of a non-resident enterprise or an enterprise, either corporate or unincorporated, in which at least one foreign investor owns sufficient shares to have an effective voice in the decision making processes of the enterprise. In these cases, an amount of the enterprise's retained earnings, proportional to the ownership of the foreign direct investor, is imputed as a remittance of property income to the foreign direct investor, even though the remittance does not take place in practice. An equal amount (with opposite sign) is shown as reinvestment of retained earnings, a financing transaction. The rationale underlying the SNA93 treatment is that the direct investment enterprise is, by definition, subject to control or influence by the foreign investor(s), and the decision to retain earnings is a conscious investment decision by the foreign investor.

Secondary income

4.66 Secondary income consists entirely of current transfers. Transfers are transactions in which one institutional unit provides a good, service or asset to another unit without receiving from the latter any good, service or asset in return. A capital transfer is one in which the ownership of an asset (other than cash) is transferred or which obliges one or both parties to acquire or dispose of an asset. All transfers not meeting these criteria are current transfers. The main types of secondary income are discussed in the following paragraphs.

Current taxes on income and wealth

4.67 These taxes are part of the gross secondary income of the general government sector and are deducted in the derivation of the net secondary income of other sectors. Most of the taxes consist of taxes on income of households or profits of corporations and taxes on wealth that are payable regularly (wealth taxes paid irregularly are capital taxes).

Social contributions and benefits

4.68 Social benefits are current transfers received by households to provide for needs that arise from certain events or circumstances such as sickness, unemployment, retirement, housing, education or family circumstances. There are two kinds of social benefits: social insurance benefits and social assistance benefits. The former are provided by social insurance schemes operated by financial institutions or by employers on behalf of their employees. Social insurance schemes pay benefits from accumulated social contributions, which are paid into the schemes by employers on behalf of employees, or directly by the employees. Social assistance benefits are paid by governments from general revenue and are not paid from social contributions. Social insurance benefits and social assistance benefits are part of the gross secondary income of households.

4.69 As discussed in relation to employer social contributions (see paragraphs 4.51 and 4.52), social contributions paid by employers on behalf of employees, including imputed contributions to unfunded schemes, are treated as part of the employees' primary income and as being paid to social insurance funds by the employees. Employer social contributions, along with social contributions paid directly by employees, are therefore deducted from gross secondary income of households to arrive at net secondary income of households.

Other current transfers

4.70 Other current transfers include non-life insurance premiums (after deduction of the service charge) and claims, current transfers within general government (e.g. grants from one level of government to another), current transfers between the government and governments of other countries or international organisations (e.g. UN, OECD), transfers (e.g. membership fees, subscriptions, donations) to non-profit institutions, current transfers between households, fines and penalties, and compensation paid (other than as an insurance claim) for injury, property damage or death.

Social transfers in kind

4.71 Social transfers in kind are individual goods and services provided to individual households by general government units and non-profit institutions. The goods and services may be produced by the government units and non-profit institutions or purchased by them. Also included are reimbursements made to individual households by general government units or non-profit institutions for purchases by the households under a scheme that authorises purchase of approved goods and services (e.g. reimbursement of the costs of pharmaceuticals purchased under a pharmaceutical benefits scheme). Social transfers in kind are not regarded as part of the disposable income of households, but are included in adjusted disposable income and actual consumption (see next section).


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