INTRODUCTION TO THE STANDARD

NOMINAL DEFINITION

The standard nominal definition of 'Total income' is:

• total 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.

Total 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 and services from consumer durables)
• current transfers (pensions, annuities, benefits and allowances, transfers from non-profit institutions and other households).

Total 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, or individual members of the household, through a reduction of cash reserves, the disposal of other financial or non-financial assets, or an increase in liabilities. It also excludes holding gains / losses resulting from changes in the value of assets and liabilities.

Exclusions:

• 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 (for example, lottery and other gambling winnings, non-life insurance claims and government reimbursements of expenditure such as Medicare and child care rebates)
• receipts that result from a reduction in net worth (for example, 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 (for example, the value of shares held).

The Conceptual framework for income provides the conceptual definition for each of the income components and discusses the exclusions in more detail.


OPERATIONAL DEFINITION

The standard operational definition of 'Total income' is the sum of amounts from the following sources before any deductions such as income tax, the Medicare Levy and the Medicare Levy Surcharge or salary sacrificed amounts are taken out:

• employee income
• own unincorporated business income (profit or loss from self employment)
• government pensions and allowances
• investment income
• superannuation pensions and annuities
• other current transfers received.

Consistent with the conceptual definition, the operational definition excludes capital transfers, certain current transfers offset against expenditures, holding gains and losses and other receipts that result from a reduction in net worth.

The standard operational definition is more limited in scope than the conceptual definition of income as it is constrained by practical considerations such as the availability of data. For practical reasons, the operational definition normally excludes income from the production of household services for own consumption, that is, imputed rent from owner occupied dwellings, estimates of unpaid domestic services and services from consumer durables. There are other differences between the conceptual and operational definitions and these are described in the section below, 'Components of total income'.

In addition to the differences between the standard conceptual and operational definitions, there are also differences in the level of implementation of the operational definition possible in each of the standard income modules. While the operational definition is fully implemented in the detailed income module, it is not possible to collect details on all the components in the shorter modules due to space and time constraints.

For more detailed information about the conceptual and operational exclusions from 'Total income', see Appendix F.

Components of total income

Income may be received from employment (employee income or own unincorporated business income), through government pensions and allowances or from the ownership of assets (investment income). Other sources of income include superannuation pensions and annuities and other current transfers received.

Employee income

Employee income is the total (or gross) income received as a return to labour from an employer or from a person's own incorporated business.

Employee income comprises direct wages and salaries for time worked and work done, overtime, bonuses and gratuities, commissions and tips, directors’ fees, profit-sharing bonuses or pay, piece rates, penalty payments and shift allowances, directors' fees for working directors, remuneration for time not worked (for example, sick leave and public holidays) and severance and termination pay. Salary packaged income is also included in employee income (that is, amounts salary sacrificed as well as free or subsidised goods provided from an employer, such as employer supplied housing or a motor vehicle).

The operational definition of employee income does not include employers' social contributions. Employers' social contributions are those payments made by employers to schemes for the benefit of their employees such as workers' compensation insurance and mandated payments to superannuation schemes.

Own unincorporated business income

Own unincorporated business income is 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 is taken out. Losses occur when operating expenses are greater than receipts and are treated as negative income.

Profits or losses from capital investments of partners who do not work in these enterprises, that is, silent partners are included in investment income, rather than own unincorporated business income.

The operational definition of own unincorporated business income excludes the estimated value of goods and services produced for barter as well as goods produced for own consumption, less the expenses of producing them.

Government pensions and allowances

Government pensions and allowances include cash transfer payments made by government entities to persons under social security and related government programs. They are primarily paid by Centrelink and the Department of Veterans' Affairs and include pensions paid to aged and disabled persons, benefits paid to veterans and their survivors, allowances for students and jobseekers and family support payments. All pensions received from overseas are included under government pensions and allowances.

Some government payments are excluded as they are considered to be a capital transfer rather than a current transfer. Their respective treatment is determined by the intent of the government payments and the associated eligibility criteria. 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 Newborn Upfront Payment is considered a current transfer as the intention of the payment is to offset some of the extra costs associated with the birth of a child.

Income from government pensions and allowances does not include government payments considered reimbursements of expenditures such as the Medicare Rebate, the Private Health Insurance Rebate, Child Care Benefit and the Child Care Rebate.

Investment income

Investment income, also commonly referred to as property income, includes interest and dividends received as a result of the ownership of financial assets such as shares and funds deposited in bank accounts, and rent and royalty payments received from the ownership of non-financial assets.

Interest receipts are payments from banks and other financial institutions (for example, 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, that is, silent partners. Dividends should be recorded net of expenses.

Rent comprises receipts from residential and non-residential properties. Operating expenses deducted from gross rent may include repairs and maintenance expenses, rates, body corporate fees, real estate agent management fees, insurance costs, interest payments and the like. If the operating expenses plus the depreciation allowances are greater than the gross rent, net rental income is negative.

Royalties are payments made to the owners of intellectual property in return for the right to use the intellectual property, such as patented or copyright materials.

Superannuation pensions and annuities

Superannuation pensions and annuities include all pensions and regular superannuation payments other than those received under government social security and related schemes, that is, government pensions and allowances. Lump-sum retirement benefits are excluded.

Other current transfers received

Other current transfers received include:

• Workers' compensation
• Payments from accident/sickness insurance, such as income protection insurance or life insurance annuities
• Transfers from other households (includes alimony and child support and other financial assistance provided by family members not resident in the household)
• Scholarships.
  

The operational definition of 'other current transfers received' does not include social transfers in kind, that is non-cash benefits and services provided by the government or by non-profit institutions to households for education, health, housing, social security and welfare. These benefits include reimbursements of approved expenditures such as the Medicare Rebate, the Private Health Insurance Rebate, the Child Care Benefit and the Child Care Rebate.

Exclusions from the operational definition of 'Total income'

(i) All modules

The operational definition of total income is more limited in scope than the nominal definition as it is constrained by practical considerations such as the availability of data that can be reported by respondents. For practical reasons the operational definition normally excludes:

• income from the production of household services for own consumption, that is, imputed rent from owner occupied dwellings, estimates of unpaid domestic services and services from consumer durables
• employers' social contributions, such as workers' compensation insurance and mandated payments to superannuation schemes
• the value of goods and services produced for barter as well as goods produced for own consumption, less expenses
• social transfers in kind, that is non-cash benefits and services provided by the government or non-profit institutions for education, health, housing, social security, welfare and electricity concessions. Social transfers in kind include reimbursements of approved expenditures such as:
  • Medicare Rebate
  • Private Health Insurance Rebate
  • Funeral Benefit (DVA)
  • Child Care Benefit
  • Child Care Rebate
  • Education Entry Payment.

(ii) Basic, Short, and Single question modules

There are also differences in the level of implementation of the operational definition possible in each of the standard income modules. While the operational definition is fully implemented in the detailed income module, it is not possible to collect details on all the components in the shorter modules due to space and time constraints.

For practical reasons, the operational definition of total income derived from the single question and the short and basic income modules is limited to receipts that are usually or regularly received and able to be reported by respondents. Receipts collected in these modules exclude:

• lump-sums payments received from the Government such as:
  • Newborn Upfront Payment (formerly known as the Baby Bonus)
  • Maternity Immunisation Allowance
  • Australian Government Disaster Recovery Payment
  • Crisis Payment
• one-off or irregular financial support or gifts received from persons not living in the same household
• an honorarium or ex-gratia payment, e.g. payment to a guest speaker of a conference to cover their costs and/or preparation time.

DISCUSSION OF ISSUES

Reference periods

Current income

For most purposes, the ABS uses current income, rather than annual income. Current income is the income received by respondents at the time data are collected. Current income provides the most up to date information available and in some cases the most accurate information available.

Current income is collected using a number of different reporting periods. For income from investments or own unincorporated businesses, respondents are generally asked to estimate the amount they expect to receive in the current financial year. For income from other sources, respondents are generally able to select the period to which the income amount relates e.g. week, fortnight, four weeks, calendar month, quarter, year or other. The income amounts reported are divided by the number of weeks in the reporting period to obtain weekly income.

Annual income

Annual income, with respect to the previous financial year, is collected in the detailed income module. Annual income provides a somewhat longer term perspective of income, providing data about income obtained from all sources over a period of a whole year. It has the advantage of being less sensitive to short term variations in income, such as a person having little or no income for a short period of non-employment, but for which they have adequate resources from past employment or prospective employment to avoid economic hardship.

However, annual income has the potential to be limited in its relevance to the current situation of respondents, especially when analysing the combined income of a household which gained or lost adult members during the course of the year. There are also practical difficulties in collecting annual income, especially from respondents who may have had relatively short periods of time in different jobs or who received government pensions for relatively short periods of time during the year.

Collection issues

Ideally, 'Total income' should be collected as a separate value for each different source of income rather than as a single value for all types of income or total income. This is because some components of income are conceptually different, e.g. gross or net of expenses, and may relate to different reference periods, e.g. received fortnightly or annually. A more precise measure of 'Total income' is achieved if each source is addressed separately rather than asking the respondent to recall and to sum all their sources in response to one or two questions for a fixed reference period.

However, it is recognised that it is not always feasible to collect income data at this level of detail and the standard incorporates a range of collection modules which produce measures of 'Total income' which vary in their level of precision and detail.

'Total income' data may be collected and analysed in respect of the following statistical units: persons, income units, families, and households. When income is collected from each individual member of the household it can be aggregated to any level required. However not all surveys require interviews to be conducted with each member of the household. In these circumstances, the standard 'Household income module' may be used in conjunction with a personal income module to collect the income of other members of the household in order to produce estimates of household income.

Dollar amount versus ranges

Ideally income should be collected in dollar amounts and not as ranges. Collection in dollar amounts enables greater precision when aggregating incomes of individuals to derive the income of income units, families, and households. It also offers greater flexibility in presenting estimates. When income data is collected in actual dollar amounts, summary measures such as means and medians can be simply produced and equivalence scales can be applied. The disaggregation of the population into income quintiles and deciles is also straightforward when actual dollar values are collected.

Where income is collected in ranges (as in the 2011 Census) it is not possible to aggregate person level income ranges directly to higher levels. To attempt to overcome this, the income range is used in conjunction with data from the most recent Survey of Income and Housing to impute an income value for each person. The imputed values for each person are then aggregated to derive imputed household and family level incomes. However there are significant methodological and resource issues in applying this approach and the results obtained are subject to substantial limitations.

Missing data

Non-response by persons selected in the survey occurs when people cannot be contacted or are unable (or unwilling) to provide the information required. Non-response to income questions leads to a loss of information, and potentially biased estimates if ignored in analysis. The magnitude of any bias depends upon the level of non-response and the extent of the difference between the characteristics of those who responded to the survey and those who did not.

The following strategies can help reduce the level of non-response:

• face-to-face interviews with respondents
• the interviewer indicating how income information is important for various uses when introducing the questions
• the use of interviewers who can speak languages other than English, where necessary
• follow-up of respondents where there is no initial response.

The following strategies can help to reduce the impact of non-response in analysis:

• imputation of missing values
• ensuring that weighted data is representative of the population by aligning the estimates with population benchmarks.