6549.0 - Household Income, Consumption, Saving and Wealth, A Provisional Framework, 1995  
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Contents >> Chapter 8. Income

Overview

Definition

8.1. Income is defined as follows: income comprises those receipts accruing (in cash and in-kind) that are of a regular and recurring nature, and are received by the household or its members at annual or more frequent intervals. It includes regular receipts from employment, own business and from the lending of assets. It also includes transfer income from government, private institutions and other households. Income also includes the value of services provided from within the household via the use of an owner-occupied dwelling, other consumer durables owned by the household and unpaid household work. Income excludes capital receipts that are considered to be an addition to stocks, and receipts derived from the running down of assets or from the incurrence of a liability. It also excludes intra-household transfers.

Running down of assets

8.2. For practical and conceptual reasons, an exception is made in this definition of income with regard to one important source - viz the household receipts from pension funds. Under the above definition of income, household receipts in the form of pensions from funded schemes should be treated as a drawing on assets and therefore not income.

8.3. However, the exclusion of private pensions and annuities from the scope of income would severely affect analysis relating to the distribution of economic well-being. For many people, these receipts of private pensions or annuities are the only income they have and are viewed as income by the household.

8.4. Therefore, the following stance is taken:

      • benefits from unfunded and funded schemes are treated as income;
      • employers' contributions or premiums paid to superannuation funds have been classified as part of income as a return to labour and therefore as part of household saving in the current account. The employer contributions are then regarded as being immediately transferred into superannuation funds, with these imputed transactions being recorded in the household's capital account. This treatment will, however, cause a double counting of income at the aggregate level and this should be kept in mind when analysing data compiled according to this framework.

(Note that similar treatment of benefits from both funded and unfunded pension schemes has been recommended in the SNA93, although an explicit adjustment is made in the Use of Disposable Income Account of the SNA93 to eliminate the double counting and hence to correctly measure aggregate household saving.)

Income in-kind

8.5. Income is generally thought of as a cash or money receipt. However, important elements of the income of persons and households are obtained in forms other than money. This is called income in-kind. There are two broad types:

      • market exchange
      • non-market exchange.

8.6. An example of the first type is an employer who provides an employee with goods (e.g. food, petrol) or with a service (e.g. the use of a car, a free house) in lieu of cash wages.

8.7. An example of the second type is the services provided by an owner-occupied dwelling. The service does not enter the market or involve money, but is nevertheless an important source of 'income' to the owner.

8.8. In order to add or compare income in-kind with cash income, the cash equivalent of the income in-kind has to be estimated or imputed. Also, because the transaction does not have the intermediary of money, income and consumption are not separate events. What is received as income is not cash but rather the right or ability to consume a particular good or service.

8.9. Therefore, in the ICW framework, a simultaneous imputed value for both income and consumption must be made.

8.10. In theory, the scope of income in-kind can be very wide. It may range from the consumption of domestic services provided by a household member, to the pleasure derived from a painting or a clean environment. Two criteria are used to define the limits to the inclusion of income in-kind:
      • is there some basis for making a reasonably accurate estimate of the money equivalent?
      • does the estimate have a practical application (e.g. in government policy)?

8.11. Applying these criteria, priority should be given to the income in-kind obtained from:
      • employment benefits
      • social security in-kind concessions
      • other government in-kind transfers
      • gifts and services provided free by other households
      • gifts and services provided free by private organisations (e.g. charities)
      • services provided by unpaid household work
      • services provided by owner-occupied dwellings
      • services provided by consumer durables.

Classification

8.12. Income can be classified as cash income or as income in-kind and can also be classified according to source of income. Income may be derived from market activity, in the form of a return to labour and entrepreneurial skills or from the ownership of assets. It may also be derived from outside the market place, in the form of government and private transfers to the household or in the form of goods and services provided from within the household.

8.13. Source of income:

      • market income
        • primary income
        • property income
      • non-market income
        • transfer income
        • other non-market income.


Primary income

Definition

8.14. Primary income is defined as receipts accruing in cash or in-kind in the current reference period to employees and self employed persons by virtue of the deployment of their labour and entrepreneurial skill in productive activity. In-kind receipts are measured as an imputed cash equivalent.

Classification

8.15. Primary income is classified as:

      • Employee income
      • Entrepreneurial income.

Primary income: Employee income

Definition

8.16. Employee income is defined as the sum of employee 'earnings', as defined by ILO (see below), and employer contributions to employee superannuation and pension funds.

8.17. The ILO defines earnings for employees as "...remuneration in cash and in kind paid to employees, as a rule at regular intervals, for time worked or work done, together with remuneration for time not worked, such as for vacation, other paid leave or holidays". (ILO 1973, quoted in Hussmanns et al, 1990).

8.18. Employer contributions to employee superannuation and pension funds (which are excluded from the ILO definition) comprise actual contributions payable to funded schemes and an imputed value of contributions to unfunded schemes.

(a) Employee cash income

8.19. Employee cash income includes:

      • wages and salaries
      • tips, commissions and regular bonuses
      • other profit-sharing bonuses
      • piecework payments
      • payment for recurring odd jobs, casual work
      • penalty payments and shift allowances
      • directors' fees
      • remuneration for time not worked
          holiday pay
          sick pay
          pay for public and other holidays
          other paid leave
      • worker's compensation paid by the employer
      • leave loading.

8.20. Employee cash income excludes severance or termination pay which is classified as a lump-sum receipt and included with capital transfers received. It excludes allowances paid by an employer purely to cover the cost of work-related expenses (e.g. electoral allowance for MPs). It also excludes pension payments from unfunded schemes paid to former employees which are included in transfer income.

(b) Employee income in-kind

8.21. Employee income in-kind includes:

      • goods or services
      • transport
      • telephone
      • holiday expenses
      • medical expenses
      • housing
      • low-interest subsidy on finance
      • shares
      • union dues/professional association
      • electricity
      • club fees
      • child care/education expenses
      • other.

(c) Employer contributions to pension and superannuation funds

8.22. As noted previously, 'employer contributions to pension and superannuation funds' differ from other components of employee income in that they are not available for household consumption. Instead, the contributions are seen to be immediately disbursed by the household into household saving.

8.23. Employees comprise persons working for an employer or working for their own corporate enterprise (limited liability company).

Classification

8.24. Employee income is classified according to the type of employee, and whether the income is in cash or in-kind.

(a) Employee income:

      • working for employer
      • working for own corporate enterprise.

(b) Employee income:
      • cash
      • in-kind
      • employer contributions to superannuation/pension funds.

Primary income: Entrepreneurial income

Definition

8.25. Entrepreneurial income is the income that accrues to persons or households as owners of, or partners in, unincorporated enterprises.

8.26. Because the enterprises are not incorporated, the householder and the enterprise form a single legal entity. All of the profits of the enterprise are therefore assumed to be disbursed to the owners. Similarly, if the enterprise suffers a loss, the household, as the owner, is responsible for this debt. Losses incurred by unincorporated enterprises are classified as a negative income flow.

8.27. The concept of 'profit/loss' used for entrepreneurial income is different from the concept of gross receipts used for other components of primary income. This profit/loss, also known as net entrepreneurial income, consists of the value of the gross output of the enterprise after the deduction of operating expenses and an allowance for depreciation of assets used in producing goods.

8.28. Gross output comprises the value of goods and services produced by the enterprise for the market, for provision to employees free or at subsidised cost or for own consumption.

8.29. Operating expenses comprise the following:

      • labour costs in the form of wages, salaries and supplements
      • the value of raw materials purchased
      • the repair or maintenance of equipment (including vehicles)
      • the purchase of fuel
      • indirect taxes
      • interest paid in connection with the business, and
      • rent paid for buildings and land used in the business.

8.30. Depreciation is the value of capital consumed in the productive activity. An allowance for this is subtracted from the receipts of the business in order to allow for entrepreneurial income to conform with the broad definition of income that defines income as receipts that exclude the running down of capital.

Classification

8.31. Entrepreneurial income may be classified as:

      • farm income
      • non-farm income.

8.32. This distinction may be useful in analysis given the added difficulty of collecting data on farm produce consumed and given the wider fluctuations in farm income from year to year.

Comments

(a) Negative income

8.33. As indicated above, the income of an unincorporated enterprise will be negative when the operating expenses and depreciation are greater than the gross receipts. This means that not only does the enterprise not make any profit, but that even to cover costs the enterprise must be either drawing on assets or incurring a debt.

(b) Accuracy and suitability of the measure

8.34. Data on entrepreneurial income is often the most unsatisfactory of all income items collected in household surveys. This 'unsatisfactory' nature of the data stems from two different considerations:

      • Accuracy - whether the data is an accurate assessment of the profit or loss of the enterprise, and
      • Suitability of the measure - whether this profit/loss is a good reflection of the resources available to the entrepreneur in determining the household's standard of living.
Accuracy

8.35. It is often the case that the record-keeping practices of the enterprise are inadequate. Many of the self employed are not in a position to provide figures for 'gross output', 'operating expenses' and 'depreciation'. Even if adequate records are kept, they are often not kept in the home where the respondent is interviewed.

8.36. A common practice is to ask respondents for their taxable income given that they are required to submit a tax return once a year and this contains the approximate information needed.

8.37. The questions then remains as to how different is the taxable income from the 'accounting income' that may be a better reflection of the enterprise's true profit or loss.

8.38. Briefly, the two income measures differ slightly both in definitional terms and in terms of timing of expenses and depreciation. No quantification of these differences has been carried out by the ABS.

Suitability of the measure

8.39. The second question is whether either of the above measures gives an accurate reflection of the resources available to the household for consumption and saving. Of particular importance may be whether some of the cash receipts of the business are used for personal consumption before they are entered into either set of accounts.

(c) Alternative measures

8.40. Given the often unsatisfactory nature of the above measures of profit/loss, it is sometimes suggested that a better measure to collect may be the 'withdrawals' that the entrepreneur makes from the enterprise. The suggestion is that this may be a better indicator of the household's standard of living and may better match the household's consumption patterns. This suggestion was most recently made at the Fifteenth International Conference of Labour Statisticians in Geneva (ILO 1992).

8.41. However, the ICLS finally concluded (helped by the submission from the ABS) that:

      'The fact that the own-account worker might actually withdraw the totality of that income (or even more) for consumption or retain part of it in the enterprise for future investment and savings should not be taken into account in measuring income from self-employment.' (ILO 1993)

8.42. The stance taken in this paper is that, conceptually, it is not appropriate to attempt to impose separate identities on the self-employed person and the enterprise when these two identities in fact form a single legal entity.

8.43. Therefore, where consumption of the household is higher than the income received, then that household must be financing that consumption either by drawing on capital or incurring a liability. Such dissavings by entrepreneurial income households are not included in the concept of income as defined by the framework.


Property income

Definition

8.44. Property income is defined as the net receipts accruing in the current reference period as a result of ownership of assets. It comprises returns from financial assets (interest, dividends), from non-financial assets (rent) and from royalties. Property income excludes the income imputed for services provided by owner-occupied dwellings and services provided by consumer durables which are included in other non-market income.

Classification

8.45. Property income is classified as:

      • Interest
      • Dividends
      • Rent
      • Royalties
      • Income on employee equity in pension funds
      • Other property income.


Property income: Interest

Definition

8.46. Interest consists of receipts from deposits (including term deposits) with banks, building societies, credit unions, and other financial institutions. Also included is interest received from government bonds/loans and securities, debentures and interest received from personal loans to others outside the household.

Property income: Dividends

Definition

8.47. Dividends comprise income received from investments in corporate equities, such as ownership of shares. Dividend income includes bonus shares received. Bonus shares are deemed to be received and saved as one notional transaction. They add to the value of the household's assets and are not available for consumption.

Property income: Rent

Definition

8.48. Rent comprises payments received from property other than owner-occupied dwellings. It includes income from lodgers and from others who are sub-letting parts of the dwelling, but excludes income from boarders who are counted as members of the household.

8.49. Rent includes that rent received by unincorporated enterprises where it is separable from other enterprise receipts.

8.50. Analogous with entrepreneurial income, rent is net of operating expenses such as repairs and maintenance and interest payments. It is also net of depreciation.

Property income: Royalties

Definition

8.51. Royalties comprise payments for the use of patented or copyright materials, etc.

Property income: Returns on equity in pension funds

Definition

8.52. Property income includes interest and other income paid to pension funds on the employee's equity while that employee is still working. This income is deemed to be received and saved as one notional transaction, increasing the value of financial assets during the period. It is therefore not available for consumption.

8.53. On the practical level, this item would be very difficult to collect in household surveys.


Transfer income

Definition

8.54. Transfer income is defined as regular and recurring receipts other than those derived from primary or property income. They differ from primary and property income in that they do not involve a 'quid pro quo' e.g. a return for labour, a return for use of assets. Therefore, transfer income is classified as 'non-market' income.

8.55. Transfer incomes often result from an effort of redistribution, either privately (e.g. child support from another household, private pensions) or by government (e.g. a wide range of social security pensions and benefits paid by various government departments with responsibility for income support and welfare). They may result from a contractual arrangement e.g. in the case of payments by a funded or defined benefit pension scheme, or on a non-contractual basis.

8.56. Income from transfers may be received either in cash or in-kind, the latter being imputed to a cash equivalent.

8.57. Conceptually, current transfers should be distinguished from capital transfers by the criterion that they are paid out of the income of the donor and considered to be income rather than an addition to capital for the recipient. However, this criterion would be almost impossible to implement in household surveys.

8.58. On a practical level, current transfers will be distinguished from capital transfers in the ICW by the criterion that they are regular and recurring receipts rather than one off, lump sum receipts which will be classified as capital transfers received. It should be remembered, however, that the regular/recurring criterion should be used as a rule of thumb rather than a strict distinguishing criterion.

Classification

8.59. Transfer income is classified as:

      • Social security cash pensions, benefits and allowances
      • Other pension and life assurance annuity benefits
        • unfunded pensions paid to former employees
        • funded private pensions and life assurance benefits
      • Social security in-kind concessions
      • Other government in-kind transfers
      • Other current transfers
        • cash
        • in-kind.

Transfer income: Social security cash pensions, benefits and allowances

Definition

8.60. Social security cash pensions, benefits and allowances are regular, recurring receipts paid by government to persons, families or households under the social security and related government programs. They include benefits paid to veterans and their survivors, study allowances for students, etc. They include pensions paid to residents by overseas governments e.g. paid to former migrants who retain eligibility for pensions provided in their country of origin.

8.61. They are usually a cash response by government to a specific claim or entitlement - e.g. age pension, disability allowance, sole parenthood benefit. The government cash responses have immediate income support objectives and, in Australia, are usually defined according to means tested eligibility criteria.

Classification

8.62. These transfers are classified according to the purpose for which they are granted.

8.63. Social security cash pensions, benefits and allowances:

      • pensions for aged persons
      • benefits for unemployed persons
      • benefits for sick and disabled persons
      • benefits for lone parents, widows and dependent spouses
      • benefits for families with children
      • special benefits
      • benefits for study purposes
      • other pensions, benefits and allowances.

8.64. These transfers should also be classified according to whether they are paid by the Australian (or State) governments or by overseas governments. They may also be classified according to the government authority responsible for the payments e.g. Department of Social Security, Department of Veteran's Affairs, Department of Employment, Education and Training.

Comments

8.65. In Australia, the bulk of government cash transfers are paid by the Commonwealth Government in the form of pensions and benefits which constitute a non-contributory scheme.

Transfer income: Other pension and life assurance annuity benefits

Definition

8.66. Other pensions and benefits are defined as all pensions and regular superannuation payments that are made other than under the government's social security and related schemes. They include annuities from life insurance paid to survivors.

8.67. These pensions may be paid from funded or unfunded schemes and this distinction is important for conceptual and practical reasons.

(a) Private funded schemes

8.68. These schemes cover pension funds in which contributions are made to the insurance enterprise or fund.

8.69. Pensions received from these schemes constitute a running-down of the household's savings. Strictly speaking, they should be excluded from the definition of income by virtue of the criterion that states that income excludes receipts derived from the running down of assets.

8.70. The ABS, however, takes a more practical view of the pension payments (as does the SNA93). The ABS recognises that households do not classify these pensions as dissaving but as income. In addition, for many households they are the only source of income they receive.

8.71. The exclusion from income of private pensions from funded schemes would severely affect analysis of the distribution of economic well-being, particularly with relation to the elderly. For this reason, they are classified as current income.

8.72. This practice will, however, result in double counting at the aggregate household level given that employer contributions have also been included in current gross income. This should be taken into account in analysis, particularly if life-cycle income is being considered.

(b) Unfunded pensions

8.73. These are schemes in which employers pay insurance benefits to their employees, ex-employees or their dependents out of their own resources without creating a fund. These are usually government schemes such as that provided for Commonwealth public servants by the government.

8.74. Pensions from these schemes are treated as current transfer income. They can be viewed as a 'deferred' income paid out by virtue of past employment.

Classification

8.75. Conceptually, it is desirable to distinguish between 'other pensions and benefits' paid out of funded or unfunded schemes. At a practical level, this may prove difficult.

Transfer income: Social security in-kind concessions

Definition

8.76. Social security in-kind concessions refer to all in-kind concessions received by persons in special eligibility categories e.g. recipients of social security and other related pensions and benefits, aged persons or students. These usually comprise goods and services provided free or at subsidised cost e.g. transport and pharmaceutical concessions, and an imputed value of the service or goods should be derived. The services or goods may be delivered directly by government or via private organisations and authorities whose services are subsidised by government - e.g. subsidised transport for pensioners delivered by private transport companies. Includes benefits provided by all three tiers of government. These concessions are over and above the general subsidy received by all users of the good or service under consideration. (See also the next topic, Other government in-kind transfers.)

Classification

8.77. These pensioner concessions may be classified according to the nature of the concession (e.g. transport, phone etc) or the government authority subsidising the service.

Transfer income: Other government in-kind transfers

Definition

8.78. These transfers are defined as indirect benefits provided by government spending other than those distributed as concessions to special eligibility groups under the social security and related schemes. They cover a broad range of benefits such as health, education, housing, welfare services, etc. All persons and households that make use of the services , e.g. medical and hospital benefits for the ill, schooling for children and adults, receive these indirect benefits. The value of the benefits received relates to the level of use. Special eligibility groups may be entitled to an additional level or type of benefit in any of these broad areas. (See the previous topic, Social security in-kind concessions.)

8.79. The scope of these benefits is very wide-ranging, embracing all 'individual consumption goods and services' as defined by the SNA93. These include goods and services, provided by government to households, in areas such as health, education, housing and welfare. Excluded from scope are the 'collective consumption services' such as public administration, defence, environmental interventions, etc.

Classification

8.80. The classification of other government in-kind transfers is as follows:

      • education benefits
      • health benefits
      • housing benefits
      • welfare
      • other.

Transfer income: Other current transfers

8.81. This broad category covers all other current transfers in cash or in-kind. It comprises transfers between households and transfers from private organisations to households. It covers both compulsory transfers (e.g. some child support) and non-compulsory transfers.

Classification

8.82. Other current transfers are classified according to whether the transfer is paid by a private organisation or by another household:

      • Other current transfers:
      • From private organisations
        • private scholarship or study allowance
        • insurance payments (regular)
        • gambling receipts (regular)
        • other
      • From other households
        • child support
        • regular receipts from inheritances and trust funds
        • gifts or financial support from other households
        • other.

Comments

8.83. It should be noted that under the present system in Australia, child support may be paid on a voluntary basis or via compulsory collection through the taxation system. It remains, however, a transfer from household to household even though the payment may be backed up by law and/or paid via the Taxation Office or some other third party (see also Current transfers outlaid (excluding taxes) in Chapter 9).

8.84. It should be noted that the inclusion of transfers between households will result in a double-counting of household income at the aggregate level. Adjustments will therefore need to be made to aggregated household income for some analyses.


Other non-market income

Definition

8.85. Other non-market income is defined as the imputed value of goods and services, other than transfers, consumed by the household and provided other than via the market place. These differ from goods and services received as in-kind transfers in that they are provided from within the household, either as a result of ownership of durable goods and dwellings or via work carried out at home by household members. As for income from unincorporated enterprises and rental property, other non-market income is net of depreciation of household assets used to produce the income.

8.86. To be included in other non-market income, the goods and services provided must be similar to those available for purchase/hire in the market place.

Classification

8.87. Other non-market income is classified as follows:

      • value of unpaid household work
      • imputed rent of owner-occupied dwelling
      • value of services provided by consumer durables.

Other non-market income: Value of unpaid household work

Definition

8.88. There are considerable difficulties in giving a satisfactory definition of what constitutes unpaid household work. These difficulties include setting the boundaries on the scope of activities to be included and, in particular, in setting boundaries between work and leisure.

8.89. In defining unpaid household work a widely accepted principle for determining the scope of unpaid household work has been adopted. This principle is the 'third person' or 'market replacement' criterion originally stated by Reid in 1934 and requoted by many writers:

      'Household production consists of those unpaid activities which are carried on, by and for the members, which activities might be replaced by market goods or paid services, if circumstances such as income, market conditions and personal inclinations permit the service being delegated to someone outside the household group'.

8.90. The criterion of the activities being 'by and for the members' means that activities such as volunteer and community work are excluded. (These activities are, however, included in the broader definition of total unpaid work discussed in the ABS occasional paper Unpaid Work and the Australian Economy, 1992.)

Classification

      • food and drink preparation and clean-up
      • laundry, ironing and clothes care
      • other housework
      • gardening, lawn care and pool care
      • pet, animal care
      • home maintenance, improvement and car care
      • household paperwork, bills, etc
      • transport and associated travel
      • child care
      • purchasing goods and services, and associated travel.

Other non-market income: Imputed rent from owner-occupied dwelling

Definition

8.91. Imputed rent from owner-occupied dwelling is defined as the imputed value of the services of (mainly) shelter provided to the household by the household's usual residence after deduction of expenses and depreciation.

Other non-market income: Value of services provided by consumer durables

Definition

8.92. This item is defined as the value of services provided by all household consumer durables (other than the owner-occupied dwelling), after deduction of depreciation and the cost of maintenance and repairs.

8.93. Consumer durables are defined as those household items that are deemed to provide continuous or repeated use over a period of at least one year. They include cars, washing machines, refrigerators, etc.

Classification

8.94. The classification of services provided by consumer durables will be left until further work has been carried out on this item.


Net disposable income

Definition

8.95. Net disposable income is defined as gross income minus the value of direct taxes and compulsory fees and fines.

Comments

8.96. For some analyses it may be desirable to deduct compulsory private transfers (along with taxes) from the gross income of households to derive a measure of net disposable income after all compulsory transfers have been dispersed. This would also overcome the problem of double counting of these transfers at national aggregate level noted earlier in Other current transfers, paragraph 8.84.





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