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Definition

Definition

The concept currently used to collect income band information is gross annual income. This is defined as income received by the individual, family or household before the deduction of income tax, levies or withholding payments, and includes such items as income sourced from wages and salaries, self-employed income, property and rental income, dividends and investments, social insurance, superannuation, government assistance schemes and private transfers such as child support.

It does not include social transfers in kind such as public education or government subsidised health care services. Also excluded are reimbursement of expenses, money received from borrowing, contingent income and unrealised income.

Irregular payments such as lump sum inheritance payments are excluded.

Operational Issues

Detailed income and income bands
Collecting income data has historically been judged as a sensitive topic for those responding. When detailed income data is not the primary objective for a collection, the use of income bands is seen as more appropriate than collecting the actual dollar amount. However, the use of income bands does not always address the sensitivity that respondents may have with the income topic. Some reasons why the income band question is not well answered are:

  • social aversion, including a perceived connection to government departments monitoring individuals
  • embarrassment due to low income or reticence about revealing high incomes.

Other reasons why the income band question is not well answered that may affect the quality of the data include:

  • those answering income on a proxy basis may not know the incomes of those they are responding for. This particularly affects people in hospitals and retirement homes
  • pooling of household incomes, for example in family businesses and shared investments, which means it is difficult for the respondent to provide individual income
  • individuals may not be involved with the management of income in the home, or not know the gross amount received from a benefit or pension
  • individuals receiving income from multiple sources during the year may have difficulty assessing their total annual income from all sources
  • individuals whose income has varied substantially throughout the year, for example, they have moved between employment and non-employment during the year and may have difficulty calculating their total income for the year.

Where the survey requires detailed information then the actual dollar value of gross income should be sought.

Explanatory Notes

Income bands provide:

  • for the collection and output of gross income for a stated period
  • data comparability between different collections when using standard income bands
  • the ability to derive family and household income band data.

Income bands vary in size based on socio-economic and statistical factors. Policy makers and researchers are interested in particular population groups and the bands have been designed to reflect this.

A question on source of income may be asked immediately before the income question to prompt individuals about the different sources they have received income from during the year. This helps to ensure that income from these sources is included in their response to the income question.

Why annual income is collected
Annual income is collected as it has the advantage of smoothing short term income fluctuations and individual and irregular payments. It may also provide a better indication of economic wellbeing than using measures for a point in time. Additionally, annual income provides a practical reference period, given that individuals with unincorporated businesses have to assess their annual income for taxation purposes. There are some disadvantages in using annual income, such as:

  • the data are from the last year and may not reflect current trends or practices
  • people have difficulty recalling the income received over a year, in particular those
    • with periods of employment, interspersed with unemployment, or not being in the labour force
    • in casual work
    • in short term contracts
    • remunerated on commission
    • in part-time work
  • income received in the previous financial year may not reflect socio-economic and other characteristics of the household at the time of collection.

Why gross income is collected
Gross income is collected because it is easier for respondents to supply and is more accurate than collecting net income. For the person providing income information it makes it easier for them to consult their wage receipts or Inland Revenue (IR) information. Gross income has the advantage of offering income comparability with other countries as each country administers taxes differently. Gross income is not affected by tax changes over time.

Net income is not often collected, as although people may be able to report net income after tax, deductions made after tax and before it is received may not be included, and respondents are often unable to estimate tax payable on all sources. Interest on assets or investments, if collected separately, normally has to be collected as net income.

Negative income (loss)
In principle, all incomes are required net of the expenses (except income tax) that are necessarily incurred in earning them. Some sources of income may have zero or negative value because they are ‘net of expenses’ measures. In practice, this only applies to self-employment income from a business and investment income resulting in negative income for individuals.

Why tax credits are included as income
Whilst technically tax credits should not be included in income, as they increase disposable income but not gross income, they are often perceived as income by recipients and it is difficult to prevent respondents counting them as income. As a result they may be included as income and it is not possible, in most cases, to know if tax credits have been included or not.

Specific sources of income
Some surveys may only require the collection of a subset of income, for example benefit income, rather than income from all sources. This may require aggregation or disaggregation of the standard income bands.

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