Residential Status For Tax Purposes And Taxability Of Foreign Income In Essay.

Jack Pondage's Residential Status

This assignment comprises two problem questions. These require students to  apply legal principles, cases and legislation to problem questions

Jack Pondage at all relevant times held a German passport.  From the time of his first visit Australia in 2007 until the end of the 2018 income year, he held a visa which permitted him to live and work in Australia.

During the time he was in Australia, Jack worked under contract as a marine engineer on a sea-going barge owned by an Australian company.  Subsequently, the barge was leased to a Malaysia-based company, Ocean Development Ltd (OD), for use in carrying out work in China.  Jack accepted employment with OD and left Australia on 8 July 2017, leaving his son and wife in Australia.  He worked for Ocean Development Ltd for nine months in China and earned AUD $90,000.  He then terminated his contract and returned to Australia where he stayed for the rest of the income year.  On his arrival back in Australia he entered into a partnership business with his wife.

Accommodation provided for Jack in China by his employer was of a temporary or transitory nature in the form of single men’s quarters or barracks.  Meals were also provided.  Ocean Development Ltd.’s office in Malaysia paid Jack’s wages into his bank account in Australia, after deducting tax required to be paid in Malaysia.  Jack paid no income tax in China.  Jack’s assets in Australia are his home in Sydney, an investment residential unit in Randwick, a super policy with AMP, listed shares, bank accounts and membership of a local golf club. Jack intended to be absent from Australia for approximately nine months and was in fact away for that period only.

For the 2017/2018 tax year:

• Is Jack a resident or non-resident of Australia? Refer to the relevant legislation and cases.
• Determine the source of income Jack received while he was working in China? 

On 10 July 2017, Timothy Tower was transferred to the Singapore office of his company, Global AIH Ltd, for five years.  His wife Eliza accompanied him to Singapore.  In Singapore they lived in a house owned by the company and leased their Sydney residence.  While residing in Singapore Eliza borrowed $100 000 from the Commonwealth Bank on 1 December 2017, to fund the purchase of 50 000 shares in Global AIH.

During the 2017/2018 tax year Eliza received $5 000 as her share of net rental income (after deductions) from the lease of their Australian home, and $2 500 in fully franked dividends from Global AIH.  She incurred no other expenses in deriving the rental income, but her interest payments on the Commonwealth Bank loan amounted to $5 650.

Advise Eliza Tower for the Australian tax consequences of these transactions. (Hints: you need to do some research on the tax consequence of dividends paid to a resident and non-resident)

Issues 

The assessment of income is based on the residential status of the person. The income tax assessment act 1997 specifies the several provisions related with the changeability of the income tax in case of a resident or non-resident person of Australia (Wilkins, 2015). The present study revolves around determining the residential status of the person named as Jack. Jack has the visa from his first visit Australia in 2007 until the end of 2018 income year. Jack is working as a marine engineer on a seagoing barge owned by an Australian company; subsequently, the barge was leased to a Malaysian company for use in carrying out work in China. Jack accepted the employment and left Australia on 8 July 2017. However, his son and wife remain in Australia. Further, he terminated the contract return to Australia after giving none month services in China. In China, the accommodation provided by the company was in a temporary nature. In Australia, he owned the residential investment unit.

It is possible for the person that he/she may consider as the resident of the two countries at the same time. It generally happens in a situation where the person is working in another country for more than 183 days and whose permanent residence in their home state (Burkhauser, Hahn, and Wilkins, 2015).

The income tax is charged on the basis of the residential status of the person.  The Income Tax Assessment Act 1997 defines the norms and regulations for ascertaining the residential status of the person. As per the Income Tax Assessment Act 1936, subsection 6(1), a person is regarded as the resident of Australia, if he/she lives in Australia in the ordinary sense (Chardon, Freudenberg, and Brimble, 2016). As per the case law R v Hammond (1852), place of residence is the place where the person lives with his family. The taxation ruling 98/17 of the income tax states the residential status of the person who coming to Australia such as tourist, migrants, and students studying in Australia, pre-arranged employment contract and many others and prescribed the conditions in which the person is regarded as the resident of Australia (Richardson,Taylor, and Lanis, 2015).  The residential status is determined by considering the overall situation of the individual, which includes the following aspects –

• The reason for living in Australia by the person.
• The extent to the commercial transaction, business and services established in Australia.
• The possession held by the individual in Australia (Kudrna, Tran, and Woodland, 2015).
• The extent to which individual is connected with the social activities in Australia.

Moreover the normal meaning of the word ‘resides’ is defined under subsection 6(1) of the income tax assessment act 1936.  If the person does not satisfy the condition prescribed under the common law test of residency, then also he/she may consider the resident of the Australia if he/she satisfies any conditions given under the statutory test of residency, which is defined under subsection 6(1) if the Income tax Assessment Act 1936 (Boyd, 2018).

Taxability of Jack's Foreign Income

(a)Residency according to ordinary concept

Whether the individual is regarded as the resident or non-resident, is based on several factors. It is the question of fact, which includes the following aspects –

• The effects of the individual are preserved in Australia or in the country of origin.
• The place of permanent residence is in the country of origin and is accessible by him /her as required (Matthew, 2018).
• Whether the individual carried out any activity in the country of origin.
• If the person is not living in Australia because of the commercial and business purpose, then it is not the sufficient condition that he/she not considered as the resident.
• The extent to which the bank account transactions or any possession held by the individual in Australia.
• Whether any commercial or business is established in Australia by the migrants (Enticott, & et al. 2016).

All the above aspect should be taken into account for determining the residency status of the person.

(b)The domicile test

If the person possesses the permanent residence in Australia, then he/she considered as the resident of Australia, except if the commissioner is satisfied that the person owns the permanent house on any other country. According to the Domicile Act 1982, the person gets the residency by the choice if the individual build the house for an indefinite period in Australia (Henderson V Henderson 1965).

(c)The 183days test

A person is considered as the resident of Australia if he/she resides in Australia for more than 183 days in a tax year either for a continuous period or in parts.

(d)The superannuation test

The superannuation test is regarded as the alternative method of an ordinary test of residency. This method is generally applicable to the person who works outside Australia for the government of Australia. If the person because of the superannuation acts 1976 working outside Australia then also he/she comes within the category of the resident of Australia. Further, the spouse and his children below the age of 16 years are also regarded as the resident of Australia.

Apart from the above provision, the government of Australia also entered into the double taxation avoidance agreement with many countries, which leads to the avoidance of the tax twice. In other words, it can be said that double taxation avoidance agreement leads to the avoidance of the double tax by the taxpayer on their income generated from the residency country as well as from the source country.

The residential status of Jack for the year 2017-18

In the present case, it is given that Jack holds the visa of Australia from 2007 to 2018. The manner in which Jack arranges the social and economic activities of life is an important factor in ascertaining the residential status. In the residency test, the conditions are determined by having regard to all situation and relevant facts. Further, the intention and purpose of presence, social or living arrangement, possession and location of the assets and connection of the business and family are the factors which are considered for the residential status. In the given study, since the Jack hold the visa of Australia for the year 2017-18 also.  The family of the Jack live in Australia, along with this he also holds the assets in Australia which the residential unit. By considering the above factors, it has been concluded that Jack is considered as the resident of Australia for the year 2017-18. The issue is that the jack worked in China did not make any impact on the residential status; he is regarded as the resident of Australia.

Tax Consequences for Eliza Tower

Sources of income of jack while working in China

As per the rule describes in the income tax assessment act, the resident of Australia are generally taxed on their whole income whether it is generated in Australia or outside Australia. However, in the case of the foreign resident, the income tax is charged only on the Australian source of income which is derived and received in Australia. In the given study, the Jack is considered as the resident of Australia. Therefore tax is charged on the all income whether it is earned in Australia or outside Australia. Further, it is given that Jack received the salary in the bank account of the Australia on which the tax is already deduced as per the norms of Malaysia. Since the government of Australia entered with the double taxation avoidance agreement with the many countries, therefore the person is not required to pay the tax on the same income twice. Thus, the tax which is already deducted, the jack can avail the credit of that tax at the time of computing the income tax levy in Australia.

Conclusion 

On the basis of the above analysis, it has been concluded that Jack is considered as the resident of the Australia and income earned from the Ocean development Ltd, is charged in Australia and he can avail the credit of the tax already deducted in Malaysia because of the double taxation avoidance agreement.

Issue 

Different provisions are defined for the taxability of the dividend paid to the resident or the non-resident person of Australia (Ainsworth & et al. 2016). In the given study the person named as Timothy tower transferred to the Singapore office of Global AIH Ltd, for five years. His wife also went there. She received the $ 5000 as rental income from the house situated in Sydney and $ 2500 in fully franked dividend from Global AIH Ltd. She incurred $5650 as interest payment for the funds borrowed for purchasing the shares of Global AIH Ltd.

The income tax is charged as per the resident status of the person. The residential status is based on certain rules, which are already described in the earlier problem. If the person is resident of Australia, then the income tax is charged on the Australian sourced income as well as income generated outside of Australia (Ainsworth & et al. 2018). In the case of FCT v Mitchum(1965), the income generated by the Mitchum is not considered as the Australian sourced income, therefore, it is not taxable for the non-resident. The non-resident of Australia, also receives a dividend from the Australian resident company. However the tax treatment is distinct from the resident shareholders (Ainsworth & et al. 2016). If the person is non-resident of Australia, the franked amount of dividend paid by the Australian resident company is not subject to withholding tax and Australian tax.  Moreover, the withholding tax is a levy on the unfranked amount of dividend. Further, the person cannot claim any franking tax offset for the franked dividend (Cannavan, and Gray, 2017). Along with this, he/she cannot entitle any franking credit related to franked dividend to decrease the amount of tax chargeable on another source of Australian income (McClure, & et al. 2018). Further, in the Australian tax return, the person should not include the amount of any franking credit or franked dividend.

In general section 51 of the act says that deduction is allowed if the outgoings are incurred for the gaining and producing the assessable income and the same judgment was given in the legal case of Evans V FCT (1986). However in case of payment of franked dividend to the non-resident of Australia, any expenses incurred for generating the dividend which is not assessable to Australia, cannot be claimed by the person (Mayo, 2018).

In the given case Eliza tower is considered as the non-resident of Australia as she went to Singapore on 10 July 2017 for the five years. The income received from leasing the house in Sydney amounted $ 5000 is regarded the Australian sourced income. Therefore it is taxable in Australia. Further, she also received the $2500 in fully franked dividend from the Australian residence company. As per the above provisions of the dividend, $2500 is not subject to Australian tax or any withholding tax (Nguyen, 2016). Moreover, she also incurred the expenses of $ 5650 as interest in borrowing taken from the bank and this fund is used for buying the shares of the company. However, she is not entitled to claim any expenses incurred for getting the dividend which is not assessable to Australia.

Conclusion 

On the basis of the above analysis it has been observed that for the non-resident of Australia, the Australian sourced income is taxable (Stewart, 2017). Further, the franking dividend received by the non-resident is not subject to Australian income and withholding tax (McLaren, and Cormick, 2018).

References 

Ainsworth, A., Fong, K.Y., Gallagher, D.R. and Partington, G., 2016. Institutional trading around the ex-dividend day. Australian Journal of Management, 41(2), pp.299-323.

Ainsworth, A., Partington, G. and Warren, G.J., 2016. The impact of dividend imputation on share prices, the cost of capital and corporate behaviour. JASSA, (1), p.41.

Ainsworth, A.B., Fong, K.Y., Gallagher, D.R. and Partington, G., 2018. Taxes, Order Imbalance and Abnormal Returns around the ex?Dividend day. International Review of Finance, 18(3), pp.379-409.

Boyd, M., 2018. Gender, refugee status, and permanent settlement. In Immigrant Women (pp. 103-124). Routledge.

Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Cannavan, D. and Gray, S., 2017. Dividend drop-off estimates of the value of dividend imputation tax credits. Pacific-Basin Finance Journal, 46, pp.213-226.

Chardon, T., Freudenberg, B. and Brimble, M., 2016. Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, p.321.

Enticott, J.C., Meadows, G.N., Shawyer, F., Inder, B. and Patten, S., 2016. Mental disorders and distress: associations with demographics, remoteness and socioeconomic deprivation of area of residence across Australia. Australian & New Zealand Journal of Psychiatry, 50(12), pp.1169-1179.

Kudrna, G., Tran, C. and Woodland, A., 2015. The dynamic fiscal effects of demographic shift: The case of Australia. Economic Modelling, 50, pp.105-122.

Matthew, P., 2018, April. Safe for whom? The safe third country concept finds a home in Australia. In The Refugees Convention 50 Years on: Globalisation and International Law(pp. 133-172). Routledge.

Mayo, W., 2018, July. Time to upgrade Australia’s company tax system from imputation to integration. In Australian Tax Forum (Vol. 33, No. 4).

McClure, R., Lanis, R., Wells, P. and Govendir, B., 2018. The impact of dividend imputation on corporate tax avoidance: The case of shareholder value. Journal of Corporate Finance, 48, pp.492-514.

McLaren, J. and Cormick, R., 2018. Dividend imputation: a critical review of the future of the system. In Australian Tax Forum (Vol. 33, No. 1, p. 141). Tax Institute.

Nguyen, H.K., 2016. A question of the integrity of the dividend imputation system when corporate tax rate changes: An Australian study. J. Austl. Tax'n, 18, p.43.

Richardson, G., Taylor, G. and Lanis, R., 2015. The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, pp.44-53.

Stewart, M., 2017. Australia’s Hybrid International Tax System: Limited Focus on Tax and Development. In Taxation and Development-A Comparative Study (pp. 17-41). Springer, Cham.

Wilkins, R., 2015. Measuring income inequality in Australia. Australian Economic Review, 48(1), pp.93-102.