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1. Discuss if Edward is a tax resident of Australia during his absence from Australia.  You must make reference to the relevant legislation, rulings and case law.

2. Advise John of his tax consequences on the sale of the land. You must make reference to the relevant legislation and case law.  

Determination of Tax Residency Status

The Taxation system of Australia is governed by the Income Tax Assessment Act 1997, which prescribes all the rules, regulations for assessing the income of the individual. Tax residency is an important aspect with respect to the assessment of the income tax of the individual (Lombard, 2017). The determination of the tax residency status depends on the circumstances of the individual.  The present study focuses on the tax residency concept of the Australian Taxation system. Further, the income tax is levied only on the consistent and regular income generated from the business activity of the individual. Therefore, the determination of the assessable income of the individual should be as per the provisions provided by the Income Tax Assessment Act 1997 (Saez, 2017).The taxation system of Australia describes the conditions of ascertaining the tax residency status of the individual, only after fulfilling those conditions individual will be considered as a tax resident of Australia (Choudhary, Koester, and Shevlin, 2016). Moreover, the separate rules are prescribed in the Act with respect to the capital gain tax of the individual.

The determination of the Australian Tax residency is based on the fact and the circumstances of the individual while applying the certain laws and statutory tests. According to (subsection 6(1) of the Income Tax Assessment Act 1936 describes that, in general aspect, an individual is considered as a residence of Australia if the individual “resides” in Australia. Here the word resides is decided by considering the overall situation of the individual which includes the intention and the purpose of the residence of the individual in Australia. It is further, supported by the level of connection with the family of the individual or business and employment within Australia and the maintenance and location of the assets of the individual and the social and living arrangement of the individual (Clark, and Maas, 2016).

By considering the case law of Harding v Commissioner of Taxation [2018] FCA 837, if the individual does not satisfy the above test of residency, then the individual will be considered as an Australian Tax resident only if the individual satisfies the statutory residence test. The statutory residence test is described in the subsection 6(1) of the Income Tax Assessment Act 1936, which are as follows-

  1. The domicile Test- An individual will be considered as a resident of Australia under the domicile test if they have a domicile in Australia except the commissioner is satisfied that the permanent place of residence of them is outside Australia. Generally, the domicile means the country in which the individual is born unless the individual migrates to another country (Boyd, 2018). According to the Domicile Act 1982, if the person plans to build the house in Australia, definitely then that person obtains the domicile by choice.
  2. The 183 days test- An individual will be considered as a resident of Australia under the 183 days test if the person is present in Australia for more than 183 days, in a particular tax year. The presence of the 183 days may be continuous or irregular; it does not make the effect on the residency. However if the commissioner is satisfied that the usual place of that person is outside Australia and the intention of that person is not to take up residence, then the individual will not be considered as a resident even if the condition of 183 days test is satisfied (Sharkey, 2015).
  3. The superannuation test- this is referred to as a substitute for the ordinary test of residence. An individual will be considered as a resident of Australia under the superannuation test, when ordinarily they do not live in Australia, however if the individual is eligible employee for the purpose of the superannuation Act 1976, or the assessee is spouse or the child below the 16 years of age of such individual, then the individual is deemed resident under this test (Burgess, 2018).

Further, an individual may be considered as a temporary resident of Australia, if the individual holds a temporary visa granted provided by the provisions of Migration Act 1958 or if the person is not a resident Australian resident under the social security Act 1991 or if the spouse of the person is not a resident provided by the provisions of social security Act 1991.

Assessable Income

Further, it is also possible for the individual that simultaneously tax resident of the two countries, for instance, individual got the assignment from the other country and received income from that country but individual satisfies any one condition of the tax residency rule which is described above therefore individual is a resident of Australia. In this example, the individual is simultaneously the tax resident of Australia and the other country also. In this situation through the double tax agreement taxing rights of the countries can be ascertained (Cui, 2016). The government of Australia has entered into an agreement with the many countries by which the individual has not to pay the tax in both the countries. However, if the individual is the permanent residence of Australia then all the income whether it is generated in Australia and outside Australia, the tax will be charged in the Australia (Long, Campbell, and Kelshaw, 2016).

In the present study Edward was living with the parents in Australia, but for the purpose of the job, Edward went to Singapore for two years, and after completion of the two years, and afterwards he went to Europe for one year, and after that, he returned to Australia. In other words, Edward comes to Australia after a period of three years. But after return to home, Edward moved out of the parent’s house and lived in the rented apartment. For determining the tax resident status of the Edward during the absence from Australia, the above-described rules have to be applied.

According to the ordinary residence test, Edward will not be considered a resident of Australia since in general aspect Edward does not reside in Australia

Since Edward does not satisfy the ordinary residence test, therefore Edward will be considered as a resident of Australia only on the fulfilling of one or more conditions which are prescribed under the statutory residence test.

Under the domicile test, Edward will be considered a resident of Australia only if he did not migrate to any other country. Since in this study Edward migrated to Singapore for the employment, therefore the domicile test does not get satisfied by the Edward, and he will not be considered as a resident during the absence from Australia.

Further, the 183 days test is not applicable for the Edward for determining the tax residency status, because the study asks about the tax residency status during the absence from Australia, therefore under this test also Edward will not be regarded as a tax resident of Australia.

Capital Gain Tax

Apart from the above, Edward will be considered as a residence under the Superannuation test only if Edward is an eligible employee under the superannuation Act 1976. Since this condition did not satisfy, as the Edward was not the eligible employee under the superannuation act, therefore Edward will not be considered as a residence of Australia during the absence period from Australia.

From the above evaluation, it has been seen that Edward does not satisfy any condition which is prescribed under the statutory residence test. Therefore,Edward is not a tax resident of Australia during his absence, and the foreign income of the Edward will not be taxed in Australia.

According to the section VI of the Income Tax Assessment Act 1997, assessable income refers to the income generated from the ordinary income and the amount which is defined as the income under the income tax law. Further ordinary income consists of the income generated from the ordinary source such as by income from rendering personal services, income from property and income earned by the trading activities. Assessable income does not include the exempt income (Edmonds, Holle, and Hartanti, 2015). The determination of the inclusion of ordinary income at the time of calculation of the assessable income can be affected by the source of the income, resident status of the individual and the how income is derived (Burns, 2017).

 Section 6-5(2) of the Act 1997, stated that if the person is resident of Australia, then assessable income includes the ordinary income generated from directly or indirectly form all the sources within Australia or the outside of Australia, during the income year.

Section 6-5(3) of the Act 1997, stated that if the person is a foreign resident, then the assessable income includes the ordinary income generated from directly or indirectly from the sources within Australia

Section 6-10(4) of the Income Tax Assessment Act 1997, stated that if the person is resident of Australia, then assessable income includes the statutory income generated from directly or indirectly form all the sources within Australia or the outside of Australia, during the income year.

Section 6-10(5) of the Income Tax Assessment Act 1997, stated that if the person is a foreign resident, then the assessable income includes the statutory income generated from directly or indirectly from the sources within Australia

Since the income tax is charged on the income of the individual, therefore it is essential to determine the nature of the income. On the capital receipt, only to the extent of the gain is taxable and only at the time of disposal. Revenue receipt is the receipts which are generated from the ordinary business activities of the individual (Chardon, Freudenberg, and Brimble, 2016). Income tax is calculated on the profit of the person which is derived by the deducting revenue expenses from the revenue receipt. Further, as per the case of Federal Court of Australia (Heerey J) in Paykel v. FC of T 94 ATC 4176 if the transaction was made with the intention to earning the profit, then also it is included in the assessable income from the individual even though the transaction is not the ordinary course of business of the individual (Evans, Minas,  and Lim, 2015).

Statutory Residence Test

 As per the Australian taxation system, the concept of capital gain tax applies to the gain and loss occurred as an outcome of the capital gain tax event happening to a capital gain tax assets. However, it is subject to certain exemptions and condition (Jones, 2017). Generally capital gain or loss is the difference between the sales consideration and the acquisition cost. All the incidental expenses related to the sales and purchase took into account at the time of capital gain tax calculation. Capital gain tax is applicable at the time of disposal of the asset subject to the specific exemption (Huizinga, Voget, and Wagner, 2018).

Capital asset is sold by assessee after keeping the twelve months from the date of acquisition of asset then assessed has to pay only 50% of the capital gain tax, on the other hand, if the asset is sold by the assessee within the twelve months from the date of acquisition then assessed has to pay full amount of capital gain tax.

Section 104-5 of the Income Tax Assessment Act 1997 defines the capital gain tax law and specifies the capital gain tax event, treatment of gain or loss arising out of the event, adjustment of the cost base, and determination of the date to apply for the transaction.

The most common event is capital gain on disposal of assets; it arises if the proceeds from the sale consideration are more than the cost base. However, sale consideration is less than the cost of acquisition of asset than it results in a capital loss. Further, the date for the determination of the capital gain/loss is the date on which the contract for the sale has been made between the parties, even if the payment of sale consideration is realized later (Faccio, and Xu, 2015).

Generally, the cost base is the amount paid at the time of acquisition of an asset which includes all the incidental cost related to the purchase of the asset such as the commission of the agent. In the Income Tax Assessment Act 1997, three forms of the cost base of the asset has been stated which are-

  1. Reduced cost base- in this method certain cost excluded and certain extra reduction applied
  2. Cost base- in this method money paid for the transaction including the ancillary cost plus later capital cost of the addition
  3. Index cost base- it is applicable only when the asset was acquired before 21 September 1999. The cost base in indexed by the changes in consumer price index.

For calculating the capital gain tax, there are two methods are prescribed under the act which is given below-

  1. Reduced cost base- in this method, if the assessee has as a capital gain, then assessed is required to check whether there is a capital loss by applying the reduced cost base method. In this method indexation not applied to the element of the cost base. All the elements of the cost base is included except the balancing adjustment amount (Tran?Nam, and Evans, 2014).
  2. Indexed cost base method- in this method capital gain tax is calculated on the difference between the sale proceeds and the indexed cost base.

In the present study, John purchased land 30 years ago for $ 300000 and sold the land for $ 5 million. The receipt from the sale of land is not the revenue receipt as the receipt is not generated from the ordinary activities of the business (Saad, 2014). Further at the time of acquisition of the land the intention of the John was not to earn the profit from the sale of land. John purchased land because of the operation of the factory. Therefore it is the capital receipt for the John, and the calculation of the capital gain tax is based on the provisions of the Income Tax Assessment Act 1997, which are described above.

Since the asset is held for more than twelve years by the John from the date of acquisition, therefore, he has to pay only 50% capital gain tax.

Conclusion 

On the basis of the above study it has been concluded that the residency status of the person is determined by applying the ordinary residency rule and if this condition is not satisfied then apply the statutory rules of the residence which are domicile test, the 183 days test and the superannuation test. Further, in the case of the dual residency, provisions of the double tax agreement will be applied, as the person is required to pay tax only one time and in one country. Apart from this tax is levy only on the income of the individual which is generated by the ordinary activities of the income or which is specified to the Act. On the capital receipt, the capital gain tax is a levy, on which the separate provisions are prescribed under the act.

References 

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

Burgess, M., (2018). International tax and estate planning. Taxation in Australia, 53(1), p.26.

Burns, A., (2017). Midmarket focus: Tax considerations when doing business offshore. Taxation in Australia, 51(10), p.535.

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.

Choudhary, P., Koester, A. and Shevlin, T., (2018).Measuring income tax accrual quality. Review of Accounting Studies, 21(1), pp.89-139.

Clark, W. and Maas, R., (2016). Spatial mobility and opportunity in Australia: Residential selection and neighbourhood connections. Urban Studies, 53(6), pp.1317-1331.

Cui, W., (2016). Minimalism about Residence and Source. Mich. J. Int'l L., 38, p.245.

Edmonds, M., Holle, C. and Hartanti, W., (2015). Alternative assets insights: Super funds-tax impediments to going global. Taxation in Australia, 49(7), p.413.

Evans, C., Minas, J. and Lim, Y., (2015). Taxing personal capital gains in Australia: an alternative way forward. Austl. Tax F., 30, p.735.

Faccio, M. and Xu, J., (2015). Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), pp.277-300.

Huizinga, H., Voget, J. and Wagner, W., (2018). Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of tax base. Journal of Financial Economics.

Jones, D., (2017). Tax and accounting income-Worlds apart?. Taxation in Australia, 52(1), p.14.

Lombard, M., (2017). Everything producers need to know about tax. Stockfarm, 7(2), pp.8-9.

Long, B., Campbell, J. and Kelshaw, C., (2016). The justice lens on taxation policy in Australia. St Mark's Review, (235), p.94.

Saad, N., (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

Saez, E., (2017). Income and wealth inequality: Evidence and policy implications. Contemporary Economic Policy, 35(1), pp.7-25.

Sharkey, N., (2015). Coming to Australia: Cross border and Australian income tax complexities with a focus on dual residence and DTAs and those from China, Singapore and Hong Kong-Part 1. Brief, 42(10), p.10.

Tran?Nam, B. and Evans, C., (2014). Towards the development of a tax system complexity index. Fiscal Studies, 35(3), pp.341-370.

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