Tax Residency And Assessable Income: Case Analysis

Question 1: Residency

Harry Simpson held an English passport at all times throughout the year. When he first visited Australia in 2009 to the end of June 2015, he held a visa which allowed him to live and work in Australia.

During his time in Australia, he worked under a contract as an IT consultant for an Australian owned private technology company, Megabytes Pty Ltd. However, being an international franchise Harry was asked by the American based and owned division if he could take up a six month contract with in their busy New York Company. He accepted, leaving behind his wife and two children in their residential rental home in Toorak, Victoria. Harry became seriously ill whilst in New York and unfortunately had to terminate his contract after only two and a half months. In this time his employer provided him with accommodation and a meal allowance. All contracts were signed in Australia, and all wages were to be paid independently by either company when work was performed into Harry’s Australian bank account.

When he returned to his Toorak residence, he was still unwell and terminated his contract with Megabytes Pty Ltd in Australia. He had only completed nine months of a two year contract to date.

After a further three months, Harry decided to establish his own IT Consultancy Company, he employed his wife as a receptionist and planned to build up clientele and possibly stay in Australia for another two years if his Visa was re-approved in future.  

Given the facts above and with reference to case law and relevant sections of the tax act, argue your views as whether the taxpayer is considered a resident or non-resident of Australia. Furthermore, comment on his source of income, and whether the income earned in America would be exempt under ITAA36 s23AG, if he were an Australian resident.

Peter Miles owned rural property for 30 years. On 1^st July 2014 he sold the rural properties and vacant lands and retired on the Sunshine Coast, Queensland.

On the 1^st September that year he purchased half an acre of land near the beach for $800,000. In order to increase his retirement funds Peter appointed a builder to build six townhouses at a cost of $300,000 each. At the same time he asked his accountant for advice on expected rental return from each of the townhouses. The units were completed on 12^th June 2015.

Peter decided to live in one of the townhouses and he rented the others on a yearly basis. All the townhouses had a separate strata title. In December 2015 Peter sold three of the townhouses for $550,000 each.

He decided to then purchase another block of land in Queensland for $1,500,000 and intended to build and develop a combination of units and townhouses.

State your views and draw conclusions making reference to relevant case law and relevant sections of the tax act as to the tax implications of the above scenario. When referring to cases explain them clearly and in detail explaining how they apply to the given situation.

The central issue is to determine whether the taxpayer Harry is considered to be tax resident of Australia or not. Further, the objective is to comment on the source of income derived by Harry and the relevant tax treatment available on the amount of income received in America.

 In order to determine the tax residency status of the taxpayer s. 6(1) of Income Tax Assessment Act, 1936 would be taken into account that comprises three statutory tests (domicile, 183 days and superannuation tests). Further, tax ruling TR 98/17 comprises resides test also as an additional test. These tests highlight the various conditions and aspects related to the tax residency. Taxpayer who satisfies the conditions of any of these tests would be categorised as tax resident of Australia (CCH, 2013).

This test is applicable on taxpayers who are the executives or officers of Australian government and have to reside in foreign land in regards to complete the job obligations. The taxpayer would be classified as an Australian tax resident only when the taxpayer has actively contributed in specific superannuation scheme of Australian Government (Barkoczy, 2015).

This test is applicable only for those taxpayers who are Australian residents and are residing in other places of the world. The taxpayer needs to fulfil the following two conditions of domicile test (Woellner, 2013).

• Taxpayer must have valid Australian Domicile under the provisions of Domicile Act 1982.
• Permanent place of abode of taxpayer must be located in Australia.

Further, there are certain aspects related to the permanent place of abode of taxpayer which are highlighted in IT 2650. These are the aspects considered by the tax commissioner while deciding the permanent place of abode of taxpayer (Gilders et. al., 2016).

The taxpayer who is non-Australian resident (foreign resident) would be termed as Australian tax resident only when the below furnished conditions are satisfied (Deutsch et. al., 2016).

• Taxpayer has spent at least 183 days in Australia during the assessment year.
• The taxpayer must have intention to permanently settle in Australia.

It is noteworthy that if the taxpayer has resided in Australia for 183 days in an income year but does not have any plan to permanently settle in Australia, then the taxpayer would not satisfy this test and would not be considered as a tax resident of Australia (CCH, 2013).

There is no specified ruling or section provided the exact meaning of word “resides.” Therefore, the verdict of relevant case law and their arguments are taken into account to determine the tax residency status of taxpayer through resides test (Nethercott, Richardson and Devos, 2016).

• Intention or purpose of the taxpayer to reside in Australia
• Presence of any personal/ professional/ educational tie with Australia on the part of taxpayer
• Social and  living arrangement made by the taxpayer in Australia
• Citizenship of taxpayer would be an imperative aspect which would be taken into consideration by Tax Commissioner.

It is apparent from the given case facts that Harry is having English passport which means he is not a citizen of Australia. Also, there is no evidence to suggest that he has an Australian PR. Further, he has enacted a contract with a private technology company (Megabytes Pty Ltd) to work as an IT consultant. It can be seen from the facts that Harry is neither an Australian resident nor government officer. Therefore, it can be concluded that domicile test and superannuation test is not applicable. Hence, valid test would be resides test and 183 days test because Harry is a foreign resident and these tests are valid only for foreign resident.

Question 2: Assessable Income

It can be cited that irrespective of the facts that Harry has stayed or not for 183 days in Australia, it is apparent that he does not have the intention to permanently settle in Australia. Hence, he fails to pass this test.

It is apparent that Harry has strong professional tie with Australia. His wife and children are also residing in Australia, all his salary is also credited in Australian bank only. Also, he has intention to establish his own IT Consultancy Company and also to employ his wife. Further, he has also planned to build up clientele and to stay in Australia for another two years if his visa is approved. It can be concluded from the facts that Harry has strong personal and professional in Australia. Also, the reason of visit to Australia in terms of long term employment is also strong. Therefore, it would be said that Harry is an Australian tax resident under resides test.

Conclusion

It can be concluded that Harry is an Australian tax resident under the applicability of resides test. Therefore, the income from Australian source and American sources would be taxed under section 6-5(2) of ITAA, 1997. Also, the foreign income from serving abroad is not exempt under s. 23AG, ITAA 1936 as Harry is not a natural citizen of Australia (Sadiq et. al., 2016).

It is imperative to note that assessable income in accordance with ITAA 1997 may be derived under the following three sections (Barkoczy, 2015).

I. Section 6-5 (Ordinary Income)

II. Section 6-10 (Statutory Income)

III. Section 15-15 (Isolated  Transaction)

All the three above incomes would result in production of assessable income.

• In order for an income to be classified as ordinary income (Sec 6-5), it is imperative that the money derived should be on the basis of any profession or employment. Further, income generated from rent of any property or dividends on shares are also included within the ambit of ordinary income under this section (Keily v. FC of T83 ATC 4248 case). This case clearly indicated the constituents of ordinary income and thus is relevant (Sadiq et.al., 2016). It is apparent from the given details that Peter Miles is not in the development of land or real estate business. This is apparent from the fact that he had rural properties for the past 30 years but still did not engage in any construction work. Even though, there seems to be buying of land and developing the same, but the same seems to be driven by the intent on the part of taxpayer to have a constant stream of income in the post retirement days and does not imply that he implies to repeat such acts indefinitely driven by higher profit making. Thus, considering the above facts, it would be suitable to conclude that the given income derived from the sale of land and subsequent construction would not be ordinary income. However, the rent income which is being regularly derived from the townhouses which have been constructed would be considered as ordinary income under s. 6-5 because of their regular nature (Deutsch et. al., 2016).

• The statutory provisions that would be relevant to the given transactions would pertain to capital gains and the resulting CGT (Capital Gains Tax) as outlined in section 108-5, ITAA 1997. For the rural properties that the taxpayer (Peter) sold on July 1, 2014, there would be no capital gains obligations as the land was purchased before the threshold date of September 20, 1985 (Gilders et.al., 2016).  However for the other properties which the taxpayer buys in 2014, there would not be any capital gains levied as the income derived on account of the various townhouses constructed on the same have been carried out with the intention of profit. Capital gains are levied on capital assets which are purchased not with the primarily objective of developing and selling or renting (as per TR 92/3) (Woellner, 2014). Thus, the given transactions in the given case are outside the ambit of CGT and thus would not lead to creation of any statutory income.

• Assessable income may be generated even when the transaction is driven by profit motive but is non-regular or isolated type. This is covered under s.15-15 which prescribes that any transaction which is isolated but has been enacted with the intention of profit or gains would lead to creation of assessable income (CCH, 2013). The above understanding has been derived in the verdict of the Westfield Limited v. FCT(1991) FCA 97 and also AGC Investments Ltd v. FC of T 91 ATC 4180 case (Barkoczy, 2015). This is applicable in the given case where the taxpayer Peter seems to have specifically invested in the beach side land and other property with the prior objective of constructing townhouses with the intention of deriving a regular stream of income from townhouses and related sale of the same.

On the basis of the above transactions, it is apparent that the rural properties sold are exempt from CGT due to the asset being pre-CGT. Further, the townhouses are other construction which have been carried out on these properties are also exempt from the aegis of CGT as any resulting profit would be recognised as gains under s. 15-15 and would contribute to assessable income. Finally, the rent income being derived till the time there is sale of property would be recognised as ordinary income for tax purposes. 

References

Barkoczy, S. 2015, Foundation of Taxation Law 2015, 7^thed., North Ryde: CCH Publications

CCH 2013, Australian Master Tax Guide 2013, 51^st ed., Sydney: Wolters Kluwer

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. 2016, Australian tax handbook 8th ed., Pymont: Thomson Reuters,

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. 2016, Understanding taxation law 2016, 9^th ed., Sydney: LexisNexis/Butterworths.

Nethercott, L., Richardson, G. and Devos, K. 2016, Australian Taxation Study Manual 2016, 4^th ed., Sydney: Oxford University Press

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 8^th ed., Pymont:Thomson Reuters

Woellner, R 2014, Australian taxation law 2014, 7^th ed., North Ryde: CCH Australia