Tax Residency In Australia: A Guide

Determining Tax Residency in Australia

Question:

Discuss about the Land Transactions and Investment Regime.

The kit was born in Chile and still has his Chilean citizenship. However, Kit is also a permanent resident of Australia. He spends a major part of the year working off the Indonesian coast on an oil rig for an American firm. He was hired by this company in Australia only, and the employment agreement was signed there too. Kit’s family including his wife and two children have been living in Australia for the past four years. They also have their own home in the country which was bought three years ago. Both Kit and his wife share their bank account with Westpac Bank, and his salary is also directly credited into this account. All the other investments of the family that includes a share portfolio are still in Chile. In every three months, Kit visits his family for a month either in Australia or in Chile.

The issue of residency could be complex and is highly reliant on a person’s individual circumstances. A person is primarily an Australian resident for tax purposes if he/she resides in the country within the ordinary context of the term “resides”. Nonetheless, residence in the ordinary context is disparate from nationality and domicile. For instance, a taxpayer can be considered a resident in Australia, though he stayed abroad permanently, given he visits Australia due to the regular system of his life. The main test used to determine residency for tax purposes if the resident test (Australian Government, 2017). If an individual is residing in the country, then he is regarded as a resident for taxation purposes, and no other resident test needs to be applied to him. If an individual does not qualify the resident test, he/she may still be regarded as a resident in Australia if any of the following three situations is met:

Domicile Test -  A person is an Australian resident under this test if he/she holds a domicile in Australia except the Commissioner is content that the individual’s permanent residence is outside Australia. As per the Domicile Act 1982, individual gains a domicile of choice in the country if he/she intends to make Australia his/her indefinite home. Domicile usually implies the nation in which a person is born unless he/she migrates to other nation (Australian Government, 2017).

The 183 days test – A new migrant or a returning expat who are present in Australia for over 183 days occasionally or continuously in a year, is considered a resident of Australia as per the 183 days test. This is except the Commissioner is content the individual’s permanent residence is out of Australia, and he does not intend to take residence (Australian Tax Residency – Guidelines, 2017).

The Superannuation test – This is a mandatory test and a substitute to the regular residence tests – which means that a person could be resident as per this test when he/she does not live in Australia in the ordinary context. In effect, a person is deemed to be resident if he is a certified employee for the intentions of the Superannuation Act 1976 or is the partner or child below 16 years of age of such an individual. This test is mainly applicable to persons who work for the Australian government offshores (Australian Government, 2016).

The Resident Test

The other factors which are considered while determining the residency for tax purposes are:

• Business and family ties
• Reason of presence
• Living and social arrangements

In the given case, Kit holds a permanent house in Australia which he purchased three years back. As per the facts mentioned in the case study, his family has been residing in Australia for the past four years. Keeping these things in mind, Kit will be treated as a resident of Australia for taxation purposes. He is obligated to disclose all the income earned by him both in Australia and outside on his Australian income tax return. Income which he is earning through every direct and indirect source is covered in assessable income and is chargeable for tax purposes. Nonetheless, as per the provisions of the Domicile test and with the justification given by the commissioner, Kit is a resident of Australia (Alan Lewis Accountants, 2012).

The entire salary earned by Kit by working on the oil rig off the Indonesian coast is taxable according to the provisions of Section 6-5 ITAA 1997. The current tax slab starts from $18201 for the resident individuals, and same is applicable on Kit. For every $1 earned over 18,200 Kit will be charged 19c. The dividend which Kit is receiving on his share portfolio in Chile is also taxable in Australia as per the provisions contained in Section 6-10 of ITAA 1997. According to these provisions, the dividend is the money received on bonus shares (Australian Government, 2016). When Kit receives a dividend on his shares, then the same would apply for franking tax offset. As per Singh, (2016) this is also known as imputation credit, and this must be shown properly on the tax return to avail such benefit. If this information is not as per the amount disclosed in the income tax return, then it will prescribe the details in comparison with the information with the tax department and relevant corrections will be made.

This case took into account the matter of the realisation of a capital asset and whether or not profit earned from selling a property to be excavated for its mineral deposits was computable as ordinary capital or income by nature. The outcome of the case was that the income from the sale of leases was computable because the intention of the taxpayer was to resell the leases at a gain rather than to work the leases. The business was of purchase and sale of leases. The verdict of the high court, in this case, was that the nature of profit generated from a business i.e. income nature or capital nature depends largely on the nature of the business and the association between the transactions which produce the gains (CCH Australia Staff, 2012). Corresponding principles were also applicable in the case of AA Finance Ltd. vs. CIR (1994)16 NZTC 11383.

This case took into account the matter of business income and whether the division and sale of land which had been utilised by a mining company as a mine were computable as ordinary income or was just a realisation of a capital asset. The ruling, in this case, was that the sale of subdivided land was only a realisation. While taking this decision, the judge pointed out that for selling the land which is in a sub-divided condition unavoidably needs the construction of roads. The keeping aside a part of the land for park and other facilities did not change the transaction from mere realisation, and it was included in the process of realisation of a capital asset. The judge also stated that the subdivision size was not an important matter (CCH Australia Staff, 2011).

Other Tests for Tax Residency

In this case, FC of T vs. Whitfords Beach, a land was purchased by the taxpayer in 1954 so that shareholder can do fishing on the beach. Three development firms decided to buy the land in 1967 through the subdivision and with the intention of making a profit. The acquired land and subdivision for sale is apparently taxable as per Section 25A (1) ITAA 36 in accordance with the commissioner (CCH Australia Staff. 2012). Nonetheless, for avoiding tax liability, the developing forms bought the share and carried out this transaction which falls under the purview of tax evasion. Hence, the high court ruling, in this case, expanded the scope of receipts for the one-off transactions to be seen as ordinary income if the transactions occurred merely for the realisation of a capital asset. The High court ruling stated that the actions of the taxpayer were for the benefit of realisation of asset and hence the activities were considered to constitute a business of land and development. The high court held that the sale proceeds from any portion of the land at Whitfords Beach in all the pertinent income years were assessable incomes of the taxpayer as per subsection 25(1) of the ITAA 1936.It is mutual ground between the concerned parties that the sum to be covered in the assessable income of the taxpayer every year is the sum of the taxpayer’s profit from the sale proceeds (Barkoczy, 2010).

The taxpayers were trustees of an estate that had deceased. The deceased party had bought a portion of farming land several years ago with the purpose of raising his family and getting involved in some farm related activities. After some years, the deceased person sold 50% of the land to a firm owned and controlled by family members. During this time also there was no intent of reselling the property at a profit. In fact, the new owners of the land began a partnership for raising cattle. The partnership failed to perform effectively, and the owners contemplated subdividing and sold the land. The Commissioner claimed that the sale of subdivided land was assessable income. The taxpayers claimed that the proceeds from the sale were not ordinary proceeds through a plan of profit making. In this case, the court considered it important that the taxpayer subdivided only after trying to sell the land in a single lot. The court held that profit from the sale was not ordinary income as the activities carried out by the party signified that the owners were not carrying out a business (Harding, 2013).

The court decided in this case that the proceeds from the sale of land and subdivision are not assessable as per the provisions of Section 25(1) and 25A of ITAA 1997 (Dixon, 2016). The taxpayer argued that subdivision and selling lots were the realisation of a capital asset and not part of business activity.

The income was obtained by the taxpayer through isolated transaction i.e. acquisition of land to work and sell the sand subsequently. Hence this income was considered as ordinary income by the court as per the provisions of Section 25 (1) of ITAA 97 (McLaren, 2014). The proceeds from this were considered as assessable profit because the intention of the taxpayer was to earn a profit.

This case had a unique decision based on the fact that property was utilised as a mine for a long time as compared to farming. Hence, the sale proceeds from subdivided land which was originally bought for farming were considered as a realisation of a capital asset (Mackie, Histed and Page, 2011).

The court held that the sale of land, in this case, was assessable according to Section 25(1). The taxpayer entered into the business with profit making intention. Hence, as the property was bought for making profits the acquisition is not treated as investment and profits accruing from it were considered as taxable income (Esmaeii and Grigg, 2016).

References

Alan Lewis Accountants. 2012. Resident or non-resident: What’s the difference? [Online]. Available through: <https://www.lewistaxation.com.au/tax/general-tax/resident-for-tax-purposes>. [Accessed on 2^nd May 2017].

Australian Government. 2016. Individual Income Tax Rates. [Online]. Available through: <https://www.ato.gov.au/rates/individual-income-tax-rates/>. [Accessed on 2^nd May 2017].

Australian Government. 2016. Residency Tests. [Online]. Available through: <https://www.ato.gov.au/individuals/international-tax-for-individuals/work-out-your-tax-residency/residency-tests/>. [Accessed on 2^nd May 2017].

Australian Government. 2017. Residency – the resides test. [Online]. Available through: <https://www.ato.gov.au/individuals/international-tax-for-individuals/in-detail/residency/residency---the-resides-test/>. [Accessed on 2^nd May 2017].

Australian Government. 2017. Work out your residency status for tax purposes. [Online]. Available through: <https://www.ato.gov.au/individuals/international-tax-for-individuals/work-out-your-tax-residency/>. [Accessed on 2^nd May 2017].

Australian Tax Residency – Guidelines. 2017. [Online]. Available through: <https://exfin.com/australian-tax-residency>. [Accessed on 2^nd May 2017].

Barkoczy, S., 2010. Australian Tax Casebook. CCH Australia Ltd.

CCH Australia Staff. 2011. Australian Income Tax Legislation 2011: Income Tax Assessment Act 1997 (div 719 1-end). CCH Australia Ltd.

CCH Australia Staff. 2012. Australian GST Legislation with Overview 2012. CCH Australia Ltd.

CCH Australia Staff. 2012. Top 100 Tax Q & As, 2012. CCH Australia Ltd.

Dixon, B., 2016. Land transactions and the new Australian foreign investment regime. Australian Property Law Journal, 25(1), pp.55-68.

Esmaeii, H. and Grigg, B., 2016. The Boundaries of Australian Property Law. CUP.

Harding, M., 2013. Taxation of dividend, interest, and capital gain income.

Mackie, K., Histed, B. E. and Page, J., 2011. Australian Land Law in context. OUP.

McLaren, J., 2014. A uniform land tax in Australia: what is the potential for this to be a reality post the Henry Tax Review. Austl. Tax F., 29, p.43.

Singh, I., 2016. Australian resident for tax purposes, explained. [Online]. Available through: <https://www.quillgroup.com.au/blog/australian-resident-for-tax-purposes-explained/>. [Accessed on 2^nd May 2017].