The objective is to ascertain Peter’s tax residency for FY2018 in light of the information extended in the case study.
A crucial role in ascertaining the individual taxpayer tax residency is played by ITAA 1936 through subsection 6(1). Further, the various statutory tests available for residency determination are outlined in TR 98/17 which would enable an individual to determine the tax residency in the context of a particular assessment year (Woellner, 2014). The relevant details of these tests are described below with particular reference to the conditions that need to be complied with for fulfillment of any given test.
The application of this test is primarily for domicile holders of Australia who have to go outside Australia for fulfillment of any obligation for personal or professional nature (Barkoczy, 2015). The test in order to be passed requires fulfillment of two conditions namely possession of Australian domicile and a permanent abode on Australian soil. Failure to comply with either of the above mentioned conditions would lead to failure of this part. For assisting the location of taxpayer’s permanent abode, a host of factors are considered by the tax authorities as has ben outlined in IT 2650 (Gilders et.al., 2016).
This is available for the determination of residency of those foreign residents which may be present in Australia for a significant amount of time. They need to necessarily comply with both the terms listed below for passing this test (CCH, 2013).
- Stay of atleast 183 days in Australia in the current assessment year
- Taxpayer wanting to settle in Australia going ahead
- Superannuation Test
This is a very specific test which is to be applied only for Australian government employees who may be posted abroad for the fulfillment of their duty. In determining the tax residency for these, it needs to be only considered if contribution to certain select superannuation funds is made by the taxpayer or not. Other factors which are considered in other tests are not essential in this test (Sadiq et. al., 2016).
While the word resides lacks a clear and lucid definition in the Australia law, clarity tends to provided by the relevant cases along with applicable tax rulings and these are significant factors in the application of the residency test. There are outlined as indicated below (Deutsch et. al., 2016).
- Visit purpose – The underlying significance of the purpose for which taxpayer has come to Australia is a critical factor. Employment (typically more than 6 months) and study are significant reasons resulting in tax residency of Australia while travelling is a casual reason which would not lead to tax residency.
- The intensity of relationships (professional & personal) that the taxpayer enjoys with Australia and compare it with corresponding relations to country of origin.
- The social arrangements that the taxpayer has in place when living in Australia and the extent of similarity of this life with the life witnessed in the country of origin.
- The frequency with which the taxpayer visits the country of origin during the assessment year coupled with the underlying duration of trip and intent regarding it is imperative.
The application of the above outlined tests considering the given information about Peter is shown below.
- Domicile Test – It is known that Peter on account of being a British national would have a British domicile and not an Australia domicile and therefore would fail this test.
- Superannuation Test – Peter is employed with a British multinational and thus cannot pass this test as it is applicable only for Federal employees serving abroad.
- 183 day Test – The first condition which requires Peter to reside in Australia for atleast 183 days in FY2018 is not met since for more than 7 months, he was stationed in New Zealand. Thus, despite the intent to settle in Australia existing on Peter’s end, he has failed to pass this test.
- Resides Test – Peter manages to clear this test on account of the reasons outlined below
- Peter has a significant reason to visit Australia with the employment term at a minimum being 12 months which can enhance further based on the contracts extension.
- During the given year i..e FY2018. Peter has made no trips to the country of origin (i.e. England).
- Besides, Peter also has intentions to make Australia as permanent abode if he gets more time to reside in Australia on account of extension in the contract.
In line with the above discussion, it would be fair to conclude that Peter for FY2018 will be classified as tax resident of Australia considering that he has managed to clear the resides test.
2. Assuming Peter is a tax resident of Australia, the relevant section for taxable income conputation would be s. 6-5(2) which implies that for Australian tax resident, income sources from around the globe would be subject to Australian tax statues provided these are derived in FY2018. The relevant treatment extended to the various incomes and deductions are as indicated below (Nethercott, Richardson and Devos, 2016).
- Rent Income (London House) – In accordance with s.6(5) and ATO ID 2009/93, rental income is ordinary income (Barkoczy, 2015).
- Relocation allowance (One-time $ 5,000) – As per tax ruling TR 95/17, relocation allowance would be taxable as there is possibility of gains being realized by the taxpayer which is not possible in case of expense reimbursement. Further, since it is related to job and paid in cash, hence adds to the assessable income as per s. 6-5(Woellner, 2014).
- Telephone allowance ($1,200 yearly) – Again the understanding derived from TR 95/17 would be applied, and since the actual telephone expense may be lower than the allowance value, thus taxpayer may derive monetary benefit and thus assessable income due to inclusion under s. 6-5(CCH, 2013).
- Salary ($100,000) – The location of salary generation is immaterial and thereby in accordance with s. 6-5, ITAA 1997 the complete amount would be added to assessable income for Peter (Gilders et. al., 2016).
- Lottery winnings ($1,000,000) – Since Peter is not a regular buyer of lottery and winnings are not based on his skills, thus it outside the ambit of s.6-5. Further in accordance with the verdict in McLelland v. FCT(1970) 120 CLR 487, the gains made through lottery would not lead to assessable income generation under s. 15-15. Further the tax ruling TR 2004/D17 along with IT 2584 establish that the proceeds of winning the lottery would be exempt from purview of CGT (Sadiq et. al., 2016).. Thus, no tax implications for Peter.
- Inducement payment (One-time $ 100,000) – It is not repetitive in nature and essentially one off due to which it is not included within ordinary income as per s. 6-5. Further, it is not statutory income as it is readily cash convertible. Instead as per the TR 1999/17 tax ruling, these payments would be capital receipts exempt from any tax (Deutsch et. al., 2016).
The discussion in relation to the underlying deducibility of the various expenses outlined is as shown beow.
- Legal fee ($ 2,000) - In accordance with TD 95/60 tax ruling, the fee given to the solicitor for tax planning would be considered as an expense eligible for deduction while income is being computed (CCH, 2013).
- Registration fee ($ 2,500) – As per TR 95/15 tax ruling, any expense related to assessable income generation would be tax deductible at the end of the taxpayer. Considering that it is related to Peter’s own domain and delivered by an expert from the industry, hence it would be deductible for tax computation (Nethercott, Richardson and Devos, 2016).
- Course fees ($ 1,500) – The course for which Peter intends to spend money is a course related to his profession and therefore as per TR 98/9, deduction can be claimed for tax (Barkoczy, 2015).
- Cash payment ($ 100)– In accordance with TR 2005/13, any donation made to a pubic hospital would be exempt from tax computation, hence gift given by Peter to Brisbane hospital would be tax deductible for taxable income computation (Deutsch et. al., 2016).
- Magazine expense ($50) – As per TR 95/18, the expense on magazine can be attributed to assessable income generation due to related profession, thus , it is a tax deductible expense (Gilders et. al., 2016).
- Southern Cricket Club expense ($ 1,500) & Hunter Sports Club expense ($ 1,500) – These expenses are not related to Peter’s profession and they also do not facilitate generation of taxable income and thus no deduction in tax based on these expenses (Sadiq et. al., 2016).
- Deductible expenses on London property ($ 15,000)- As per ATO ID 2003/32, the expenses that are considered deductible in relation to the given property is deducted for purposes of tax and this would also not be an exception (Barkoczy, 2015).
The above understanding in relation to assessable income and deductible expenses of Peter is highlighted in the tabular form shown below to derive FY2018 taxable income.
Barkoczy, S. 2015, Foundation of Taxation Law 2015, 7thed., North Ryde: CCH Publications
CCH 2013, Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Coleman, C 2011, Australian Tax Analysis, 4th ed., Sydney: Thomson Reuters
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Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. 2016, Understanding taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths.
Nethercott, L., Richardson, G. and Devos, K. 2016, Australian Taxation Study Manual 2016, 4th 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, 8th ed., Pymont:Thomson Reuters
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