LEGL602 Taxation Law

The “Taxation Ruling IT 2650” is concerned with determining the residential status of a person whose permanent place of abode outside Australia. The statutory definition of “subsection 6 (1) of the ITAA 1936” states that a person is an Australian occupant whose place of residence is in Australia lest the taxation officer is satisfied that the perpetual place of residence is outside of Australia. To determine the residential status based on the above stated definition there are certain test that help in ascertaining whether a person is a resident. This includes, residence based on normal conceptions, domicile or permanent place of residence test and 183 days’ test.

Under the “Resides Test” the word resides represents to dwell permanently or for the considerable time period. The period of physical presence in Australia and maintenance & location of taxpayer’s assets are also relevant. The court in “FCT v Miller (1946)” held that tax residency of a person rests on question of fact and degree.

Domicile is held as the lawful theory of ascertaining the residential status under the “Domicile Act 1982”. Under domicile test, a person is held as the Australian occupant if their home is in Australia unless the taxation official is content that an individual has the permanent place of residence out of Australia. In “Applegate v FCT (1979)” the taxation commissioner argued that the taxpayer domicile was in Australia failed to meet the requirement as the taxpayer place of abode was out of Australia. The court apprehended that the permanent place of residence do not represent forever and the same is assessed objectively every year.

In ascertaining a person’s residence within the definition of resident under the “subsection 6(1)” it is crucial to understand the intent of an individual as to the nation in which a person makes their home indefinitely. Hence, a person with the Australian residence but living outside Australia would maintain the abode if the individual proposes to coming back to Australia with an evidently expected and practically anticipated contingency.

The “183-day test” states that a person will be held as the Australian resident for taxation purpose when a person’s physically present in Australia for a period of no less than six months during the income year. However, the exceptions include if the taxation official is content that the taxpayer’s normal place of abode is out of Australia and the person does not propose to take up the residency in Australia.

A receipt obtained through employment and providing personal service might be considered for taxation under “section 6-5 of the ITAA 1997” as the ordinary income. As held in “CT v Scott (1935)” the term income should be considered based on the ordinary concepts. A nexus with the receipt arising out of taxpayer’s personal service is regarded as ordinary income. This includes salary or wages, fees charged for rendering any service.

Application: 

In the current case of Tom, he signed the agreement of acting as the plantation manager in Brunei which stipulated him to stay in Brunei for two years with possible of another year. Though Tom did not have any definite view of accepting or rejecting however would consider an extension at the end of two-year period.

With reference to “Reside Test” Tom had maintained his physical maintenance of place of abode in Australia as he did not abandon his Sydney residence and rented out the same while his stay in Brunei. Furthermore, he also maintained his Australian bank account where his rental income was paid. Tom has maintained his location and physical asset such as Australian bank account. With reference to “Miller v FCT (1946)” Tom’s intention and purpose of presence in Brunei was transitory as the taxpayer later rejected the offer of accepting the extension of contract. Therefore, Tom will be considered resident under the ordinary concept test.

Under “Domicile Test”, Tom’s domicile is in Australia and did not established any place of residence outside Australia. Furthermore, he also rejected the intention of staying for additional another year in Brunei as he planned to come back Australia following the end of his two-year contract. Tom’s place of abode in the Brunei should be considered as transitory or temporary for two reasons. At first he lived by the continuing authorisation of the company, in a house that was leased by the company in Brunei. Secondly, with regard to the 2-year period of his employment, Tom relationship with his place of residence in Brunei needed more permanent connection with a specific place of residence than anticipated to exist where an individual normally lives or has there as his normal place of residence. Citing the reference of “Applegate v FCT (1979)” Tom will be held as Australian resident under the “Domicile test”.

Tom under the 183-day test cannot be held as Australian resident as he was not present in Australia continuously for a period of six months.

In the later instances following his return to Australia he opened an accounting practice and billed a client for a sum of $8,000. The receipts by Tom can be categorized as income from providing personal service which may be subjected to income tax. With reference to “Scott v Commissioner (1935)” the amount would be regarded as income under the ordinary concepts and would be considered for taxation under “section 6-5 of the ITAA 1997”.

Conclusion: 

With respect to “subsection 6 (1) of the ITAA 1997” Tom is a resident under the ordinary concepts and domicile test as he has successfully met the criteria listed under those test. The receipts from the accounting service would be treated as income under the ordinary concepts of “section 6-5 of the ITAA 1997”.

References:

Barkoczy, Stephen, Foundations Of Taxation Law 2014

Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business Taxation

Jover-Ledesma, Geralyn, Principles Of Business Taxation 2015 (Cch Incorporated, 2014)

Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)

Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)

Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian Taxation Law (CCH Australia, 2013)

Sadiq, Kerrie, Principles Of Taxation Law 2014

Woellner, R. H, Australian Taxation Law Select 2013 (CCH Australia, 2013)