Determining Tax Residency Status In Australia

Tax Residency Status Definition

Issue

The main issue is to determine whether Sam is an Australian tax resident for the income year ending 30 June 2015 and 30 June 2016.

Tax residency status of an individual is an imperative aspect because it decides the tax treatment for the income derived by the taxpayer for the respective financial year. An Australian tax resident is an individual whose assessable income is derived from both domestic sources as well as from foreign sources. However, in case of foreign tax resident, the part of income that is derived from Australian sources only would be taxed. It means the income received from overseas sources would not be assessable for tax. Section 6-5(2) and Section 6-5(3) of ITAA, 1997 are the respective sections for the tax treatment in case of Australian and foreign tax resident respectively(CCH, 2013).Therefore, it is essential to determine the tax residency of the concerned taxpayer for the given tax year.  Section 6(1) of ITAA, 1936 is the leading statute for the determination of the tax residency. Moreover, there are four residency tests, which are defined in TR 98/17 that deal with the various aspects related to check the tax residency of an individual taxpayer (Nethercott, Richardson, and Devos, 2016). It is essential to note that the taxpayer must pass atleast one of the below mentioned test in order to recognize as Australian tax resident for the given assessment tax year (Barkoczy, 2015).

This test is directed for foreign resident only. As per this test, it is imperative on the part of the taxpayer that he/she must reside within Australian for a period of minimum 183 days in a given income year.  It is not necessary that the taxpayer resides in Australia in a single stay. These 183 days can be in different interval or in breaks but the total duration must be 183 days or more in order to satisfy this residency test. Also, there should be intention tosette in Australia on behalf of the taxpayer. (CCH, 2013).

This test is applicable only for officers and employees of Federal Government of Australia who are residing in other country in regards to accomplish their obligations. Moreover, it is important that the taxpayer must involve in any of the below mentioned scheme of Federal Government in regards to categorised as an Australian tax resident (Sadiq et. al., 2016).

• Commonwealth Superannuation Scheme as per Superannuation Act 1976 (Cth)
• Public Sector Superannuation Schemes as per Superannuation Act 1990 (Cth)

This test is also directed for foreign residents only. There are certain conditions of resides test that must be fulfilled by the taxpayer in order to classify as an Australian tax resident under reside test (Gilders et. al., 2016).

• The total duration of stay in Australian especially if the taxpayer is not a regular visitor of Australia.
• The frequency and reasons of visits to the native country as per the decision made in IRC v Lysaght [1928] AC 234 case.
• Intention to make a permanent residence within Australia.
• The strength of personal and professional bonds with Australia and with the country of origin under the witnessed in Levene v IRC [1928] AC 217 case.
• When any kind of uncertainty is still remaining then the final element i.e. nationality of the concerned taxpayer would be taken into consideration.

Residency Tests Defined in TR 98/17

This test is applied on to Australian residents, who are residing in other places of the world in regards to sustain their professional or personal commitments. There are mainly two essentials of this test that are imperative to be fulfilled by the taxpayer.

• Taxpayer must have Australian domicile as per the provisions of Domicile Act 1982(ATO, 1991).
• Permanent residence of the taxpayer must be located in Australia (ATO, 1991).

For determination of the permanent residence of the taxpayer, a plethora of factors are taken into account by the Tax Commissioner which are discussed in the tax ruling IT 2650. These essential factors for permanent residence are as listed below (Deutsch et. al., 2015):

• The difference between the amount of intended duration of stay and actual duration of stay on behalf of taxpayer in foreign land.  
• Intention or future plan of the taxpayer to make a permanent abode abroad
• Sale of Australian residence on the part of the taxpayer
• Make permanent residence in foreign land by setting up fixed assets or business and so forth
• Numerous activities on the part of taxpayer that indicates the intention to reside in Australia or in foreign land.

It is noteworthy under the decision of Federal Commissioner of Taxation v Applegate (1979) ATC 4307 case that the concerned taxpayer went overseas in order to complete the job/ professional obligations and he/she did not have a clear estimation regarding the duration of stay. Also, he had already decided to return back to Australia after the completion of work. However, in between of the work, he had to return permanently to Australia due to major health issue. In this case, the honourable court ruled that the taxpayer would be classified as foreign tax resident for the period of time which, the taxpayer had spent overseas. It means the permanent residential place of the taxpayer for that amount of period is located in foreign location when the amount for time for which the taxpayer shifts to a foreign place is substantial. Hence, in such cases the income derived from overseas sources would not be considered as assessable income for taxation (Gilders et. al., 2016).

Sam is a resident of Australia and thus, domicile test would be applicable here.

As per the discussion above, it is apparent that Sam is a foreign tax resident for the income year 2015 and 2016. This is evident from the Federal Commissioner of Taxation v Applegate (1979) ATC 4307 case. The following reasons are outlined in order to draw this conclusion:

• It is reflected from the given case facts that Sam does not have clear idea regarding the duration of stay in Italy.
• He hopes to continue and extendshis contract of playing soccer in Inter Milan in Italy. This aspect clearly states that Sam has a plan to stay in Italy for long period of time.
• He has opened a bank account in Italy, on which he has received his contractual payment.
• Due to injury, he could not continue his soccer playing career and thus, has to come back  Australia.

This means for this period of stay, he has a permanent resident in Italy and thus, he does not satisfy the prerequisite condition of domicile test. Therefore, he would be considered as foreign tax resident for the given income years.

Conclusion

It can be concluded from the above that Sam is not an Australian tax resident for the tax year 2015 and 2016.

To ascertain an advice to Sam about the various aspects related to his received income and to comment whether the income is assessable for taxation for FY2015 and FY2016.

Permanent Residence Factors Consideration

In accordance of Section 6-5(2) of ITAA, 1997 the income derived by an Australian tax resident would be accountable for the taxation irrespective of the source of income(ATO, 1991).It means that all the income received by the concerned taxpayer for the given financial year would be considered as assessable income. While Section 6-5(3) of ITAA, 1997, would be applied in case when the taxpayer is a foreign tax resident (CCH, 2013). The part of the total income received from Australia would be assessable for tax. The portion of income that is received by the taxpayer from foreign sources would not be considered as assessable income and thus, wound not taxable under the provision of Australian tax law (Sadiq, 2016).

From the above, it is apparent that Sam has not satisfied any of the residency tests and thus, he would not be considered as an Australian tax resident for either of the tax years. Therefore, the income that he has received from Australian sources only would be assessable for taxation. Moreover, no portion of the income would be assessable for tax, which he derived from foreign sources i.e. from Italy. Therefore, the income derived from contractual payment in Italy would not be considered as assessable income and hence, not be taxable under the provision of Australian tax law. Further, he has a two bedroom units in Clovelly,which he rented out. The rent income would be considered as assessable income from ordinary concepts (s. 6-5, ITAA 1996). Therefore, as a foreign tax resident this rent income would contribute in the total assessable income for Sam for financial year 2015 and 2016.

Conclusion

It can be concluded from the above case facts and relevant tax ruling that Sam is a foreign tax resident for the given financial years. Hence, his domestic income would be assessable income, while the foreign income would not be recognised as assessable income.

Reference

ATO 1991, IT 2650, Australian Taxation Office, [Online] Available at https://law.ato.gov.au/atolaw/view.htm?Docid=ITR/IT2650/NAT/ATO/00001 [Accessed April 9, 2017]

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. 2015, 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