The main objective is to ascertain assessable income for Peter for the given tax years in accordance with the relevant provisions of ITAA 1936 and ITAA 1997.
The key aspect determining the assessability of the given income source is the tax residency status of the individual taxpayer which particularly becomes prominent when the income also has been derived from foreign sources besides domestic sources. Section 6-5(2), ITAA 1997 categorically state that if the underlying taxpayer is an Australian tax resident, then income from all parts of the world would be subject to tax in Australia and the location of the source becomes immaterial (CCH, 2013). This is not the case for foreign tax residents as has been highlighted in s. 6-5(3), ITAA 1997 which makes it abundantly clear that only domestic income i.e. income arising from sources located within the Australian territorial boundaries would be subject to tax (Barkoczy, 2015).
For opining on the tax residency status the primary stature applicable is s. 6(1), ITAA 1936 along with the relevant tax ruling i..e TR 98/17. Together, these highlight the applicable residency tests that the individual taxpayer can apply to ascertain the residency status for tax purpose in a given assessment year (Nethercott, Richardson and Devos, 2016). In total, there are four tests whose application and key clauses are as enumerated below (Gilders et. al., 2016).
The application of this test is limited only to foreign residents who tend to arrive in Australia for a variety of reasons and hence based on the given circumstances, the tax residency may be determined.
The application of this test is limited only to foreign residents who tend to arrive in Australia to visit or other purpose and hence based on the given circumstances, the tax residency may be determined
The application of this test for tax residency determination is limited to Federal government employees who on behalf of the government are serving in foreign locations and thus have to stay out of Australia for significant periods of time.
The application of this test is confined only to Australian residents who are residing at a foreign location for the fulfilment of obligations which may be of personal or professional nature. For the given situation, as the concerned taxpayer is an Australian resident, hence only the detailed discussion of the domicile test is being carried out.
For passing the domicile test for gaining the status of Australian tax resident, the following two conditions are required to be fulfilled (Sadiq et. al., 2016).
The concept of permanent abode has been explored in the discussions carried out during the Levene v. I.R.C. (1928) A.C.217 case. With regards to the application of the above test for determination of the taxpayer’s tax residency, the issue is not with the determination of whether the concerned individual has domicile of Australia or not but with ascertaining with objectivity the underlying location where the permanent abode is located for the period under assessment (Deutsch et. al., 2015). Typically with regards to the determination of permanent abode location, a host of factors are considered to reach a final decision in this regard which has also been highlighted in IT 2650. This particular ruling tends to signify certain factors which are taken into cognizance by the relevant tax authorities when framing a opinion about the permanent abode location (ATO, 1991).
Another key issue pertains to the meaning of the word “permanent” and whether the shift in abode permanently by default implies that the taxpayer would never return to Australian in the future for residence purpose. A leading case which highlights the key arguments in this debate and facilitate the correct interpretation of the word “permanent” here is the F.C. of T. v. Applegate (1979) ATC 4307 (Barkoczy, 2015).
This case revolved around an Australian domicile holder who was sent abroad with the intention of setting up an office for the Australian employer in the foreign location. As the work scope was quite wide and flexible, the period of stay abroad could not be determined at the onset and would become clear over the period of time as things would start falling in place. This was indicative of the fact that typically the time commitments would be large in the given case. However, it was agreed beforehand between the taxpayer and the Australian employer that post the task accomplishment, the taxpayer would come back to Australia permanently. The taxpayer during the course of discharging his professional commitments fell seriously sick and thereby had to come back to Australia on a permanent basis at the end of the second year even though the work still remained unfinished. Even though the taxpayer was back in Australia on a permanent basis but the honourable court still ruled that for the whole period. An important clarification offered by the court was that the meaning of the word “permanent” in this context was essentially a substantial length of time which necessarily did not imply indefinite period. This stance has been reiterated by the court during the verdict offered for a similar case i.e. F.C. of T. v. Jenkins 82 ATC 4098 (ATO, 1991).
With regards to computation of assessable income, two key components are ordinary income and statutory income that are respectively governed by s. 6-5 and s. 6-10, ITAA 1997 respectively (Sadiq et. al., 2016).
Section 6-5 mentions that ordinary income would be income that is derived in accordance with the ordinary concepts but has not provided the details in this regard. Hence, the commentary given in relevant tax rulings along with case laws has been deployed to decipher that the following sources tend to contribute to ordinary income under the aegis of s.6-5 (CCH, 2013).
In accordance with the name, it is apparent that for this form of income, a separate statute would exist which would provide relevant details about the same. A key constituent of this income is in the form of capital gains which tend to attract CGT or Capital Gains Tax. When a capital asset is liquidated, the capital proceeds are non-taxable, however, the capital gains made in the process may be taxable in accordance with the applicable CGT provisions (Deutsch et.al., 2015). As per s. 108-20(2), ITAA 1997, any asset which is essentially meant for personal use would not be subject to CGT and thus would be exempt from CGT (Barkoczy, 2015). Also, in line with Division 115 ITAA, 1997, individual Australian tax residents can avail a discount of 50% on the taxable capital gains if these are long term capital gains (Gilders et. al., 2016).
The relevant information from the given case is a highlighted below:
It is apparent that Peter does possess the domicile of Australia. With regards to location of permanent abode, the arguments made in F.C. of T. v. Applegate (1979) ATC 4307 would apply. Here, at the time of migrating to England, Peter had no idea about the timeframe required but based on the behaviour of other band members and also leasing of house till 2018, it is apparent that the period was expected to be substantial. Hence, it may be conclude that during the period of stay in England, his permanent abode was located in England only and not Australia. Hence, for the all the three years i.e. FY2016, FY2017 and FY2018, the domicile test is not satisfied. As a result, Peter would be classified as a foreign tax resident and only would have income derived from Australia as potentially tax assessable. Foreign income would be outside the scope of Australian tax authorities.
The assessable income for Peter during the three years has been highlighted based on the above mentioned facts.
Peter has leased his own home for a period that would continue till end of 2018. Therefore, the income derived in the form of lease amount would be classified as assessable income as per Section 6(5).
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Barkoczy, S. 2014. Foundations of taxation law.
Kenny, P. 2014. Australian tax.
Krever, R. 2015. Australian taxation law cases.
Morgan, A., Mortimer, C. and Pinto, D. 2015. A practical introduction to Australian taxation law.
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