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Tax Residency Of Sam For The Year FY2015 And FY2016

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Questions:

1.Is Sam an Australian Resident for the Income Tax years ending 30 June 2015 and 30 June 2016? Give reasons.

2.Advise Sam Whether the Income he receives will be Assessable in Australia during these tax years.
 
 

Answers:

1.Issue

The core issue in the given case is to determine the tax residency of Sam for the year FY2015 and FY2016 taking into consideration the various facts given.

Rule

The relevant statute that deals with the subject of tax residency is Section 6(1), ITAA 1936. It specifies various tests that may be deployed in order to determine the tax residency status of the taxpayer under question. These tests have also been enumerated in TR98/17 (CCH, 2013). The importance of determining tax residency lies in the fact that differential tax norms tend to be applicable for the Australian tax resident and Foreign tax resident in line with section 6-5(2) and 6-5(3), ITAA 1997 (Barkoczy, 2015). The various residency tests that may be used for individual taxpayer tax residency status are highlighted below (Nethercott, Richardson, and and Devos, 2016).

  • Superannuation Test
  • 183 days Test
  • Reside Test
  • Domicile Test

The taxpayer needs to satisfy only one of the tests mentioned above so as to be categorised as the Australian tax resident. It is imperative to note that there are certain conditions associated with each of the tests listed above that limit their application. For Australian domicile holders, the relevant test for tax residency is the domicile test which would be discussed in detail here (Sadiq et. al., 2016).

In accordance with the domicile test, tax residency is granted on the fulfilment of both the below stated conditions (Gilders et. al., 2016).

  • The given taxpayer must have a valid domicile of Australia as per Domicile Act 1982
  • It is essential that the permanent abode or permanent residence of the concerned individual should be located within Australia.

While, the first condition is rather easy to check in an objective manner, but there is considerable subjectivity with regards to determination of place of permanent residence. In this regards, IT 2650 may be useful as it highlights the critical factors that the Tax Commissioner is likely to consider for determining the place of permanent abode. These are mentioned below (ATO, 1991).

  • Deviation of the actual stay period in a foreign location in comparison with the intended stay period.
  • Presence or absence of intention on taxpayer’s part to come back to Australia
  • Act of setting up a home in a foreign location
  • Abandonment of the Australian residence
  • Amount of time for which the taxpayer is present in foreign location and the visits to Australia during that period
  • Extent of association that the given taxpayer maintains in Australia while residing in foreign location

A relevant case which merits discussion is the F.C. of T. v. Applegate (1979) ATC 4307 case. In this case, an Australian domicile holder was sent abroad for professional purposes and the duration of foreign stay was indefinite. However, it is known that eventually after his task was over, he would return back to Australia. But, the taxpayer had to return permanently to Australia after two years due to illness. In the given case, the honourable court opined that the taxpayer would be treated as a non-Australian tax resident even though eventually he would have returned to Australia. It was also highlighted that the word permanent does not imply indefinitely but rather a substantial length.  Similar stance was assumed in the F.C. of T. v. Jenkins 82 ATC 4098; (1982) 12 ATR 745 case (Deutsch et. al., 2015).

Application

Based on the above discussion and the given facts, Sam would be treated as a foreign tax resident for FY2015 and FY2016 because of the following reasons.

  • The duration of stay in Italy is not definite and Sam hopes to extend his stay as he wishes to extend his contract with the Inter Milan ream based in Italy. This clearly reflects that Sam had intention to stay for a long time in Italy which could have spanned multiple years.
  • As a result, he had even set up a bank account in Italy which also hints toward the same.
  • Despite Sam having the intention to return to Australia eventually, the arguments of the C. of T. v. Applegate (1979) ATC 4307 would be applicable in this case.
  • Even though Sam has returned in May 2016, but the same is because of the injury and end of soccer career and not voluntarily.

Thus, taking into consideration the various case laws discussed above, it is apparent that the permanent abode for Sam during the two years was in Italy. Hence, he fails to satisfy the domicile test for either year.

 

2.Issue

The central issue is to determine if the income received by Sam during his stay in Italy would be taxable in Australia or not.

Rule

As per Section 6-5(2), if the given taxpayer is classified as a tax resident of Australia, then income derived from both foreign and domestic sources would contribute to the assessable income. However, the treatment is different for foreign tax residents, which is highlighted in v Section 6-5(3) (CCH, 2013). In accordance with Section 6-5(3), for foreign tax residents, only the income derived from sources located within the territorial boundaries of Australia would contribute to assessable income in Australia. Thus, any foreign income derived by a foreign tax resident would not be assessable or taxed in Australia (Barkoczy, 2015).

Application

It is apparent from the discussion above that Sam is a foreign tax resident for FY2015 and FY2016. Hence, in line with Section 6-5(3), he would be liable to pay tax only on any income that he would have derived from Australia.  Any income from foreign sources would be exempt from tax in Australia. It is apparent that the contract income for soccer is derived from Italy and hence would be foreign source income which is not taxable in Australia as per the relevant rules. However, it is also known that Sam has a property in Australia which has been rented. The rent income is derived from Australia only and hence would be taxable in Australia.

Conclusion

Sam would be considered a foreign tax resident for FY2015 and FY2016.

As, Sam is a foreign tax resident for the given time period, hence only the rent income derived from property located in Australia would be taxable at the hands of Australian tax authorities.

 

References

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 March 30, 2017]

Barkoczy, S. 2015, Foundation of Taxation Law 2015, 7th ed., North Ryde: CCH Publications

CCH 2013, Australian Master Tax Guide 2013, 51st 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, 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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