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Tax Residency Status : Taxpayers

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Question:

Discuss about the Report for Tax Residency Status for Taxpayers.

 

Answer:

1. Issue

In this particular case, the critical issue is to comment on the tax residency status of the concerned taxpayer Juliette based on the relevant case law and tax rulings for the given financial year FY2015 and FY2016.

Rule

Subsection 6(1), ITAA, 1936 will be taken into consideration to comment on the tax residency in Australia for taxpayers. However, subsection 6(1), ITAA, 1936 is assumed to be insufficient to determine the tax residency in case of an individual taxpayer (Deutsch et. al., 2016).

Hence, it is essential to use tax ruling in order to opine the tax residency status of an individual taxpayer. Tax ruling TR 98/17 provides a  set of tax residency tests, which can test the tax residency status for an individual taxpayer for a given income year. These tests have certain prerequisite and conditions that need to be satisfied by the taxpayer in order to recognise as tax resident of Australia (ATO, 1998). A brief discussion about these residency tests and their conditions are as follows:

Test 1 – Resides test

There is no ruling or direct law available to mention the scope and precise understanding of the word ‘reside’. Hence, in order to comment on the tax residency position for an individual, one needs to find the verdict of the relevant cases. These judgements with the provision of the tax ruling 98/17 will provide a root to opine the tax residency position. Here is some set of conditions that must be gratified to recognise a legal tax resident of Australia based on the reside test. The nationality of the taxpayer will also be taken into consideration if there is any improbability left (CCH, 2012).

  • Intention to make a permanent abode in Australia

It is required on the part of the taxpayer that there must be a prime intention of the taxpayer to make a permanent residence place within the Australian region.  The activity or action to reside in Australia must be significant and valid accordance to the Australian law. Any short stay in Australia due to training, casual travelling cannot be considered for the intent to get settled in Australia in near future. However, professional, educational and personal promises and contract will enact a long term and permanent relationship with Australia. These commitments will force the taxpayer to reside in Australia for long term. The duration or length of living in Australian region is one of the crucial parameter in this regards. This can be viewed in the verdict of FC of T v. Pechey 75 ATC 4083; (1975) 5 ATR case. A significant involvement in these activities will indicate the future plan on behalf of the taxpayer to make a permanent residential place in Australia (Barkoczy, 2013).

The specific duration of the abode of the taxpayer in Australia is also essential if the taxpayer is not a regular visitor. If the taxpayer is consistently visiting Australia then in such cases the duration of revisit, frequency of visits and the intent of visit outside from Australia mainly if the revisited place is his/her country of origin will be determining aspects which can be accountable as specified under the judgement of  IRC v Lysaght [1928] AC 234 case (Coleman, 2011).

  • Ownership of the valuable tangible assets in Australia

If the taxpayer who is residing in the Australian territory owned some valuable fixed assets like home, land, machinery, furniture, building in the Australia. This significant activity of the taxpayer indicates the willingness to reside in Australia for long term.  This understanding can be seen in the verdict of the Commissioners of Inland Revenue v. F L Brown (1926) 11 TC 292 case. The same location of fixed capital asset and residential place of taxpayer in Australia also express the commitments to stable reside in Australia (Gilders et. al., 2014).

  • Communal relations of the taxpayer

The participation of the taxpayer in the social activities will explain the motive of the taxpayer to stay for a longer duration in Australia. It can be viewed in the living routine of the taxpayer, if he/she is following the same life style in Australia as he/she was perusing in the respective  country of origin, then, it also helps to find the possible expected stay in Australia for long period of time on behalf of the taxpayer (Woellner, 2014).

  • Tie of taxpayer with Australia

It is essential aspects on behalf of the taxpayer that at what level extent he/she is having tie or commitments with Australia. This element of the taxpayer can be taken from the verdict of the Peel vs The Commissioners of Inland Revenue (1927) 13 TC 443 case. This tie can be professional level, which includes employment contracts or job obligations, training or/and personal level, which comprises marriage, relationship or so on. These personal or professionals ties are essential and support the tax authority i.e. Income Tax Commissions to determine the level of the association on behalf of the taxpayer with Australia country (CCH, 2012).

 

Test 2 - Superannuation test

Superannuation test of residency tests is considered only in such situations, when the aim is to determine the tax residency of such taxpayer who is residing in other country in regards to complete their government job responsibilities. This test is only applicable for the administrative staffs or employees of Australian government. The other pivotal condition of this test is that the concerned staff or employees must make contributions in one of the below mention Australian Federal government scheme (Coleman, 2011).

Public Sector Superannuation Scheme (PSSS) under Superannuation Act 1990

Commonwealth Superannuation Scheme (CSS) under Superannuation Act 1976

The specific nature of this test is that, if any taxpayer has an Australian government employee and willingly and actively involved in any of the above mentioned scheme, then in such cases the Australian government will recognise him/ her as an Australian tax resident. Additionally, after satisfying this test, there is no need to apply any other residency test to examine the test residency (Barkoczy, 2013).

 Test 3 –183 day test

As name suggests 183 day test, according to tax ruling 98/17, it is required that the taxpayer must stay in Australian territory for a certain period of time. The time period decided is 183 days as per tax ruling. It means that 183 days is the minimum duration of stay in Australia by the taxpayer to pass this test.  This is not compulsory that this period of 183 days requires to be consumed in only one go or into different time slots as long it belongs to the current financial year which is being assessed. Also, it is required that the taxpayer will not involve in any suspicious activity or action with the intention of either settling in another country or returning to the country of origin on permanent basis. If these aspects are not satisfied by the taxpayer then he/she will not be considered as Australian tax resident as per this test (Deutsch et. al., 2016).

Test 4 - Domicile test

When an individual resides outside from Australia due to involvement in any specific personal or professional obligations but has Australian domicile, in such cases, there are two basic situations that must be fulfilled by the taxpayer in regards to be called tax resident of Australia (Gilders et. al., 2014).

Must have Australian domicile under the provisions of Domicile Act 1982.

Must have a permanent residential place (also called as “permanent abode”) within Australia which can be viewed under the verdict of Levene v. I.R.C.(1928) A.C.217 Hence, the taxpayer will not be liable to recognise as tax resident of Australia if he/she established a permanent residential place in foreign land. The decision of Federal Commissioner of Taxation v Applegate case is the evidence in this regards.

There are some other essential parameters which are highlighted in the domicile test as per the norms of tax ruling 98/17 (Barkoczy, 2013).

The effective variation of the real duration of stay with the planned duration of stay abroad.

The intention on behalf of the taxpayer to inhabit permanently abroad.

The interest or activity of the taxpayer to make main residential abode in other country rather than Australia.

Application

Summary of the case study – Relevant facts and figures

Juliette is the concerned taxpayer, who was famous for her dance. England was the country of origin where she was residing with her mother.  A private theatre company, which was USA based had made a two year contract with Juliette. The contractual duties were supposed to start on March 15, 2015 and will be ending in March 2017 in Australia.  It was stated in the contract that the payment for the employment will be transferred into Juliette’s Swiss bank account.

She was supposed to enter into contractual duties on March 2015. She willingly arrived in Australia in February 2015 in regards to make a bus tour trip in Australia. In February end, she had to go back to England due to the sickness of her beloved mother. When her mother’s health conditions become little better, on May 1, 2015 she returned to Australia and joined her job. For residing in Australia, she leased a flat. However, she entered into a relationship with her co-choreographer Romeo and afterwards got married to him on September 1, 2015. Subsequently, she had purchased a home in Australia and resided there with her partner Romeo. She was enjoying her job and marital life, later on she had visited to her country of origin England on October 15, 2015 due to serious sickness of her mother. She was completely involved in taking care of her mother and also sending the essential choreography notes and steps to her husband Romeo to fulfil her contractual obligations. She had stayed in England till April 14, 2016. After her mother passed, she returned to Australia on April 15, 2016.

 

Application for financial year FY2015

Domicile test is not valid because the concerned taxpayer Juliette did not own an Australian domicile.

Superannuation test is also not relevant here because Juliette was not an Australian government employee.

Resides test can be relevant here but

she had spent only three months in Australia in the year FY2015 which is insufficient to predict any long term stay plan

she had not maintained any fixed asset in Australia in this duration

she had not create any long term professional or personal relations with in Australia as she had with her country of origin

From the above statements it can be concluded that she had not cleared any of the conditions of resides test.

183 day test is also not relevant in this duration because it is the necessary that the Juliette must reside in Australia for the minimum duration of 183 days. However, she had lived in Australia only for three months. Hence. This test is also not passed by Juliette.

Application for financial year FY2016

Domicile test is not valid because the concern taxpayer Juliette did not have an Australian domicile as per the Domicile Act 1982.

Superannuation test is also not valid here because Juliette was not an Australian government employee.

Resides test is having relevancy in the FY2016 because

She had formed personal tie in Australia by getting married with her co-choreographer Romeo.

She had actively involved in her employment obligations whet she was residing in Australia and also when she was taking care of her sick mother and residing in her country of origin by providing the essential choreography steps and notes to Romeo. This indicates intense commitment towards her employment professional tie.

She also maintained a house in Sydney (Australia) where she lived with Romeo

The requisite conditions of reside test are accomplished by Juliette.

  • 183 day test is also valid for the financial year FY2016, since she was resided in Australia is for 183 days. This number of days can be evaluated with the help of provided information

Number of days resided in Australia by Juliette=

(July 1, 2015 to October 15, 2015) + (April 15, 2016 to June 30, 2016)

= 183 days

This figure of 183 days satisfies one of the pivotal conditions of 183 day test which is that she stayed in Australia for 183 days in one complete financial year and also there is intent of residing in Australia for long run with Romoe. 

 

Conclusion

Summary of the residency tests for FY2015

Juliette cannot be termed as Australian tax resident in the time frame of FY2015, because she had not passed any residency test under the provision of tax ruling TR 98/17.

Summary of the residency tests for FY2016

Juliette will be termed as Australian tax resident in the time frame of FY2016, because she had satisfied the prerequisite norms of 183 days test and resides test as advocated in the tax ruling TR 98/17.

2. The aim here is to present the income statement for the rental property owned by George. It is known that the property has been on rent ever since the ownership was gained by George. The relevant ATO rules allows the taxpayer various deductions on whom claim may be made and hence these could be deducted from the rent income derived by the taxpayer i.e. George. The list of various deductions applicable for George’s property is shown below (ATO, 2015).

The decline in value on account of the assets (present on the rented property) incurring depreciation can be deductible.

General wear would cause some damage on the property and expenses incurred to fix the damage would be classified under repairs and maintenance. Further, the property may suffer damage due to bad weather, flood or any other natural disaster and the expense incurred on fixing these would be tax deductible and termed as repair and maintenance expense only.

At times, there is capital expenditure aimed to bring about enhancement of the effective life of the property and these would be termed as capital works and would be deductible from the income at the annual rate of 2.5% pa for forty years.

Property management related expenses would also be deductible.

Thus, based on the above deductions, the rented property’s income statement is summarised below.

 

Explanations:

The commission of the agent responsible for managing of property = 5% of the rental income = (5/100)*13900 = $ 695

Capital deduction on account of roof top replacement = 2.5% of 15000 = (2.5/100)*15000 = $ 375

The schedule for calculation of depreciation is shown below. It has been assumed that the assets have been acquired on December 1, 2015 and hence duration has been computed from that date to June 30, 2016 (Gilders et al., 2014).

The explanations with regards to various deductions highlighted in the income statement are as follows.

As highlighted in the tax ruling TR 97/23, for damage caused due to gradual deterioration in the property, fixing expenses would be needed in order to eradicate this damage and fix up the technical snag, expenses incurred would be classified under repair and maintenance (ATO, 2016). The repair and maintenance in this case has been incurred on the following.

Front side fence repainting

Repairing of the front door that has been damaged

General repair and maintenance

Further, expenses in relation to the management of property like that given to the agent in this case is deductible and thus included in the income statement as a deduction from the rental income received by George (ATO, 2015).

Besides, a plethora of depreciable assets are present within the property premises and based on their estimated life, the value of these assets tend to decline which needs to be taken into consideration into computation of taxable income (CCH, 2012).

It is imperative to distinguish between repair and maintenance and capital expense. In the given case, it is known that damage has been caused to the fibre roof. However, George as per the information provided did not fix it but actually replaced it with a new more durable roof. Hence, through this there is an enhancement of property’s life and possibly value and therefore this would be expense of capital nature. Such expenses are deductible annually at the rate of 2.5% and this can be availed for a period of 40 years (Barkoczy, 2013).

 

References

Case Laws

FC of T v. Pechey 75 ATC 4083; (1975) 5 ATR

IRC v Lysaght [1928] AC 234

Federal Commissioner of Taxation v Applegate case

Levene v. I.R.C.(1928) A.C.217

Peel vs The Commissioners of Inland Revenue (1927) 13 TC 443

The Commissioners of Inland Revenue v. F L Brown (1926) 11 TC 292

Tax Rulings

Taxation Ruling TR 97/23

Taxation Ruling TR 98/17

Websites

ATO (1998), Taxation Ruling TR 98/17. Retrieved on September 2, 2016 from https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR9817/NAT/ATO/00001

ATO (2015), Rental Properties 2015, Retrieved on September 2, 2016 from https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/Rental-properties-2015.pdf

ATO (2016), Rental Property Expenses, Retrieved on September 2,, 2016 from https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Investments,-including-rental-properties/Rental-property-expenses/

Books

Barkoczy, S. (2013), Foundation of Taxation Law 2013, North Ryde: CCH Publications,

CCH (2012), Australian Master Tax Guide 2012, Sydney: CCH Australia Limited

Coleman, C. (2011), Australian Tax Analysis, Sydney: Thomson Reuters (Professional) Australia,

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P. and Snape, T. (2016), Australian tax handbook, Pymont: Thomson Reuters

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2014), Understanding taxation law 2014, LexisNexis/Butterworths.

Woellner, R. (2014), Australian taxation law 2014, North Ryde: CCH Australia

OR

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