Determining Tax Residency Status Of Taxpayers: Guide To TR 98/17

Income Sources and Assessable Income

Question:

Discuss about the Taxtation Law Residency & Source.

The income earned from different sources is an imperative aspect to determine the total assessable income of a taxpayer. The income received from sources such as domestic source or from foreign source is considered for taxation on the basis of the tax residency status of the taxpayer. Therefore, it can be concluded that in regards to determine the assessable income of a taxpayer for an income year, the tax residency status is essential.

In order to check whether the concerned taxpayer is an Australian tax resident or foreign tax resident for the given assessment year, the subsection 6(1), ITAA 1936[1] would be the guiding statute. Moreover, TR 98/17[2] is the leading tax ruling to determine the various tests regarding tax residency of a taxpayer. There are mainly four tests that are highlighted in TR 98/17[3] are as listed below[4]:

• Resides Test

This test is valid for the taxpayer, who is foreign resident and can be applied to check whether the foreign income would be chargeable as assessable income for the given income year or not.

• 183 Test

This test is valid for the taxpayer, who is a foreign resident and thus, can be used to check whether the income derived from foreign source considered as assessable income or not on the basis of the duration of stay in Australia.

• Superannuation Test

This test is valid and used to determine the tax residency of officers and government employees of Australia, who are staying in other country in order to fulfil their job obligations[5]

• Domicile Test

The imperative test that is valid and applied to an Australian resident is domicile test.

If the taxpayer has satisfied any of the above highlighted tests then he/she would be termed as Australian tax resident for the respective tax year. It is apparent that the taxpayer in the given case study is an Australian resident and is not a federal government staff. Hence, domicile test is validated here.

There are two main essentials that are illustrated in the domicile test that must be satisfied by the taxpayer[6].

• It is necessary that taxpayer must have domicile of Australia as per the norms of Domicile Act 1982.
• Permanent abode must be located in Australia.

It is noteworthy that the taxpayer must not make a permanent abode in foreign land at any time period of the respective tax year or else he would be considered as foreign tax resident. The permanent abode concept has been explained in greater details in the Levene v. I.R.C.[7] case and the same would be extended to the given case also.

If the taxpayer fails to complete the above illustrated essentials of the domicile test, then he/she would not be designated as Australian tax resident under this test. This test decides the factors related to the domicile and permanent abode. But, there are some requisite elements related to the permanent abode that are would be taken into consideration on behalf of the tax commissioner to frame an opinion on the location of the same.  These requisites elements are listed in the tax ruling IT 2650[8] and are outlined below:

• Total period of stay in foreign land (variation in the indent period and actual period)
• Location of stay in foreign land especially, if the taxpayer has any personal or professional relation in most frequent visited foreign place
• Intention or future plan on behalf of the taxpayer to reside in the foreign land
• Various asset/ properties acquired by the taxpayer in Australia or in foreign land
• Any particular activity that indicates the future plan of the taxpayer to create a permanent residence in a country rather than Australia

Further, the taxpayer may be termed as foreign resident, if he has a permanent residence in Australia but has resided in some other country for sustaining a business. The critical aspect is to determine if the taxpayer does have any clear idea regarding the subsequent time to stay in other country and also the expected duration or not[9]. Further, if the taxpayer in such cases returns to Australia in between of the work because of any serious health issue or other related reasons when actually there was plan to stay for a longer duration, then also the taxpayer would not be considered as Australian tax resident for that specific income year[10]. Therefore, the income derive in that period from other country’s sources would not be considered under assessable income because the taxpayer would be termed as foreign tax resident and the foreign income would not be taxed under the Australian Tax Law. The leading case in this regards is the F.C. of T. v. Jenkins.[11]

Guiding Statute and Tax Ruling for Tax Residency Status Determination

It is apparent from the given information that Peter is a member (bass guitarist) of a popular band in Australia. On January 15, 2016, in order to achieve more popularity in England, all the members shifted to England. In this process, Peter had the future plan that he would return to Australia and stay there on a permanent basis once the band would get expected popularity in England. Peter required finance in regards to pay the air fare and the rent amount in England. Therefore, he sold his personal car and leased the house till 2018.

After reaching England, they had leased a large house. The duration of the lease is of 12 months. After a year of working, the band had gained sizable popularity in England. The band was also awarded with several awards, prices and royalty on the released album. In August 2017, the team decided to go back to Australia. In October, 2017, Peter and other members came back to Australia. It is noteworthy that Peter had leased the house till 2018 and thus, after returning back to Australia, he had to lease a house to reside.

The first critical condition of domicile test is satisfied by Peter i.e. possession of Australian domicile. The major aspect is to comment on the permanent abode location of Peter during the assessment years under question. It is apparent that Peter does not have in mind a specific time duration for which he would reside in England. Moreover, he has leased his own house till the end of 2018, which indicates that he will approximately not come back earlier than this. Moreover, the aim of the band was to gain the popularity irrespective of the time consumed. Therefore, it can be concluded that under the decision of F.C. of T. v. Jenkins 82 ATC 4098 case, the permanent abode of Peter for the time he was not in Australia would be England only. The permanent residential place of Peter is not located in Australia and thus, for financial years 2016, 2017 and 2018, he would be considered as a foreign tax resident. Therefore, the proceeds received on the account of the professional work in England would not be termed as assessable income for taxation. Moreover, the portion of the income derived from Australia would be chargeable as assessable income under the highlighted of Australian tax law.

If the taxpayer is a foreign tax resident, then the amount of the income derived from foreign sources would not be accountable for taxation in Australia (s. 6-5(3))[12]. Although, if the taxpayer is an Australian tax resident for the given tax year, then the total income derived from both the sources would be taxed as per the Australian tax provisions (s. 6-5(2))[13]. Since, Peter is not a Australian tax resident, hence only income sources arising from Australia have been focused on and remaining have been ignored.

Ordinary income and statutory income are the two main parts of assessable income under Section 6(5) and Section 6(10) respectively[14]. There is no direct law available in case of ordinary income to define the sources but the judgement of various case laws and tax rulings can be used to determine whether the received income is from ordinary source of income or not. The sources that would result ordinary income are listed below[15].

• Income received from personal exertion on behalf of the taxpayer
• Interest amount from various sources such as banks, bonds
• Rent amount or lease amount
• Dividend received on the shares
• Income received from the business of the taxpayer
• Salaries or proceeds received from employment of the taxpayer
• Any income derived from the professional work would be considered as ordinary income under Section 6-5.
• Any prize related the profession as per Scott v. Federal Commissioner of Taxation[16]

As the name suggests, it includes all income for which there is a dedicated statute and this forms part of the assessable income as highlighted in s. 6-10, ITAA 1997[17]. One of the significant components of this income is the capital gains which attract a tax known as CGT or Capital Gains Tax. It is noteworthy that capital gains make a contribution to assessable income. Also, for computation of taxable capital gains, 50% rebate is available to Australian tax resident for the long term gains on assets[18]. Besides, assets such as car meant for personal usage are exempted from the purview of the CGT[19].

Income received by Peter in year FY2016

• Income derived from the liquidation of personal car would not be considered as assessable income because it is classified as capital receipts. Further capital gains are exempted from CGT under the Section 108-20(2)
• Selling of the shares result in long term capital gains to the taxpayer and would contribute to assessable income. Amount = $11,000-$5,000 = $6,000
• Amount received on account of ARIA Award would be assessable income as it is ordinary concept under Section 6(5). Amount = $20,000
• The amount received on the account of profession would be assessable income from ordinary concept under Section 6(5). Amount = $140,000
• Income received from the lease of the house would be considered as assessable income as per the provision of Section 6(5).

Income received by Peter in year FY2017

• Royalty income derived on the account of released album in Australia would be assessable under Section 6(5). Amount = $ 30,000
• Amount received on the account of ARIA Award would be assessable income from ordinary concept under Section 6(5). Amount = $10,000
• Income received from the lease of the house would be considered as assessable income as per the provision of Section 6(5).

Income received by Peter in year FY2017

• Income received from the lease of the house would be considered as assessable income as per the provision of Section 6(5).
• Royalty income derived on the account of released album after coming back to Australia would be termed as assessable income under Section 6(5). Amount = $4,000

References

Books & Websites

ATO, INCOME TAX ASSESSMENT ACT 1997, < https://www.ato.gov.au/law/view/document?DocID=PAC/19970038/6-5>

Australian Taxation Office, Taxation Ruling No. IT 2650, (1991) <https://www.ato.gov.au/Individuals/Income-and-deductions/Income-you-must-declare/ >

Australian Taxation Office: Taxation Rulings:  TR 98/17 (25 November 1998), < https://www3.austlii.edu.au/au/other/rulings/ato/ATOTR/1998/tr1998-017/>

Barkoczy, Stephen, Foundation of Taxation Law 2015, (North Ryde, CCH, 2015)

CCH, Australian Income Tax Legislation 2011: Taxation Administration Act, 2011, (CCH Australia Limited, 2011)

Commonwealth Consolidated Acts: Income Tax Assessment Act 1936 –SECT 6 < https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s6.html>

Commonwealth Consolidated Acts: Income Tax Assessment Act 1997 –SECT 6.5. <https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html>

Deutsch, Robert, et. al., Australian tax handbook.  (Pymont, Thomson Reuters, 2015)

Gilders, Frank, et. al., Understanding taxation law 2015. (LexisNexis, Butterworths 2015)

Marine, The Actors’ Handbook: A guide to the Australian Entertainment Industry, 2007, (Marine Hill, 2007)

Taxpayers Australian lnc, The taxpayers Guide 2014-2015,  (John Wiley & Sons, 2015)

Williams, Australian Income Tax: Australian Taxation Office Rulings and Guidelines, (Butterworths, 2002)

Case Law

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

F.C. of T. v. Jenkins 82 ATC 4098

Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514