Taxation Advice for Mr. Lewis

Residency

Mr Mark Lewis is employed on a luxury cruise liner which travels the Mediterranean Sea. After deductions his taxable income is AUD$150,000, (Hong Kong Dollar 790,000)

He owns a farmhouse in Australia which was his family home. After divorcing his wife, the wife took their twins to live in Canada. Mark now rents the farmhouse to a lovely couple who sublease parts of the house through Airbnb.

The farmhouse is rented including all furniture, with the furniture belonging to Mark. Mark stays on the property when he is in Australia in a converted shed consisting of a master suite, bathroom and toilet. This part of the property is not listed on the lease agreement. All of Mark’s personal belongings are locked up and stored in this shed. The shed makes up about 25% of the overall lettable property.

In the current tax year, Mark spent eighty days in the converted shed in Australia. The remainder was spent on the luxury liner or visiting his twins in Canada, where he spent a total of 40 days.

The luxury liner where Mark works visits many locations around the Mediterranean. Mark is employed by a company incorporated in the Cook Islands under an employment contract signed in Hong Kong. The luxury liner is owned by a company incorporated in Bermuda.

The income earned by Mark from the cruise company was salary and wages derived by him under the contract of employment.

In addition, in preparation for his retirement, Mark has taken up cattle breeding. He currently owns one hundred cows which live and feed on an external farm in Australia (for a fee). These cows are being fattened up and after half are at the required weight they will be sold. The other half will be used for further breeding.

Mark consistently keeps up to date with the development of the cows. He spends most of his free time reading literature and attending paid courses related to the business. Mark plans on purchasing a large, vacant property next door to his farmhouse specifically for keeping his cows when he retires from the luxury liner. In retirement, Mark intends on living permanently in the converted shed and will still rent out the farmhouse.

For each of the prior three years that Mark has been undertaking this activity, there has been a tax loss made, although the tax losses have been reducing in size as the venture becomes more successful. In fact, this year Mark has made a small profit before tax of $50,000 (taxable income $200,000, tax deductions $150,000).

Working in a team of four tax accountants, you are to provide written taxation advice for Mr Lewis relating to the following four main tax issues:

1) Residency

2) Source

3) Exemptions

4) Business 

• Identify the specific tax issues relating to the four main categories above

• Find any relevant taxation legislation/case law pertaining to the tax issues