Discuss about the Submission to Standing Committee on Economics.
Issue: In the present situation, it is required to analyze the residential status of Julie as per Australian Taxation Office who originally belongs to Vancouver, Canada. Julie, 22 years old arrived Brisbane, Australia based on a “12- months working holiday visa” on September 2, 2015 for the purpose of holiday and temporary work. Therefore, the case requires determination of Julie’s residential status in Australia for the year ended 30 June 2016 as per TR 98/17, ITAA 97.
Law: Regulations of TR 98/17 ITAA 97 provides that an individual is considered as Australian resident for the purpose of tax if the individual has permanent residence in the country. However, in case of foreign resident, individual is referred as Australian resident for taxation purpose if the individual stays in the country for more than six months in the financial year according to the constructive residential test in Australia (Ato.gov.au 2016). The regulation of Income Tax Assessment Act 1997 further provides that if an individual arrives in Australia based on working- holiday visa and travels to different locations then the individual will not be considered as an Australian resident even if the stay exceeds six months (Austlii.edu.au 2016).
Analysis: The present case of Julie is similar to “Miller v. FCT (1946) 73 CLR” in which court held that the individual should not be considered as a resident of Australia for taxation purpose since, the individual’s permanent residence was England. The taxpayer arrived in Australia and stayed for more than six months but travelled to different locations for work hence, the taxpayer will be considered as a foreign resident as per Australian Taxation Office (Sharkey 2015). Another similar case on “Applegate v. FCT (1979) ATC 4307”, court decided that the taxpayer would not be regarded as Australian resident as per the meaning of ordinary resident since his permanent place of living was outside Australia. It was held that the taxpayer travelled Australia for the purpose of holidaying hence, he will be considered as non- resident as per Australian Taxation Office. Since, Julie’s permanent resident is in Canada and travelled Australia for holiday and work for temporary period hence, ordinary resides test cannot be satisfied. On the contrary, Julie stayed in Australia for more than six months but travelled to different locations which is similar to the decided case of “Reid v. ICR (1926) TC 292” (Kirsch 2016). Accordingly, Julie would be considered as non- resident in Australia for the purpose of tax.
Conclusion: Considering the above discussion on Julie’s stay in Australia, it can be concluded that Julie is non- resident Australian during the year ended on 30 June 2016. Julie’s stay in Australia constitutes from September 2 2015 to June 16 2016 i.e. more than six months but since she travelled to different locations during her stay for holidaying and working, she cannot be considered as Australian resident under the principles of ITAA 97 TR 98/17 during the year 2015-2016.
Principles of TR 98/17 ITAA 97 provides that the non- resident taxpayer is liable to pay tax under Australian Taxation Office only if the income has been earned in Australia during the stay referred as a source country. Any other income received from other countries will not be assessable in the taxable income as per the regulations of Australian Taxation Office since income generation was not from the source country (Ato.gov.au 2016). Accordingly, Julie’s income during the financial year 2015- 16 will be assessable as per her residential status determined in the first requirement. As per the conclusion of the requirement, it has been determined that Julie is non- resident Australian for the year ended 30 June 2016 therefore income derived in Australia would be assessable as per section 6-5, ITAA 97.
As per the taxation laws in Australia, every individual who is a resident or non-resident (income source is in Australia) requires to tax on the income generated from different sources (Woellner et al. 2016). There are mainly three different sources, which the government of the country considers for calculating the taxable income and these sources are – personal income in terms of salaries or wages, capital gain and the income from business or any other professions. While calculating the taxable income, the government considers all applicable deductions and exemptions as mentioned in ITAA 97 (Ato.gov.au 2016). In this point, it is important to mention that while claiming for the deductions, the individuals who are paying the tax need to prove the expenditures are related to the work. At the same time, the individuals are also requiring to provide each relevant information or documents in support of their claim for deduction (Smith et al. 2016).
Here, the deduction regime for the taxpayers in Australia is identified through critical analysis and discussion. In the first part of the discussion, the principles of good taxation system are evaluated critically. The discussion and evaluation show that how the principles of good taxation system can help the taxpayers in Australia. The critical analysis or evaluation is done so that the simplicity and reliability of good taxation system can be better understood. While analyzing these principles, the current taxation system in Australia is compared with the good taxation principles. Along with that, at the end, the Australian taxation system is compared with the New Zealand’s taxation system.
Regulations provided under ITAA 97/36 are the main basis of calculating the taxable income of the individuals in Australia. In Australia, there are mainly three level of government, who take part in the tax calculation of income tax of the people in the country (Barkoczy 2016). These three levels help the government of the country verifying and calculating the actual tax liability of the individual in context of salaries or wages, income of professions or business and capital gains.
The regulations under the ITAA 97/36 have mentioned that in order to get the deduction benefits on expenses, the individuals are required to prove that the expenses are related with their works. In case of Australia, maximum limit of paying the tax is 45%, which indicates that an individual can pay maximum tax of 45% on his or her total taxable income (Austlii.edu.au 2016). As per the rules, the Federal government in Australia requires to collect 67% of income tax revenue in a financial year (Austlii.edu.au 2016).
In order to identify the taxable income of an individual in Australia, the government considers the time period, which starts from 1st July of the current year to 30th June of the next year (Warren 2016). The regulations and guidelines under the ITAA 97 have stated that the tax payers in Australia must file the withhold tax, income tax return and other income taxes and along with that paying the Medicare levy is also the responsibility of the income tax payers in the country. The individuals in Australia require paying 2% Medicare Levy on their taxable income (Ato.gov.au 2016).
Any taxpayer in Australia can claim for the deductions on the expenses, which are allowed by the Australian tax system for deductions. As per the Australian taxation law, the expenses for which the deductions are claimed must be related to the work of the tax payer (Wilson 2016). There is a particular time at which the individuals can claim the deductions and that is at the time of filling the return file of income tax. Apart from these two basic rules, there are many other rules, which must be maintained by the tax payers in Australian. These rules and guidelines are as follow:
The requirements, which are mentioned above are the primary requirements for the deduction claim. However, the deduction claim requires fulfilling many other requirements, which can be considered as the secondary requirements. In schedule A, it has been mentioned that the expenses, for which the tax payers are claiming the deduction must be itemized under the head “ordinary and necessary expenditure”. At the same time, the expenses, which the employer has not reimbursed, can be claimed for deduction but if that those expenses below 2% of the gross income, then that will not be considered as the deductible expenses (Chardon, Freudenberg and Brimble 2016). The eligible expenses for the deduction are as follows:
Income tax is the major income source for the government of the country. The development steps taken by the government in any country depend on the amount of income tax that the government can collect from the income tax payers (Mulyadi et al. 2016). This is because if the government earns more income tax, then it can spend more money for the development purposes. However, the government in any country cannot increase its tax income easily. In a country, the government can charge only a certain percentage of tax on the incomes of the individuals (McClure, Lanis and Govendir 2016). At the same time, it is also true that the government cannot charge high percentage of tax on the incomes of the tax payers because that is unethical. Therefore, deciding the correct tax percentage and building a proper taxation system is very important.
Daley and Wood (2016) stated that in order to maintain the proper income flow of the government, the country must have a good taxation system. Good taxation system includes neither high tax rate nor very low tax rate. If the tax rate in the country is much high, then the tax payers will try to avoid the tax payment or try to do the fraudulence. On the other side, if the government charges very low tax rate, then the income level of the government will go down and the government will not be able to improve the economic and financial situation of the country. Kiprotich (2016) mentioned that there are mainly four principles of a good taxation system. These principles are stated below:
Principle of convenience – This principle of good taxation system suggests developing such a taxation system, which is convenient to every taxpayer in the country. Clear and simple guidance or rules must be there so that a balance can be maintained between the time of generating the income and paying the tax for the income (Bernstein and Stiglitz 2016).
Principle of economy – The principle of economy suggests minimizing the cost of collecting the taxes from the tax payers in the country. The minimization of the cost is possible if the government follow a simple taxation system, so that the tax can be collected easily. If the cost of tax collection is reduced, then the net income of the country will be high (Burak and Nemec 2016).
Principle of equality – This principle suggests that there must be equality in the taxation system in the country. This indicates that the tax rate must be charged based on the income level of the individuals. If the individual is earning less income, then the tax rate for that individual must be low and if the income level of the individual is high, then the tax rate must be high (McClure, Lanis and Govendir 2016).
Principle of certainty – As per this principle, the taxation system in a country must charge such a tax rate so that it is ensured that the tax payers in the country can pay the tax properly. This means the tax income of the government must be certain (Bernstein and Stiglitz 2016).
From the above discussion, it can be stated that a taxation system can be considered as the good taxation system when it meets the requirements mentioned under the above-mentioned four principles. The four principles indicate that the good taxation system must be simple and include standard tax rate, so that every tax payer in the country can calculate and understand the taxation system.
The Australian taxation system has mentioned that the individuals can claim for the deductions only on those expenses, which are related to the work of the taxpayers. However, Kiprotich (2016) noted that the taxation system in Australia requires making some amendments in order to convert the taxation system into the good taxation system. In this context, Wilson (2016) argued that the taxation system in Australia is much sound and includes the four primary principles of good taxation system. The TR 95/17 ITAA 97 of Australian taxation law has indicated that in order to claim the deductions, the individuals must prove that the expenses are work related (Barkoczy 2016). This can be identified in the case Lunney v. FCT (1958) 100 CLR 478. In this particular case, the court suggested that to claim the deduction, the expenses must have the characteristics that make the expenses deductible as per the Australian tax law (Tran-Nam 2016). Hence, the court asked the taxpayer Lunney to provide the documents that prove the expenses are deductible.
On the other side, in the case Edwards v. FCT (1994) 49 FCR 318, the tax payer was asked to present that the expenses were incurred for buying the work uniform and other work-related events, so that the deductibility of the expenses can be judge (Daniel et al. 2016). Therefore, from this judgment by the court also proves that in order to claim the deductions, the tax payer must have the relevant documents that prove the expenses are incurred for the work. In this context, Daley and Wood (2016) argued that the taxation system in Australia is much complex. There are huge numbers of rules and regulations, which make the tax payers confused regarding their tax liability. This indicates that the Australian taxation system does not meet the demand of the “principle of convenience” of good taxation system. In support of this, Wilson (2016) mentioned that many taxpayers in Australia face difficulties while calculating their tax liability because they do not have enough knowledge about the taxation rules and regulations.
Therefore, in order to convert the taxation system of Australia in to a good taxation system, the government of the country must simplify the system. This simplification can help the government maintaining the “principle of certainty”. However, McClure, Lanis and Govendir (2016) commented that the government of Australia is able to collect the income tax properly in each financial year. On the contrary, Chardon, Freudenberg and Brimble (2016) stated that the tax rate in Australia is much high than that of the other countries, which can make the taxation system a burden on the tax payers. Therefore, from this discussion, it can be stated that the taxation system in Australia is well developed but in order to be a good taxation system, the government of the country requires simplifying the system and reducing the tax rate.
Unlike the taxation system of Australia, New Zealand taxation system provides tax collection power to the Inland Revenue Department in compliance with the taxation system at national level. According to the New Zealand Taxation System, individual taxpayers are required to pay tax on personal income as well as on business income for the supply of products and services. New Zealand Taxation System does not require taxpayers to pay tax on income from the transfer of capital assets or property (Dridi and Boubaker 2015). However, in certain situations taxpayers are required to pay tax on capital profit, which is considered as income including the profit on sale or transfer of patent right. For the purpose of measuring taxable business income, taxpayers are entitled to claim deductions with respect to several business expenses incurred to derive the business income (Flynn, Belak and Soltis 2014). However, certain business expenses cannot be claimed for deduction even if expended for generating the income for business in compliance with the regulations of New Zealand Taxation System. In order to claim the deduction on business expenses, it is important to spend the same particularly for generating the business income as well as during the taxation year. For example, charges of depreciation, charges on goods and service tax and other production expenses can be claimed as work- related deduction for computing taxable income from business during the financial year (Pinto-Sanchez et al. 2015).
In view of the work- related deductions in Australia and New Zealand, it has been analyzed that the basic regulations for claiming deduction on business expenses along with requirements for maintaining records of business expenses. It has been observed that the deduction on business expenses can be claimed only if it is directly related to generate business income as per both the taxation system of Australia and New Zealand (Sawyer 2016). Travelling expense, for example can be claimed under work- related deduction only if it is spent solely for the purpose of business or profession. If the travelling expense has been spent for personal purpose fully or partly, then the sane would not be claimed as deduction. On the other hand, expenses incurred to commute in local work location cannot be claimed as deduction under the both the taxation system of Australia and New- Zealand even though it is directly related to work (Austlii.edu.au 2016).
Moreover, there are several differences in deduction system of Australia and New Zealand for the purpose of computing taxable income. Taxation system of New Zealand provides that the taxation on capital gain is not applicable to the taxpayers therefore deduction on respective expenses on the capital asset cannot be claimed even if it is used to operate business (Dridi and Boubaker 2015). Besides, capital gain taxation is applicable under Australian Taxation System therefore, taxpayer is entitled to claim deduction expended on the business capital assets during the taxation year. According to the taxation system of New Zealand, provisional tax liability would be imposed on the individual assessees if the previous year residual tax exceeds the threshold limit amounted to $2,500 (Fellows and Kahng 2013). On the other hand, this regulation is not applicable to the taxpayers under the taxation system of Australian Taxation Office rather; probable taxation liability is applicable for payment of installment. For the purpose of claiming deduction related to work New Zealand taxation system require taxpayers to claim deduction for “in- work tax credit” with respect to the inflation rate growth. While, in case of Australian taxation system, individuals are not entitled to claim for such deduction in order to pace with the country’s inflation and economy (Hirte and Tscharaktschiew 2013).
Conclusion
Considering the explanation and analysis of work- related deduction system in Australia for the taxpayers, it can be said that the federal government is required to constitute simple and fair regulations in accordance with the good taxation system. It has been observed that the current year’s work- related deduction policy established by the federal government of Australia provides that the taxable income should be determined as and when incurred during the taxation year as well as should be related to specific work. In addition, Australian Taxation Office provides that the taxpayers need to maintain essential documents and invoices to validate the expenses spent on business work. It is also essential to consider the principles of good tax system based on equality, simple and fair means, certainty and economy for the benefit of taxpayers. Accordingly, federal government of Australia established deduction policy in accordance with the principles of good tax system yet there are certain complications in the regulations to claim work- related deductions as well as filing return.
In view of the current taxation system, certain complex taxation rulings are difficult to understand and apply for the taxpayers to determine the taxable income under the principles of ITAA 97. For determining the appropriate and accurate nature of work- related expenses for the purpose of deduction with respect to capital and revenue nature, it is essential to for the individuals to have clear understanding of taxation principles. Further, comparison of deduction system in Australia with that of New Zealand reflected several similarities and dissimilarities. Similarities between the two-taxation systems included incorporation of actual expenses, preservation of expenses documents or invoices along with appropriate disclosure and direct relation with the business income derivation. On the other side, differences between the Australian deduction system and New Zealand deduction system are available in terms of “in-work tax credit”, capital gain tax deductions and provisional tax liability. It has been observed that the deduction system of New Zealand is certainly different and complex compared to that of Australia for understanding the regulations on “in- work tax credit or provisional tax liability”. Therefore, in order to conclude the analysis, it can be said that the deduction regime of Australia needs to be improved in certain ways in line with the principles of good taxation system to provide equality, economic growth through simple and fair means of regulation.
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