Describe about the Assessable Income and Related Liability for Business Entities.
Issue
The core issue in the given case is to determine the assessable income and related liability for namely three entities i.e. Stephanie, Ronald and Rogan Advertisement.
Rule
Tax Residency of Individuals
The first step to determine the assessable income of the concerned taxpayer is to ascertain the underlying tax residency since Section 6-5(2), ITAA 1997[1] prescribes that only for tax residents of Australia would the income from abroad be also contribute towards assessable income while Section 6-5(3), ITAA 1997[2] prohibits the same for foreign tax residents.
For individuals, the various residency tests are elaborated by the tax ruing TR 98/17. As per this ruling, there are namely four tests and if the taxpayer could satisfy one of these tests, he/she would be successful in being classified as an Australian tax resident[3]. The relevant details of the various residency tests are highlighted as follows.
Domicile Test – This particular test is applicable for tax residency determination of Australian domicile holders or Australian residents who have to spend a major portion of the time on foreign soil. The two conditions that need to be complied with by the concerned taxpayer are given below[4].
Possession of Australian domicile at the assessment time which should be congruent with Domicile Act 1982.
Location of permanent abode to be situated in Australia only.
The domicile condition can be objectively determined; the same cannot be opined in the context of determination of permanent abode location. In this particular endeavour, the tax ruling IT 2650 offers insight with regards to the factors that are considered vital[5].
The intention of the taxpayer to set up permanent residence in foreign land.
The duration of foreign stay expected and the duration actual stayed and the underlying explanation for the variation.
The extent of ties (personal, professional) maintained in Australia and visit frequency to Australia.
Resides Test – The tax residency determination of foreign residents is carried out using this test. In this regard, the pivotal factors that are taken into regards for decision making are enumerated as follows[6].
The main purpose of the taxpayer’s Australian visit.
Level of ties in profession, personal sphere that the taxpayer boasts in Australia
The characteristics such as duration ,reason and frequency of trips made to the country or origin
Social arrangements that the taxpayer has forged while staying in Australia.
183 Day Test – Another residency test for foreign residents tax is 183 day test. It primarily requires the underlying taxpayer to comply with the following two conditions[7].
Atleast a stay of 183 days in Australia whether on continuous or intermittent basis
Clear indication on the end of taxpayer with regards to long term settlement plan in Australia.
The test would be passed only if the taxpayer complies with both the conditions highlighted above.
Superannuation Test –
A selective test which has utility only for the government employees working abroad whose tax residency is linked to contribution made to select superannuation scheme[8].
Tax Residency of company
For any given company to be categorised as a tax resident, it is imperative that one of the terms mentioned below are fulfilled[9].
The company’s incorporation must be carried out in Australia.
The firm’s business should be Australia based and the firm’s majority shareholding should be with be with Australian tax residents or the control of management must rest in Australia.
Source of Income
Assessable income may be derived under the ambit of the following two sections.
Section 6(5) – This caters to income as per the ordinary income concepts and primarily comprises of the following three payments[10].
Business Income by carrying on a business activity
Personal service income through employment or providing other services.
Income on investment in the form of rent, dividends and interest.
Section 15(15) – Any profit that the underlying taxpayer derives carrying out an isolated transaction with profit making intent[11].
Tax Residency Status
With regards to determination of tax residency of Stephanie and Ronald, from the above residency tests that have been listed, the test that has relevance is Domicile test since both are Australian residents. Further, the relevant facts are summarised as follows.
The couple at the end of FY2015 move to Brazil to fulfil their professional obligations with an expected return to take place by October –November 2016.
They have a joint house in Australia which remains leased during their stay in Brazil.
The fortunes of the business (i.e. Rogan Advertising) are highly driven by Stephanie and also the couple expect to come back once professional obligations finished.
For payment of salary, a joint account is opened in Brazil while the payment derived from house lease is credited into the joint bank account in Australia.
As per IT 2650, a stay on foreign land for a period which does not exceed two years essentially is referred to as being temporary in nature. In case of the couple, it is lesser than 2 years. Further, the couple continue to main residence in Australia along with the joint bank account. Besides, they intend to return back from Brazil and aim to finds a healthy business. Hence, going by the assumption that the expected return time does actually materialise, then it would be fair to assume that both Stephanie and Ronald would be classified as tax residents of Australia for both FY2016 and FY2017.
In relation to Rogan Advertisement, the Australian tax resident would be confirmed for both years since the company seems to be incorporated in Australia and besides that its primary business is based in Australia. Also, the owners are Australian tax residents.
STEPHANIE
In accordance with the discussion in the previous section, the assessable income computation is shown below.
Section 6(5) – Ordinary Income
Income from personal exertion – Annual salary from Rogan Advertising = $ 80,000
Considering that Stephanie is an Australian tax residents for both years, income from foreign source is also assessable (Section 6-5(2)).
Income from lectures ($ 24,000) is linked to Stephanie’s professional skills as an advertiser and owner of a business and this would be attributed to in this section.
Income from investment in property – Rent income (Lease payments) assuming that share of both Stephanie and Ronald is 50% each = (450/2)*52 = $ 11,700
Further, based on underlying rate and balances, rent income to the extent of 50% from joint accounts in Australia and Brazil would also contribute to assessable income (Due to information not being given, for both years these are assumed to be zero).
Also, unfranked dividends payable by Rogan advertisement from the remaining profits would be assessable (For both years these are assumed to be zero).
Hence, assessable income (FY2016) = 80000 + 11700 + 24000 (Assuming lectures in FY2016) = $ 115,700
Further, assessable income (FY2017) = 80000 + 17*(450/2) (assuming that return date of couple to their Australian house is October 31, 2016) = $ 83,825
ROGER
In accordance with the discussion in the previous section, the assessable income computation is shown below.
Section 6(5) – Ordinary Income
Income from personal exertion – Annual salary from Rogan Advertising = $ 80,000
Income from investment in property – Rent income (Lease payments) assuming that share of both Stephanie and Ronald is 50% each = (450/2)*52 = $ 11,700
Further, based on underlying rate and balances, rent income to the extent of 50% from joint accounts in Australia and Brazil would also contribute to assessable income (Due to information not being given, for both years these are assumed to be zero).
Also, un-franked dividends payable by Rogan advertisement from the remaining profits would be assessable (For both years these are assumed to be zero).
Hence, assessable income (FY2016) = 80000 + 11700 = $ 91,700
Further, assessable income (FY2017) = 80000 + 17*(450/2) (assuming that return date of couple to their Australian house is October 31, 2016) = $ 83,825
ROGAN ADVERTISING
As the details about firm’s revenue and operating expenses are not stated, hence the assessable income of the company cannot be determined. Thus, it has been assumed that the company breaks even and hence no un-franked dividends are passed on to Stephanie and Ronald.
Conclusion
In wake of the discussion carried above, there is lack of information which prohibits the taxable income calculation for the entities given. Following incremental information is desired.
Actual return of Stephanie and Ronald to Australia for determination of tax residency (Both years) and lease payments on house for FY2017.
Amount of interest earned in various banks accounts for calculation of assessable income for both Stephanie and Ronald (FY2016 and FY2017).
Audited financial statements for Rogan Advertisement to determine taxable income along with quantum of dividend paid to Stephanie and Ronald (FY2016 and FY2017).
Exact dates when lectures were held by Stephanie in Brazil to ascertain whether the proceeds would be realised in FY2016 or FY2017.
The level of ownership in the house for Stephanie and Roger to determine the division of lease payment income between the two (FY2016 and FY2017).
References
ATO, TR 98/17 (25 November, 1998) < https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR9817/NAT/ATO/00001>
ATO, Taxation Ruling IT 2650 (8 August, 1991) < https://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2650/NAT/ATO/00001>
ATO, Companies (27 May, 2013) < https://www.ato.gov.au/Business/Starting-your-own-business/In-detail/Getting-started/Residency-requirements-for-companies,-corporate-limited-partnerships-and-trusts/?page=2#Companies>
ATO, Residency – the resides test, < https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Residency/Residency—the-resides-test/>
AusTax, Residency Status- Arrival in Australia, < https://austaxpbr.com.au/document/PBR_17804>
Austlii, Income Tax Assessment Act 1997- Section6-5, < https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html>
Austlii, INCOME TAX ASSESSMENT ACT 1997 – SECT 15.15, < https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s15.15.html>
Describe about the Assessable Income and Related Liability for Business Entities.
Issue
The core issue in the given case is to determine the assessable income and related liability for namely three entities i.e. Stephanie, Ronald and Rogan Advertisement.
Rule
Tax Residency of Individuals
The first step to determine the assessable income of the concerned taxpayer is to ascertain the underlying tax residency since Section 6-5(2), ITAA 1997[1] prescribes that only for tax residents of Australia would the income from abroad be also contribute towards assessable income while Section 6-5(3), ITAA 1997[2] prohibits the same for foreign tax residents.
For individuals, the various residency tests are elaborated by the tax ruing TR 98/17. As per this ruling, there are namely four tests and if the taxpayer could satisfy one of these tests, he/she would be successful in being classified as an Australian tax resident[3]. The relevant details of the various residency tests are highlighted as follows.
Domicile Test – This particular test is applicable for tax residency determination of Australian domicile holders or Australian residents who have to spend a major portion of the time on foreign soil. The two conditions that need to be complied with by the concerned taxpayer are given below[4].
Possession of Australian domicile at the assessment time which should be congruent with Domicile Act 1982.
Location of permanent abode to be situated in Australia only.
The domicile condition can be objectively determined; the same cannot be opined in the context of determination of permanent abode location. In this particular endeavour, the tax ruling IT 2650 offers insight with regards to the factors that are considered vital[5].
The intention of the taxpayer to set up permanent residence in foreign land.
The duration of foreign stay expected and the duration actual stayed and the underlying explanation for the variation.
The extent of ties (personal, professional) maintained in Australia and visit frequency to Australia.
Resides Test – The tax residency determination of foreign residents is carried out using this test. In this regard, the pivotal factors that are taken into regards for decision making are enumerated as follows[6].
The main purpose of the taxpayer’s Australian visit.
Level of ties in profession, personal sphere that the taxpayer boasts in Australia
The characteristics such as duration ,reason and frequency of trips made to the country or origin
Social arrangements that the taxpayer has forged while staying in Australia.
183 Day Test – Another residency test for foreign residents tax is 183 day test. It primarily requires the underlying taxpayer to comply with the following two conditions[7].
Atleast a stay of 183 days in Australia whether on continuous or intermittent basis
Clear indication on the end of taxpayer with regards to long term settlement plan in Australia.
The test would be passed only if the taxpayer complies with both the conditions highlighted above.
Superannuation Test –
A selective test which has utility only for the government employees working abroad whose tax residency is linked to contribution made to select superannuation scheme[8].
Tax Residency of company
For any given company to be categorised as a tax resident, it is imperative that one of the terms mentioned below are fulfilled[9].
The company’s incorporation must be carried out in Australia.
The firm’s business should be Australia based and the firm’s majority shareholding should be with be with Australian tax residents or the control of management must rest in Australia.
Source of Income
Assessable income may be derived under the ambit of the following two sections.
Section 6(5) – This caters to income as per the ordinary income concepts and primarily comprises of the following three payments[10].
Business Income by carrying on a business activity
Personal service income through employment or providing other services.
Income on investment in the form of rent, dividends and interest.
Section 15(15) – Any profit that the underlying taxpayer derives carrying out an isolated transaction with profit making intent[11].
Tax Residency Status
With regards to determination of tax residency of Stephanie and Ronald, from the above residency tests that have been listed, the test that has relevance is Domicile test since both are Australian residents. Further, the relevant facts are summarised as follows.
The couple at the end of FY2015 move to Brazil to fulfil their professional obligations with an expected return to take place by October –November 2016.
They have a joint house in Australia which remains leased during their stay in Brazil.
The fortunes of the business (i.e. Rogan Advertising) are highly driven by Stephanie and also the couple expect to come back once professional obligations finished.
For payment of salary, a joint account is opened in Brazil while the payment derived from house lease is credited into the joint bank account in Australia.
As per IT 2650, a stay on foreign land for a period which does not exceed two years essentially is referred to as being temporary in nature. In case of the couple, it is lesser than 2 years. Further, the couple continue to main residence in Australia along with the joint bank account. Besides, they intend to return back from Brazil and aim to finds a healthy business. Hence, going by the assumption that the expected return time does actually materialise, then it would be fair to assume that both Stephanie and Ronald would be classified as tax residents of Australia for both FY2016 and FY2017.
In relation to Rogan Advertisement, the Australian tax resident would be confirmed for both years since the company seems to be incorporated in Australia and besides that its primary business is based in Australia. Also, the owners are Australian tax residents.
STEPHANIE
In accordance with the discussion in the previous section, the assessable income computation is shown below.
Section 6(5) – Ordinary Income
Income from personal exertion – Annual salary from Rogan Advertising = $ 80,000
Considering that Stephanie is an Australian tax residents for both years, income from foreign source is also assessable (Section 6-5(2)).
Income from lectures ($ 24,000) is linked to Stephanie’s professional skills as an advertiser and owner of a business and this would be attributed to in this section.
Income from investment in property – Rent income (Lease payments) assuming that share of both Stephanie and Ronald is 50% each = (450/2)*52 = $ 11,700
Further, based on underlying rate and balances, rent income to the extent of 50% from joint accounts in Australia and Brazil would also contribute to assessable income (Due to information not being given, for both years these are assumed to be zero).
Also, unfranked dividends payable by Rogan advertisement from the remaining profits would be assessable (For both years these are assumed to be zero).
Hence, assessable income (FY2016) = 80000 + 11700 + 24000 (Assuming lectures in FY2016) = $ 115,700
Further, assessable income (FY2017) = 80000 + 17*(450/2) (assuming that return date of couple to their Australian house is October 31, 2016) = $ 83,825
ROGER
In accordance with the discussion in the previous section, the assessable income computation is shown below.
Section 6(5) – Ordinary Income
Income from personal exertion – Annual salary from Rogan Advertising = $ 80,000
Income from investment in property – Rent income (Lease payments) assuming that share of both Stephanie and Ronald is 50% each = (450/2)*52 = $ 11,700
Further, based on underlying rate and balances, rent income to the extent of 50% from joint accounts in Australia and Brazil would also contribute to assessable income (Due to information not being given, for both years these are assumed to be zero).
Also, un-franked dividends payable by Rogan advertisement from the remaining profits would be assessable (For both years these are assumed to be zero).
Hence, assessable income (FY2016) = 80000 + 11700 = $ 91,700
Further, assessable income (FY2017) = 80000 + 17*(450/2) (assuming that return date of couple to their Australian house is October 31, 2016) = $ 83,825
ROGAN ADVERTISING
As the details about firm’s revenue and operating expenses are not stated, hence the assessable income of the company cannot be determined. Thus, it has been assumed that the company breaks even and hence no un-franked dividends are passed on to Stephanie and Ronald.
Conclusion
In wake of the discussion carried above, there is lack of information which prohibits the taxable income calculation for the entities given. Following incremental information is desired.
Actual return of Stephanie and Ronald to Australia for determination of tax residency (Both years) and lease payments on house for FY2017.
Amount of interest earned in various banks accounts for calculation of assessable income for both Stephanie and Ronald (FY2016 and FY2017).
Audited financial statements for Rogan Advertisement to determine taxable income along with quantum of dividend paid to Stephanie and Ronald (FY2016 and FY2017).
Exact dates when lectures were held by Stephanie in Brazil to ascertain whether the proceeds would be realised in FY2016 or FY2017.
The level of ownership in the house for Stephanie and Roger to determine the division of lease payment income between the two (FY2016 and FY2017).
References
ATO, TR 98/17 (25 November, 1998) < https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR9817/NAT/ATO/00001>
ATO, Taxation Ruling IT 2650 (8 August, 1991) < https://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2650/NAT/ATO/00001>
ATO, Companies (27 May, 2013) < https://www.ato.gov.au/Business/Starting-your-own-business/In-detail/Getting-started/Residency-requirements-for-companies,-corporate-limited-partnerships-and-trusts/?page=2#Companies>
ATO, Residency – the resides test, < https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Residency/Residency—the-resides-test/>
AusTax, Residency Status- Arrival in Australia, < https://austaxpbr.com.au/document/PBR_17804>
Austlii, Income Tax Assessment Act 1997- Section6-5, < https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html>
Austlii, INCOME TAX ASSESSMENT ACT 1997 – SECT 15.15, < https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s15.15.html>
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