Determining Residential Status For Tax Purposes In Australia

Case Study Involving a Hong Kong Resident Temporarily Working in Australia

Jenny is a resident of Hong Kong but as her profession involves travelling from one place to another thus she came to Australia regarding her profession. Now the issue is that whether Jenny who is staying in Australia for the last few months will be considered as a resident of Australia or not for the purpose of taxation.

The laws or acts or rulings or judgements that can be used to establish the residential status are as follows:

• The provisions of the Income Tax Assessment Act 1936 is applied in this case.
• The Section 6-1of the Income Tax Assessment Act 1936 provides the definition on residential status and it is applied in the discussion.
• The Section 995-1 of the Income Tax Assessment Act 1936 is applied in this case as it provided the definition of residents;
• The section 4-1 of the Income Tax Assessment Act 1997 states who are required to pay tax.
• The section 4-15 of the Income Tax Assessment Act 1997 describes the manner of calculation of taxable income.
• The 6-5 of the Income Tax Assessment Act 1997 provides the meaning of ordinary income;
• The section 6-10 of the Income Tax Assessment Act 1997 provides the meaning of statutory income;
• The Taxation Ruling TR 98/17proides the rules relating to the determination of the residential status.

According to the Income Tax Assessment Act 1936 and 1997, it administers the residential status of an individual and whether the person is liable to pay tax in Australia or not. Not only this, an important role in determining the liability to pay income tax of the taxpayers in Australia has also been played by Taxation Rulings, explanatory guidelines mentioned in Australian Taxation Office and various case judgments (Barkoczy 2016). It is mentioned under section 4-1 of the Income Tax Assessment Act 1997 that a company or an individual or any other entity is obliged to pay tax on the income generated by them that is taxable. Whereas on the other hand, as per section 4-15 of the Income Tax Assessment Act 1997, the income which is taxable must be considered by decreasing the deductions from the assessable income which are permitted under taxation. The income as per the ordinary income under section 6-5 of the ITAA 1997 and in accordance to the income which are statutory under section 6-10 of the Income Tax Assessment Act 1997 is being classified by this act. It is mentioned under section 6-5(2) of the ITAA 1997 and section 6-10(4) of the ITAA 1997 that if, the person who is taxpayer and liable to pay tax is a resident of Australia then in such cases his/ her income from all the sources will be considered as taxable income at the time of assessing the tax liability of that person. However, if the person is not a resident of Australia then those incomes will be considered as assessable income that are generated from Australian sources (Lam and Whitney 2016). Thus due to the above mentioned reason, it is very much essential to determine the residential status of a person in order to calculated the liability of the person to pay income tax.

Section 995-1 of the Income Tax Assessment Act 1936 defines the term Australian resident which refers to an individual who is an Australian resident according to the act. Under section 6-1of the Income Tax Assessment Act 1936, the meaning of the term Resident is explained which also mentions about the four different test/ methods which can be used in measuring an individual’s residential status (Bevacqua 2015). According to the paragraph 32 of the Taxation Ruling TR 98/17, four methods/ test for the determination of an individual’s residential status are:

• Ordinary Test or determining the residential status as per ordinary conception;
• Domicile Test or determining the residential status on the basis of domicile;
• Superannuation Test; and
• 183 Days Test.

With the help of the above mentioned test it can be established that whether Jenny will be considered as an Australian resident for the purpose of taxation or not.

Methods Used to Determine Residential Status for Tax Purposes in Australia

The most basic and primary test or method to determine the residential status of an individual is the ordinary test or resides test. This test states that if an individual is by default a resident of Australia, then that individual will be considered as an Australian resident by default. In other words, if a person resides in Australia only since the time of birth then the person would be considered as an Australian resident for the purpose of taxation and thus he/ she will not need to apply for any other further residential test for the purpose of determining his/ her residential status (Gartner2015). But in case if the person does not satisfy or fails to satisfy the above mentioned test, then he/ she might be required to satisfy any one of the other three test which are the Domicile Test, the 183 Days Test and the Superannuation Test in order to be considered as an Australian resident.

As it is evident from this case that Jenny has her permanent house in Hong Kong and she is also a resident of Hong Kong, therefore she fails to satisfy the ordinary test and will be subject to satisfy any one of the other three test in order to consider herself as an Australian resident.

The word domicile refers to that particular place where an individual have his/ her permanent place of residence. According to the Australian Taxation Office, an individual will be considered as an Australian domicile for the purpose of taxation in Australia if it is proved that the individual have his/ her permanent place of abode in Australia (Bowden 2016). However if the Commissioner of Taxation in Australian is satisfied of the fact that being a permanent place of residence in Australia, the individual resides at any other foreign country or abroad then the individual will not be considered as an resident of Australia for the purpose of taxation according to the domicile test.

It is found from this case study that Jenny is already a permanent resident of Hong Kong before she entered Australia for employment purpose. Therefore it is thus proved that she is already a permanent domicile of Hong Kong. Despite of the fact that she took up an executive apartment on rent at Sydney but it was on a temporary basis. This point thus establishes that Jenny does not have any permanent place of abode in Australia and moreover she is a domicile of Hong Kong where she have her permanent place of abode. Hence Jenny fails to satisfy the Domicile test and thus she cannot be considered as an Australian resident for the purpose of taxation.

The superannuation test states that an individual who is an employee of the Government of Australia and posted anywhere abroad i.e. outside Australia at an Australian post will be considered as a resident of Australia for the purpose of taxation (Novikov et al. 2014).

It can be understood from the above definition that superannuation test does not relates to the case of Jenny by any mean as she is not an employees of Australian Government and thus it is not possible to establish the residential status of Jenny as an Australian resident by referring to this test. In simple words, this test is not applicable in case of Jenny as she can never satisfy this test due to the reason that she is not an employee of the Australian Government.

The Ordinary Test

The 183 days test is another method or ways to determine the residential status of an individual. According to the Australian Taxation Office, if an individual or a person stays at Australia for more than half an income year or more precisely more than or equal to 183 days that may be in a continuous manner or with taking breaks then that particular person will be considered as a productive resident of Australia (Torepe and Manning 2017). This law is also mentioned under para 50 of Taxation ruling 98/17 that if any individual who is entering Australia for the purpose of study or to take up any employment opportunity and if the same resides for more than half of the income year with breaks or without breaks then the individual will be considered as an Australian resident since their arrival in Australia. But however, if it seems that the individual’s permanent place of abode is outside Australia and also he/ she have no such intentions of taking up residence in Australia then the individual will not be considered as an Australian resident for taxation purpose (Weller et al. 2013).

By relating this point with this case it can be found that Jenny although came to Australia to reside for only 3 months but later she decides to stay further 9 months at Sydney to handle her clients. Thus in this process Jenny qualifies the 183 days test where she stayed at Australia for more than 183 days and thus she would be considered as an Australian resident for the purpose of taxation since her arrival.

Conclusion

Based on the above discussion it can be concluded that jenny should be regarded as a resident of Australia for the purpose of tax. That means income received from any source by Jenny shall be taxable in Australia.

In this case, the main issue is to ascertain whether the receipt is related to, the work performed and is therefore related to the ordinary income as per section 6-5 of the Income Tax Assessment Act 1997. In addition to this evaluation should be made whether the amount is a capital receipt as per the case FCT V Woltie (1982) 13 ATR 579 for giving up the right to make income (AO 2015).

In this case the annual salary of $10000 received by the TV personality is taxable as an ordinary income as per section 6-5 of the Income Tax Assessment Act 1997. It can be seen that the salary receipt have direct relation or nexus with the service provided hence it is an assessable income (Doran et al. 2013).

The amount of $400000 cannot be directly regarded as income and is required to be compared with the decisions like Woite and Jarrold V Boustead (1963) 41 TC 701. In the case of Brent V FCT (1971) 125 CLR 418 it was stated that if there is a nexus between the receipt and service then the receipt should be regarded as an ordinary income. However, in the case of Woite it was held that if the receipt is for giving up income then the payment is a capital receipt. Therefore, it can be said that the conclusion is depended on the particular facts of the case (Vandenberg and Sharma 2016). If it is evident that the taxpayer is provided an inducement for, entering into contract for proving services in future then the nexus is established and the receipt is regarded as ordinary income under section 6-5 of the Income tax Assessment Act 1997.  In this case, the amount of $100000 is paid for joining a new network for providing services (Chapman et al. 2015). Therefore, based on the above discussion it can be said that the amount received is an assessable income.

References

AO, M.D.A., 2015. Modernising the Australian Taxation Office: Vision, people, systems and values. eJournal of Tax Research, 13(1), p.1.

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

Bevacqua, J., 2015. ATO accountability and taxpayer fairness: An assessment of the proposal to split the Australian taxation office. UNSWLJ, 38, p.995.

Bowden, R., 2016. One step at a time. Superfunds Magazine, (409), p.28.

Chapman, R., Plummer, P. and Tonts, M., 2015. The resource boom and socio-economic well-being in Australian resource towns: a temporal and spatial analysis. Urban Geography, 36(5), pp.629-653.

Doran, C.M., Byrnes, J.M., Cobiac, L.J., Vandenberg, B. and Vos, T., 2013. Estimated impacts of alternative Australian alcohol taxation structures on consumption, public health and government revenues. Med J Aust, 199(9), pp.619-622.

Gartner, C., 2015. Flushing out smoking: measuring population tobacco use via wastewater analysis.

Lam, D. and Whitney, A., 2016. Taxation and property: Practical aspects of the new foreign resident CGT witholding tax. LSJ: Law Society of NSW Journal, (21), p.84.

Novikov, A.A., Ling, T.G. and Kordzakhia, N., 2014. Pricing of volume-weighted average options: Analytical approximations and numerical results. In Inspired by Finance (pp. 461-474). Springer International Publishing.

Torepe, T.K. and Manning, R.F., 2017. Cultural Taxation: The Experiences of M?ori Teachers in the Waitaha (Canterbury) Province of New Zealand and their Relevance for Similar Australian Research. The Australian Journal of Indigenous Education, pp.1-11.

Vandenberg, B. and Sharma, A., 2016. Are alcohol taxation and pricing policies regressive? Product-level effects of a specific tax and a minimum unit price for alcohol. Alcohol and Alcoholism, 51(4), pp.493-502.

Weller, S., Smith, E.F. and Pritchard, B., 2013. Family or Enterprise? What shapes the business structures of Australian farming?. Australian Geographer, 44(2), pp.129-142.