Describe about the Financial Year for the Periods of Month Beginning.
1. 2014/15 Income year
A financial year is a period of 12 months beginning 1st July every year (ss 4-1(1) and 995-1 ITAA97). The 2014/15 financial year started on 1st July 2014 to 30th June 2015. It is notable that you physically spent some days in Australia on this year. Therefore you will be submitted to the test of residency for the financial year 2014/15. There are four residency tests applied by the commissioner of tax to establish if a taxpayer is liable to income tax for a financial year or not. These tests are 183-day test, domicile, ordinary concept and superannuation test. The commissioner of tax has to satisfy only one out of these four tests to be declared as a residence of Australia and hence liable to income tax for the financial year. The above tests are discussed in this paper in depth to establish that you are not liable to income tax as a foreign residence in Australia for the financial year 2014/15.
To begin with, it on record that you were physically present in the Australia for only 89 days during 2014/15 financial year and the rest were spent in England. You arrived on 1st February and left on 28th same month in the year 2015. Afterwards you came back on 1st may and stayed up to the end of 2014/15 financial year. This was as results of unavoidable tours back home to take care of your sick mother. The commissioner of tax will be satisfied that you don’t qualify to be a residence of Australia for 2014/15 financial year under this 183 days test.
Second, is the reside test that is based on the ordinary concepts to establish residence of an individual. It involves behavioural check on purpose of presence, location and maintenance of assets, employment or business ties and lastly social and living arrangements. It is notable that you had no other intention or living arrangements on the 2014/15 financial year. You were in Australia purposely for a job contract that you had been offered by an US based company for two year. It can be urged that you spared some of your furniture items that were valuable intending to use them on return. This shows that you had no intentions of extending your presence in Australia behold your contractual job. Furthermore, you didn’t have any social ties that can be used to prove otherwise. In addition, you had no assets in Australia that can be used to show that you were planning to make Australia your abode. Therefore, the Commissioner of tax will not be able to sufficiently demonstrate routine or continuity of behavior to prove the reside test.
Thirdly is the domicile test which is meant to establish if an individual has his domicile in Australia. According to Domicile Act 1982 considerations of origin at birth and choice of a taxpayer to make Australia his or her domicile are considered in determining this test. This is applicable to Australians moving and working overseas and therefore not applicable to you as a foreigner who is an England nationalist by birth and choice till 30th June 2015.
Lastly is the superannuation test that applies to commonwealth superannuation funds. Since you are not under any superannuation funds, you don’t qualify to this category of test by default.
In conclusion, am convinced behold doubts that you are not liable for income tax in Australia for the 2014/15 financial year. Haven stayed in Australia for only 89 days in a financial year cannot come closer to an individual being a residence under 183 days test. The domicile test is not applicable too to your case because you spent a very short period of time in Australia to make decisions on whether to make Australia a domicile or not. It is also impossible for the commissioner of tax to understand your behavioural traits during this financial year because of the short period of time that you spent in the country. So, the ordinary concepts test will not be applicable too .And the last superannuation test is not applicable to you since you aren’t a civil servant of a Commonwealth or under superannuation funds. It worth noted that out of the four tests for residency in Australia, there is non that will declare you residence of Australia for the 2014/15 financial year. Therefore, there is enough evidence to prove that you don’t qualify to be an Australian residence for the 2014/15 financial year.
The 2015/16 financial year started on 1st July 2015 to 30th June 2016. It in records that you arrived in Australia last financial year after which you went back to London under unavoidable circumstances and back to Australia. Several other activities occurred during this financial year and will need to be put into context. Therefore, the scenario will need an in depth analysis to sufficiently prove or disapprove residency test in this financial year. The residency test will comprise 183 days test, residency test, domicile test and superannuation test.
By observing the 183 days test, it happens that you spent exactly 183 days in Australia for the 2015/16 income year. You were in Australia on the first three and half months in the beginning of the financial year i.e. July, August, September and October. Then you flied back to London for six months. You came back to Australia on mid April 2016 till the end of the financial year on 30th June 2016. Following this account, you are not liable to income tax since the Act requires more than 183 days for an individual to be considered a residence of Australia in a specified year.
Resides test uses ordinary concepts to establish if an individual is a residence for taxation in a specified financial year. This test will consider family or employment or business ties, purpose or intention of presence, location and maintenance of an asset and lastly the social and living arrangements by an individual while in Australia (Tax Ruling 98/17). It in records that you were in Australia for 183 days of 2015/16 financial year and the other half of the year in London elapsing sufficient time for the commissioner of tax to account on your stay. On August 2015, you bought a house in Sydney. You got married on 1st September creating a family tie and living arrangements in Australia. Being in married to Romeo, you changed your intentions and purpose of presence in the country. You also disclosed your love and will to stay in Australia indefinitely. Following these accounts, Commissioner of tax will be able to show that you created social and living arrangement, acquired assets, got family ties and your intentions to stay in Australia indefinitely. Therefore, he will be able to sufficiently demonstrate that you be considered a residence of Australia for the 2015/16 income year under resides test.
The domicile test will be undertaken by Commissioner of tax to establish that though you moved oversees, you had abode in Australia. You got married to Romeo who is a permanent residence of Sydney and your intentions to stay in Australia indefinitely and being overseas didn’t change your choice for Australia as your domicile. Since you were not planning to get another permanent home overseas, the Commissioner of tax will be able to satisfy that though you have been outside the country, you have not changed your domicile in Australia.
The fourth and final test will be superannuation test which is not applicable to your case. You are in Australia as an employee contracted by a private company and therefore not related to commonwealth superannuation fund.
In conclusion, it my pleasure to inform you that you will be liable to income tax in Australia for the 2015/16 financial year. This is because; the commissioner of tax will have sufficient evidence to demonstrate that you passed ordinary concepts test and domicile test. Though the commissioner will not be able to satisfy the other two tests, it stipulated in the Act that only one out of the four tests has to be established for the individual to be liable for tax in the concluded financial year. Therefore, you will be treated as a residence of Australia and be required to pay all your tax liabilities without failure.
2.
Prime cost method
Items declining in value;
Stove $900 × = 37.5
Hot water services $2000 × = 83.3
Carpets $3500 × =175
Furniture and fittings $5000 × =187.5
Management commission; 5%×$13900=$ 695
Rental property Statement
For the year ended 30th June 2016
Gross Income $13,900
Deductions on Repair
General repairs and maintenance $6000
Fixing broken front door $1000
Total Deductions on Repair $7000
Expenses
Depreciation
Stove $37.5
Hot water Service $83.3
Carpets $175
urniture and fittings $187.5
Management commission $695
Total expenses 1178.3
Taxable income $5721.7
2(b)
Gross rent received for the current financial year is a very essential component to declare. Rent is referred to as a payment in exchange of use of someone else property for a specified agreed amount of time .It is an ordinary income (Adelaide Fruit and Produce Exchange Co v FCT ,1932). George has to show the Commissioner of tax the total amount received from the rental property. It is from this component that assessable income is calculated. George received $13900 for the whole year as the rental income. It is mandatory for George to disclose total income received because it the first step for taxable income computation.
General repairs and maintenance are specific deductions that are included in the statement of rental property. These repairs have provisions in the income tax legislation and the taxpayer is offered a deduction for the cost incurred to repair an income generating capital. The expenses incurred were meant to restore the rental house functionality and therefore qualifies for deduction. These general repairs and maintenances were carried out in the course of a business that was income generating (s25-10). George incurred $1200 on general repairs and maintenance on his rental property and this amount is subject to deduction from the taxable income.
Replacement of damaged fibro roof with long lasting color bond has been excluded in the statement of rental property. Replacing fibro roof involves replacement of the whole asset (roof) with another type of roof that is long lasting (color bond).This color bond roof is a capital expense and not deductable as stipulated in the Act (s25-10(3). Replacing with new longer lasting color bond improved the house surpassing the original roof (FCT v Western Suburbs Cinemas Ltd, 1952). George incurred $15000 on replacing damaged roof with a better color bond roof that is more durable. He is not entitled to repair deductions in this case because the expense will be deemed as a capital expense. The interpretation of the precedent FCT v Western Suburbs Cinemas Ltd(1952), placed into context that a repair should restore a defect by use of existing materials into functionality and not acquiring new items.
New furniture and fittings are also excluded in the statement of rental property. According to section 25-10, these items are categorized as capital expense because they improve the facilities of the house. The new furniture enhanced the character of the property offering advancement to the existing property. George acquired new furniture and fitting for his rental house at $1200. This amount is a capital expense that he used to improve the rental property. This is not deductable from the assessable income.
The act of repainting the front fence is not a repair expense and has been excluded in the statement of the rental property. Repainting is done to improve the existing paint of the wooden pickets to make them look better. The existing paint has no defect to be repainted but it the choice of George for the repainting to be carried out. For an item to be included for repair reduction, the property must be in need of restoration or have defects that require remedy for the property to work properly. George incurred $2500 to carry out repainting of the front fence. This amount is not recognized as deductible repairs because it meant to improve the property (s 25-10(3). Therefore it falls under category of capital expenditure on repairs.
Fixing the broken door has been included in the list of items that will have repair deductions. The act of fixing involves remedy action to correct defects for the full functionality of the item. The door need to be fixed for the property to operate (Case J47(1958) . Therefore, fixing the door is a repair expense and will be deductable to the tax payer’s assessable income. George incurred $1000 to fix the broken door that was damaged. This amount is deductible from the assessable income because it is used to remedy the defects of an income generating property by restoring functionality
Depreciation of assets has been included in the statement of rental property. Depreciation is a capital allowance deductible for the capital expenditure. The depreciating assets in the statement are stove, carpets, hot water service, furniture and fittings. These items have a limited effective life and do decline in value from the time they start to be used (s 40-30(1)). The declining value of the items in the above statement has been determined through prime method .When choosing a method of declining value of an item; caution has to be taken to avoid changing a method once it has been chosen or overstating base value because it can lead to fine if the commissioner of tax finds out (s 40-130). For instance, the use of furniture for one year will decline in value from the initial value due to tear and wear. Therefore it held that a taxpayer can claim deductions equal to depreciated value. For example, George will claim $175 for carpets while filling returns for the rental property. George will also be offered deductions for capital allowances as follows; stove $37.5, hot water service $83.3, carpets $175, furniture and fittings $187.5.
The management commission has been included in the statement of rental property as an expense. This commission represents the operation cost of running the rental property for the year. George is entitled to deduction of operating expense since taxable income is made up of net inflows of an investment. He has incurred $ 695 to pay the Honest Chris Real Estate for managing the property for the whole year. However, this amount is deducted from the taxable income.
And finally is the taxable income. This is the amount that is subjected to the tax scale to obtain the tax payable by an individual or a business. It obtained by subtracting all the capital allowances and the expenses incurred in the financial year from the income received. George has a taxable income of $5721.7 after being allowanced capital deductions in form of depreciations and expenses he incurred in the financial year. This amount ($5721.7) will be subjected to the tax scale to realize George’s tax liability for the year.
References
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FCT v Western Suburbs Cinemas Ltd (1952)
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