Describe about the Income Tax Assessment for Respective Business Resources.
Based on the given facts, the given case aims to opine on the level of assessable income and their respective sources for Rogan Advertisement, its founder, Stephanie and her husband Ronald.
Rule
Tax Residency – Individuals
When the underlying taxpayer is deriving income from foreign sources, in order to properly account for the same, it is essential to determine the tax residency status of the given taxpayer. This is in accordance with Section 6-5(2) which advocates that foreign income be held assessable for Australian tax residents[1]. On the other hand, Section 6-5(3) advocates that only domestic income (i.e. derived from Australia) would be held assessable for foreign tax residents[2].
The relevant tax residency tests are highlighted in the relevant tax ruling named TR 98/17 which elaborates on four different tests and also details the underlying circumstances under which each of these would be applicable[3]. The various associated conditions linked with each of these tests are outlined below.
The applicability of the given test is limited to only the Australian residents as one of the conditions that is requisite for this particular tests is that the taxpayer should have an Australian domicile at the time of assessment[4]. Besides, there is additional requirement on the part of the taxpayer that the permanent abode of the same should not be located outside Australia. In the application of this test in reality, there are issues faced with regards to objectively determining the permanent residence location. In this regard, IT 2650 ruling is of immense helps as it highlights the various relevant factors to be considered to determine the location besides discussing the relevant tax cases in this regard.
The relevant parameters taken into consideration by the Tax Commissioner to frame an opinion in this regards are mentioned below[5].
Intention on taxpayer’s part to settle abroad.
Amount of time expected to be spent on foreign territory and the actual time spent and the comparison of the two with suitable reasoning for deviation.
The frequency of visit of taxpayer to Australia and the level of personal and professional ties maintained.
Resides Test – This particular test would apply only on foreign residents and requires that the following factors be taken into consideration for reaching a verdict with regards to tax residency[6].
The significance of the intention behind taxpayer’s Australian visit
The extent of relationship in the personal, professional and business sphere that are maintained in Australia by the taxpayer.
The nature of social arrangement that have been put in place by the underlying taxpayer during Australian stay.
183 Day Test – This test is also strictly relevant only for non- Australian residents and advocates that namely the outlined conditions below need to be satisfied[7].
The taxpayer needs to spend at least 183 days in Australia during the assessment year
The taxpayer should have clear intent with regards to making Australia permanent residence in the future.
Violation of even one of the above conditions would result in non-granting of Australian tax residency.
Superannuation Test –
This is a test having limited use as it determines tax residency of only those government employees who are stationed abroad and the criterion for residency is participation in one of two mentioned superannuation schemes for this purpose[8].
With regards to tax residency status of the a company, the requisite conditions to be satisfied are enumerated below[9].
The incorporation of the company has been done in Australia only.
The business of the company should be based in Australia and either the company’s majority shareholders comprise of tax residents of Australia or a significant amount of management control arises from Australia.
It is noteworthy that one of the above two conditions is sufficient for Australian tax residency.
Source of Income
There are two section detailed in ITAA 1997 that lay the foundation of assessable income which are highlighted below
Section 6(5) – This section includes all proceeds which would be earned in the ordinary concept and includes the following proceeds[10].
Income earned by the taxpayer by indulging in business activities which need to distinguished from hobby using TR 97/11
Income earned by the taxpayer through personal exertion such as employment income salary and other employment related incentives.
Income earned by the taxpayer through investments that would typically take place as interest (bank account), dividend (shares) and rent (property).
Section 15(15) – As per this section, any proceeds that are earned by the taxpayer through involvement in an transaction which is isolated would be assessable as per this section provided the activity has been undertaken driven by primary intention to make profit[11].
Tax Residency Status
As both Stephanie and Roger are residents of Australia, hence out of the residency tests earlier discussed, the only relevant test is the domicile test and further attention needs to be paid on the determination of location of permanent residence of the taxpayer in accordance with IT 2650.
.In accordance with IT 2650, it has been opined that if the foreign stay is for a period of less than two years then, it is considered as being temporary. Additionally, a relevant judgement in this regards is F.C. of T. v. Applegate (1979) 9 ATR 899 case where the judge opined that shift in permanent residence would typically take place when the underlying taxpayer has no intention to return to Australia in the foreseeable time. However, if the taxpayer has intention to return back to Australia for continuing their stay, then such taxpayer would be considered Australian tax residents.
For Stephanie and Ronald, there expected tenure in Brazil is for almost 18 months commencing from the beginning of tax year 2015/2016 and ending in October or November 2016. Additionally, based on the information provided, it is apparent that they would return back as they have a house on lease in Australia and also have a business in Australia which cannot flourish without Stephanie. Hence, it may be concluded that both Stephanie and Ronald are Australian tax residents for both tax years.
Additionally, Rogan Advertising would also be an Australian tax resident company as the company in all likelihood seems to be Australia incorporated only Besides, the shareholders for the given years are also Australian tax residents and hence company is Australian resident for tax purpose.
STEPHANIE
Section 6(5) – Ordinary Income
Proceeds from personal exertion – Employment income from the company to the tune of $ 80,000
This salary is credited in bank account in Brazil and thus may seem to be a foreign salary but as the taxpayer is Australian tax resident, hence the payments would be assessable.
Also, the lecture income to the tune of $ 24,000 would be classified under this section since she indulges in activities that had commercial value and are linked to her skills as a advertiser.
Proceeds from investment– The house has been leased and thus lease payment would be classified here. Since there is joint ownership of the house, hence assuming 50% stake for each, Stephanie and Ronald would obtain half of the lease payment each.
Proceeds from lease payments= (450/2)*52 = $ 11,700
Also, interest income would be received based on bank accounts in Brazil and Australia. Since both are jointly owned, hence each would be entitled to 50% of the interest income in each tax year.
Besides, as per the scheme of arrangement the residual profits of company are paid equally to both Stephanie and Ronald as un-franked dividends.
For calculation of assessable income in FY2016, it is assumed that lectures were held during this year only. Further, for both years, any income discussed above not stated is assumed to be zero for convenience. Also, it is assumed that the couple do eventually return to Australia by end of October end, 2016.
Assessable income of Stephanie (FY2016) = 80000 + 11700 + 24000 = $ 115,700
Assessable income of Stephanie (FY2017) = 80000 + 17*(450/2) = $ 83,825
RONALD
Section 6(5) – Ordinary Income
Employment income from the company to the tune of $ 80,000
This salary is credited in bank account in Brazil and thus may seem to be a foreign salary but as the taxpayer is Australian tax resident, hence the payments would be assessable.
Proceeds from investment– The house has been leased and thus lease payment would be classified here. Since there is joint ownership of the house, hence assuming 50% stake for each, Stephanie and Ronald would obtain half of the lease payment each.
Proceeds from lease payments= (450/2)*52 = $ 11,700
Also, interest income would be received based on bank accounts in Brazil and Australia. Since both are jointly owned, hence each would be entitled to 50% of the interest income in each tax year.
Besides, as per the scheme of arrangement the residual profits of company are paid equally to both Stephanie and Ronald as un-franked dividends.
Assessable income of Ronald (FY2016) = 80000 + 11700 = $ 91,700
Assessable income of Ronald (FY2017) = 80000 + 17*(450/2) = $ 83,825
Rogan Advertising:
The relevant information about revenue and expenses have not been provided and therefore it is not possible to calculate the taxable income. Further for convenience sake, it is assumed that the operating revenue and expenses are equal and hence the company’s taxable income is zero for both the years.
Conclusion
In wake of the missing information, the following information needs to be provided for calculation of assessable income.
The date in FY2017 when the couple return back – Imperative for tax residency status of FY2017
Interest income from both banks (Brazil and Australia) – Calculation of assessable income of individual taxpayers (FY2016 and FY2017).
Dates on which Stephanie gave the lectures – Proceeds to be appropriately derived in the same year when the lectures were delivered
The details about operating revenues and expenses of Rogan Advertisement – Determination of taxable income of company and also of dividend income for individual taxpayers (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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