Discuss aout the Report for Business Advertising Company for Assessable Income.
Based on the information provided, it is apparent that an advertising company has been founded by the Stephanie named Rogan Advertising where her husband Ronald is employed as the director. In wake of the given information, the given analysis aims to highlight the assessable income for the couple on an individual basis and also for the company i.e. Rogan Advertisement.
The key issues worth discussion as identified from the case are highlighted as follows.
Tax Residency- Individual
Tax residency determination is significant as Section 6-5(2), ITAA 1997[1] allows foreign income to be assessable in case of Australian tax residents while Section 6-5(3), ITAA 1997[2] limits the assessable income for foreign tax residents only to income derived from Australia only. In regards to tax residency, the primary statute is Section 6(1), ITAA 1936 although detailed explanation and appropriate case law reference is provided by TR 98/17. In accordance with this, four residency tests are available for individual taxpayers and compliance with even one of these is a sufficient condition for gaining Australian tax residency[3]. These residency tests have been briefly described below.
Domicile Test – This test has relevance only for Australian residents as it is deployed in situation when the given taxpayer has to spend a considerable time abroad owing to professional commitment or any other reason. For compliance with this test, the following conditions need to be satisfied[4].
Taxpayer at assessment time should be Australian domicile holder.
Taxpayer’s permanent residence needs to be located within Australian territorial boundaries.
While the determination of domicile is straight forward, there is considerable difficulty with regards to the underlying location of permanent residence evaluation of the taxpayer. In this context, critical information is made available by IT 2650 which lists down the critical factors as mentioned below[5].
Taxpayer’s intent to settle on foreign land.
Taxpayer’s engagement in a particular activity that would effectively result in establishment of permanent residence abroad.
The intended period of stay on foreign land to be compared with the actual data and the underlying reasons for variation specially if the duration is extended.
Ties in various personal and professional aspect that the tax has in Australia along with frequency of Australian visits during assessment year.
Resides Test – This particular test has relevance only for non-Australian residents. The critical factors to be evaluated with regards to taking a stance on the tax residency are summarised below[6].
Taxpayer’s core reason to visit Australia and the significance of the same.
Taxpayer’s extent of ties in place with regards to professional and personal relation while in Australia.
Taxpayer’s visit frequency to country to origin and duration of the same.
Taxpayer’s social arrangements during the period of residence.
183 Day Test – This is also directed only at foreign residents and based on fulfilment of both the conditions listed below[7].
Taxpayer’s minimum stay in Australia to the tune of 183 days.
Taxpayer’s intention of making efforts to settle in Australia going ahead
Superannuation Test – This test is highlight specialised in its application and scope and used only for certain government employees that are working from foreign countries[8].
Residency Status – Stephanie and Ronald
The relevant residency tests have already been described above and the facts to be considered are detailed below.
Both Ronald and Stephanie in order to work on the advertising assignment left for Brazil on June 26, 2015 and they are expected to be back in about 17 to 18 months.
The couple have a home in Australia which they have put on lease for the duration of their Brazil assignment.
The company is highly dependent on ability of Stephanie to garner new customers and the couple have the expectation to return to Australia at the end of the advertisement contract.
They maintain a joint bank account both in Australia and Brazil where the lease payment of house and salary are credited respectively.
Since both individuals are Australian residents, hence the relevant test to be applied in the given case would be domicile test. In accordance with ruling IT 2650, a foreign stay extending to a period lower than two years would be recognised as temporary for the domicile test. For Stephanie and Ronald also, they are expected to return to Australia before 24 months. Also, the main residence for the couple meanwhile is their home in Australia. Besides, in wake of their professional ties in Australia with Rogan Advertisement, it is expected that the owners and directors would come back. Further, an assumption has been taken here with regards to the return date for the taxpayers, which has been assumed as October 31, 2016. Thus, in this scenario, both taxpayers are recognised as Australian tax residents for the year 2015/2016 and also 2016/2017.
To have the Australian tax residency of a company legal structure, atleast one of the following conditions need to be complied with[9].
Incorporation of the company should be in Australia.
Company’s business needs to be based out of Australia and also the majority shareholders need to have tax residency of Australia or the management control should be based out of Australia.
Tax Residency- Rogan Advertising
For the given company i.e. Rogan Advertising, it seems reasonable assumption that the incorporation place is Australia only as there is little reason to believe based on the given information that the same could be elsewhere. Thus, the company is Australian tax resident for both financial years FY2016 and FY2017.
Two section in the ITAA 1997 lead to the derivation of assessable income and briefly discussed below.
Section 6(5) – This primarily refers to ordinary concept income receipts and tends to refer to the three types of proceeds highlighted below[10]
Proceeds on the basis of personal exertion (includes income from personal service)
Proceeds on basis of various investments (Examples include dividends, interest income and rent income)
Proceeds on basis of involvement in a business
Section 15(15) – In accordance with tax ruling 92/3 and verdict of the case Westfield Limited v. FCT (1991), the gains that the taxpayer may derive from transactions of isolated nature enacted with the intention of making money would contribute to assessable income[11].
STEPHANIE
The income earned can be classified in the following manner.
Section 6(5)
Proceeds from personal exertion – Employment income from the company – $ 80,000
As tax residency is Australian for both years, thus this income credited in Brazilian bank account would be assessable for tax purposes.
Lecture income – $ 24,000 – Indirectly earned because of the underlying advertising knowledge as a result of which she got the invitation from the University.
Proceeds from investment– Lease payments that are credited into Australian bank account.
Taking the standard assumption of equal share, income derived = (450/2)*52 weeks = $ 11,700
Besides, interest income would also be earned in the bank balances maintained in bank account in Australian and Brazil.
Additionally, the company (Rogan advertisement) provides dividend income in the form of un-franked dividends based on the residual profits of the company and these are equally divisible between Stephanie and Ronald
Thus, based on the above, assessable income for FY2016 = 80000 + 11700 + 24000 = $ 115,700
The assumptions for the above computation are that dividend income is zero, interest earned in zero and also the lectures were delivered in Fy2016.
Also, assessable income for FY2017 = 80000 + 17*(450/2) = $ 83,825
There has been an adjustment in the rent income as the couple are coming back at the end of October and hence lease payments from July1, 2016 to October 31, 2016. Remaining assumptions are the same as above.
ROGER
The income earned can be classified in the following manner.
Section 6(5)
Employment income from the company – $ 80,000
As tax residency is Australian for both years, thus this income credited in Brazilian bank account would be assessable for tax purposes.
Proceeds from investment– Lease payments that are credited into Australian bank account.
Taking the standard assumption of equal share, income derived = (450/2)*52 weeks = $ 11,700
Besides, interest income would also be earned in the bank balances maintained in bank account in Australian and Brazil.
Additionally, the company (Rogan advertisement) provides dividend income in the form of un-franked dividends based on the residual profits of the company and these are equally divisible between Stephanie and Ronald
Thus, based on the above, assessable income for FY2016 = 80000 + 11700 = $ 91,700
The assumptions for the above computation are that dividend income is zero, interest earned in zero.
Also, assessable income for FY2017 = 80000 + 17*(450/2) = $ 83,825
There has been an adjustment in the rent income as the couple are coming back at the end of October and hence lease payments from July1, 2016 to October 31, 2016. Remaining assumptions are the same as above.
ROGAN ADVERTISING
In the given case, no financial data pertaining to the revenue and expenses has been provided and thereby an assumption has been made that the company just breaks even for both the tax years under consideration. Otherwise, taxable income would be calculated by deducting expenses and other available concessions from the net revenues.
Conclusion
There seems to a host of information that seems missing in the case and is required as mentioned below.
Interest income for Stephanie and Ronald to ascertain their assessable income.
Dates when Stephanie delivered the lectures to ascertain that income is recorded correctly in the same tax year when these were delivered.
The actual date on which the taxpayers come back to Australia to opine on tax residency status and also compute the lease rental income in FY2017.
Respective stakes of both owners in house so that lease income can be appropriately divided between the two for both years.
Details about the revenue and expense detail of the company for both years for calculation of taxable income along with the dividend payment made to director and owner.
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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