Studies On International Fiscal Law: Residency Test, Tax Rates And Taxable Income

Residency Test for Australian Taxation

Discuss about the Studies on International Fiscal Law.

Residency test means the test based on the residential status of an individual. It is important to calculate the residential status of an individual. According to Australian Law if a person resides in Australia, he/she is considered as an Australian resident for taxation purpose. In this case, he does not require passing the residency test of the country. There are three judicial tests to calculate the residential status of an individual in Australia which are as below:

The domicile test: The term domicile means a person has a permanent home in one country, i.e. in his home country. A person can be treated as an Australian resident if  he is residing in the country by constructing or owning his home in Australia unless he satisfies that his permanent home is outside Australia.

Test based on 183 days: According to Australian Law, if a person resides in the country for more than a period of 180 days during their financial year, either continuously or by taking breaks in the tenure, than the person in this case can be treated as the constructive residence of the country unless he satisfies that his permanent residence is outside the country, moreover, he don’t have any intention to stay in the country permanently.

Test based on Superannuation method: It is helpful for those people who work for the government of the country in Australia, i.e., the person who is involved in either civil services or any government services. The person can be treated as Australian residents if he is working overseas for his post. 

The person has to declare all the details of his income whether earned in the country or overseas.

In the given case, Midoona does not satisfy any of the above-mentioned condition. To pass the domicile test she has a permanent place outside Australia but she does not own any place of residence in Australia. She leases an apartment in Alatai and pays the rent on weekly basis, so that she can save money when she was touring to England for her recording sessions. So, no intention of her can be seen regarding permanent residency. Hence, she is non-resident for the financial year 2015/16.

Based on the criteria of 183 days: She arrives in the country on 2 July 2015, and left the country on 15 September 2015 [30+31+15=76 days]. She returned to Australia again on 1 April 2016 and stays in the country for some time. Therefore, the calculated days during this period are [30+31+30=91]. Total calculated days=76+91=167 days. She does not satisfy the second test also. Hence, non-resident for the financial year 2015/16.

Calculation of Tax Liability

The Superannuation test of residency is not applicable on her because she is not involved in the governmental services of the country. She works as a karaoke singer in the hotel.

To conclude Midoona fails to satisfy all the three conditions of the residency test, hence, the income, which she earns in the country, is not taxable in Australia. 

According to Australian Law total income of an individual can be calculated based on three sources of his income, which includes income from business, income from salary and wages and income from capital gains. It is the main source of income for the federal government because it accounts for more than 67%of the income tax of the country whereas the other tier of government collects 55% from the total source of the revenue. The slab rate of tax for an individual is about 45% whereas for the corporate sector it is @ 30%. The Australian Taxation Office collects the tax. The financial year starts from 1^st July and ends on 30^th June every year. The tax is calculated on the income of an individual by subtracting the allowable deductions under specified sections of the act. After making necessary changes to the gross income of an individual his net income or the assessable income can be ascertained. The slab rate of tax for a resident in the country is as follows:

Taxable income Till  $18,200 From $18,201-$37,000 From $37,001-$80,000 From $80,001-$180,000 From more than $180,001

Tax on income Nil 19c for each dollar earned above $18,200 $3,572+32.5c for each dollar above $37,000 $17,547+37c for each dollar above $80,000 $54,547+45c for each dollar above $180,000

Tax rate 0% 0%-9.7% 9.7%-21.9% 21.9%-30.3% 30.3%-44.9 %( less than 45%)

On the other hand the slab rate of tax for the income earned by a non-resident individual in the country are as follows:

Taxable income Up to $80,000 From $80,001-$180,000 Above $180,001

Tax on income @of 32.5c for each dollar $26,000+37c for each dollar above $80,000 $63,000+45c for each dollar above $180,000

In the given problem, Midoona visited the country on 2^nd July 2015 to commence her tour known as ‘like a popstar’ in the country with her 3 children. The tour was very successful and she earns $450,000 from this tour. Her operating expenses for this tour are $ 380,000. She earns $15,000 as appearance fees for the show “The Affairs of Today’’. On 15 August 2015, she completed her final tour in Adelaide and went for a trip to Australian outback. At Darwin, she enters into a trivia competition at Imperial Hotel. She earns $500 as cash and $500 as weekend package to Alatai. She left the country and returned to England on 15 September from Darwin. She visited Darwin again on 1 April 2016. There she won cash prize of $200 by participating in a competition at Grand Hotel. She earns $45,000 as karaoke host in Darwin. She receives $2,500 as tips from her customers. She deposits this amount to her children account as their pocket money. She spends $1,000 for two dresses, which is essential for her job. She spends $450(150*3) to purchase stilettos for her job. She spends $200 for subscription in the magazine “Karaoke Queen” so that she can improve her Karaoke skills. She also spends $500 for subscription to the Karaoke Australia Organization. 

Discussion on Inclusion/Exclusion of Taxable Items

Particulars Income from tour in Australia in the year 2015 Operating expenses Appearance fees Amount received in cash from trivia competition Amount received in kind from trivia competition Amount received in cash from Grand Hotel Amount received by giving service as karaoke host Amount received as tips from customer Amount spend on costumes Amount spends on shoes used for working purpose Amount spends on the subscription of the magazine Amount spends on the subscription of Karaoke organization

Amount $450,000 $380,000 $15,000 $500 $500 $200 $45,000 $2,500 $1,000 $450 $200 $500

Reason Foreign resident To be deducted from total income To be included in total income Exempt under sec. ITAA97 Exempt under sec.ITAA97 Exempt under sec.ITAA97 Taxable Taxable Deducted from income Deducted from income Deducted from income Deducted from income

Taxable 450000 380000 15000 Nil Nil Nil 45000 2500 1000 450 200 500

Taxable income=$70,630

[Note: for calculation see the appendix below] 

Discussion for the justification for the inclusion/exclusion of each item in the tax payable calculation above:

According to Australian Law there are certain implications which a person has to follow for the purpose of taxation which are as below:

• If a person does not have a permanent home outside Australia, than, the person is to be treated as Australian resident for taxation purpose.

If a person, visits Australia for more than a period of six months and he lives at same place for that period than the person is to be treated as Australian resident. But in this case Midoona has a permanent home in UK, moreover, her period of stay was less than 180 days during the year. 

On the other hand there are certain other criteria based on which a person can be treated as foreign resident for taxation purpose:

• If a person visits Australia for more than a period of six months and he keeps on travelling during that period than in this case he is treated as a foreign resident for taxation purpose.
• If a person visits the country for holiday purpose or for a period which is less than a period of six months than he is to be treated as a foreign resident for taxation purpose.

 In case, if you are a foreign resident than the income which you earned in Australia should not be declared as a foreign income for taxation purpose.

 In some cases, it depends on the taxation treaty of the other country. It means if the country has some set up with Australian taxation law than the person is liable for tax in both the countries. For example, if a person earns some income in the UK and he is the permanent resident of Australia. If UK has, any set up with Australia than the person can pay the tax either in his own country or in UK. In the given problem, no further information regarding the taxation treaty is seen so it is assumed that there is no taxation treaty among the country. Therefore, whatever she earns in the country will be treated as foreign income and are chargeable to the taxation purpose in UK only. In certain, similar cases like Martin v FCT (1954) 90 CLR 470; Evans v FCT (1989) 20 ATR 922; 89 ATC 4540; Babka v FCT (1989) 20 ATR 1251; Brajkovich v FCT (1989) 20 ATR 1570. The High Court decision in FCT v Stone 2005 ATC 4234; [2005] HCA 21 the court opined that there is a difference in between the income earned as a profession and income earned from hobby. In the given case Midoona earned her income as a profession instead of hobby. Hence chargeable for taxation purpose. 

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