1. The main objective is to determine the tax residency of Amity for the year ending June 30, 2016. The topic of tax residency of individuals has been discussed in ss. 6-1 ITAA 1936 where the residency tests are outlined. A useful tax ruling in this context is TR 98/17 which provides a detailed discussion on the residency tests with reference to specific case laws (Barkoczy, 2017). There are four main tests for ascertaining the tax resid3ency of taxpayers in Australia which are indicated as follows (Coleman, 2016).
For the situation provided, it is reasonable to take Amity as Australian domicile holders considering the fact that she has been working in Australia for atleast 7 years and has family in Australia. She is employed by a private firm and hence superannuation test is irrelevant which implies the only test which assumes relevance for Amity is Domicile Test (Reuters, 2017).
Domicile Test – For satisfying this particular test, it is essential to comply with the following two mandatory conditions (Krever, 2017).
In order for a given individual to be termed as a tax resident of Australia, both the conditions listed above need to be necessarily satisfied. In relation to test for domicile, it is comparatively easier to ascertain when compared to ascertaining location of permanent abode (Sadiq et. al., 2015).
A case law which merits discussion is F.C. of T. v. Applegate (1979) 9 ATR 899. As per this case, an Australian company sent the taxpayer (who was Australian resident) to set up an office abroad. Considering the nature of the task, the time frame was not clear but it was apparent that it would be significant. However, it was clear from the starting that as soon as the foreign branch is established the taxpayer would return to Australia. The taxpayer fell severely ill and had to permanently return to Australia after two years even though the work was not finished. The court decided that moving away from Australia for substantial period does conduct shifting of permanent abode abroad and hence held the taxpayer as a foreign tax resident (Barkoczy, 2017). Another comparable case is F.C. of T. v. Jenkins (1982) 12 ATR 745 in which also the taxpayer was declared as a foreign tax resident. In this case also, a tax payer was sent abroad for a period of three years for professional purposes but owing to illness had to come back to Australia within 2 years (Deutsch, Freizer, Fullerton, Hanley & Snape, 2015).
Taking the case laws discussed above under consideration, it can be concluded that case face of the Amity are similar to those listed above since she has been relocated to Karabati for atleast 2 years which can be further extended by three years. Amity has developed substantial ties with Kiribati as she has relocated with her family (husband) and has also initially bought a house besides opening a bank account. Thus, based on the discussion above and the relevant case facts, it is appropriate to conclude that Amity for the tax year 2015/2016 would be categorised as a foreign tax resident.
2. a) In accordance with the scenario presented, a transaction involving barter has been enacted between the client and dentist. A case worth discussion is C. of T. v. Cooke & Sherden 80 ATC 4140 as it indicates that if any consideration as a result of barter would be categorised as income in accordance with s. 25-1 ITAA 1936, then the transaction related consideration derived by the taxpayer would also be income in nature and attract tax (Reuters, 2017). Also, Henderson v FCT 70 ATC 4016 highlights that in case of professional services being extended to client, once services have been provided, a receivable arises, the settlement of which leads to assessable income (Krever, 2017). Taking into cognizance the cases highlighted above, it is correct to conclude that the dentist would realise an income of $ 550 since the toy received has a market value of $ 550.
b) With regards to prize, it would be considered as ordinary income in accordance with s. 6-5 ITAA 1997 if the underlying skills used in winning the prize are the ones which are used in generating employment or business income. This understanding has been endorsed by the honourable court in Scott v. Federal Commissioner of Taxation(1966) 117 CLR 514 case (Barkoczy, 2017). Yet another case which merits discussion in the wake of the scenario presented is Squatting Investment Co Ltd v. Federal Commissioner of Taxation(1953) 86 CLR 570. In accordance with this case, the prize tax assessability essentially would be linked to the underlying circumstances and surrounding motives related to the prize won by the taxpayer (Coleman, 2016). Typically, a significant direct or indirect relation between employment skills and the winning of prize would ensure that there is derivation of assessable income from the prize.
For the situation presented, it is evident that the nature of the competition is such that there is no skill involved but the prize is only based on luck. Thus, the underlying gains would be windfall gains without any relation to any skills and hence the prize money would not contribute to ordinary income
3. a) In relation to s. 8-1 ITAA 1997, tax related deduction can be availed if the underlying outgoing or expense is related to assessable income generation. However, it is essential that the underlying expenditure should not be capital expenditure, must not be domestic in nature and should not be related to production of non-assessable income (Barkoczy, 2017).
For the scenario presented, the taxpayer has sought financial assistance for a property which has use both as residential as well as commercial property. As indicated in the Ronpibon Tin v FC of T (1949) 78 CLR 47 at 57 case, it is imperative that causal relationship needs to exist between expense being undertaken and assessable income being produced. It is evident that for the given scenario, the producing of assessable income (in form of rent income) would not have been possible if the property would not have bought which would not have been possible if loan was not assumed. Therefore, loan interest would be deductible to the extent that it has been used for production of assessable income i.e. ground floor purchase (Deutsch, Freizer, Fullerton, Hanley & Snape, 2015).
b) In relation to s. 8-1 ITAA 1997, tax related deduction can be availed if the underlying outgoing or expense is related to assessable income generation. The principle highlighted by the honourable court during the Ronpibon Tin v FC of T(1949) 78 CLR 47 at 57 case ought to be considered before analysing the situation at hand (Krever, 2017).
i) As per the information provided, it is known that loan was assumed for procuring plant and equipment which would have contributed to assessable income production. But, there has already been liquidation of plant and equipment but the loan has not been fully discharged and interest still continues. Clearly, the interest outflow is on account of loss produced from the endeavour to produce higher assessable income through incremental equipment which is still possible, hence deduction under s. 8-1 is granted (Sadiq et. al., 2015).
ii) As per the information provided, the business has already wound up and thereby the loans have no chance of generating any incremental assessable income and therefore no tax deduction would be offered to the taxpayer in relation to the interest expense being incurred even after asset disposal (Reuters, 2017).
4. a) The key aspects of assessable income are highlighted as shown below.
Sales – Assessable income in accordance with s. 6-5 ITAA 1997
Proceeds from loan – Non-Assessable income as these are capital proceeds and would be paid back
Winnings from Lottery – Not related to any particular skill and purely chance driven and therefore non-taxable.
Incentive to Display – As indicated in TR 2009/5, this type of incentive does not result in lowering of purchase cost and hence contributes to assessable income generation.
Franked dividends – In accordance with s. 6-5, this is ordinary income and hence taxable. Also, there would be generation of related franking credits which would be reflected in assessable income.
The key aspects of deductible expenses are highlighted as shown below.
Gross wages paid – As per s. 8-1, this is linked to sales and hence general expense deduction would apply.
Raw materials – As per s. 8-1, this is linked to sales and hence general expense deduction would apply.
Rent on premises – As per s. 8-1, this is linked to sales and hence general expense deduction would apply
Interest expenses – As per s. 8-1, this is linked to sales and hence general expense deduction would apply to the extent the loan is utilised for business purpose.
The relevant computations are indicated as follows.
b) Taxable income would be defined as the difference between the assessable income and deduction. Hence, taxable income = $544,714 – $534,412 = $ 10,302
With regards to the tax payable on account of the taxable income computed above, it is imperative to note that a deduction of $ 2,314 can be availed as the same has been already paid by the dividend paying company and can be availed as franking credit (Coleman,2016).
References
Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional) Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., & Snape, T. (2015) Australian tax handbook. 8th ed. Pymont: Thomson Reuters.
Krever, R. (2017) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON LAWBOOK Company.
Reuters, T. (2017) Australian Tax Legislation (2017). 4th ed. Sydney. THOMSON REUTERS.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., &Ting, A. (2015) Principles of Taxation Law 2015. 7th ed. Pymont: Thomson Reuters.
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