Discuss about the Tax Residency Position for Statutes and Legislations.
To find the tax residency position of the concerned taxpayer (Juliette) on the ground of tax ruling and appropriate tax legislations for the financial years FY2015 and FY2016.
Law
The tax residency position of the concerned taxpayer is primarily governed by section 6(1) of ITAA, 1936. In this scenario, there are different tests available which can be adopted in order to ascertain the tax residency position of the concerned taxpayer that are highlighted in the tax ruling 98/17 (ATO, 1998). Domicile test, Residency test, Superannuation test, 183 days test are the significant tests discussed in tax ruling 98/17, a brief discussion of these tests and there essential terms and conditions is shown below.
Domicile test
This test is imperative in such cases, when the prime objective is to ascertain the tax residency of those taxpayers who are possessing Australian domicile under Domicile Act 1982 but are residing on foreign territory due to the professional or/and personal liabilities. These obligations force the taxpayers to reside outside Australia. Another imperative factor in this regards is that the given taxpayer must continue to sustain a permanent resident within Australia while residing in abroad to fulfil his/her respective obligations (Woellner, 2014). According to the judgement of the Federal Commissioner of Taxation v Applegate case, any given taxpayer who has Australian domicile as per the Domicile Act 1982, but possess a permanent residence in foreign land would not be labelled as Australian tax resident for that financial year. There are certain aspects of domicile test described in tax ruling IT 2650, which are considerable by the Income Tax Commissioner in regards to determine the intent and place on behalf of the taxpayer for the permanent residence. Factors such as the length of residing in the foreign land along with intention on taxpayer’s behalf to settle in abroad are also considered while applying the domicile test especially with regards to determining the location of permanent abode (Barkoczy, 2013).
Resides test
It has been seen that reside has not been defined or explained in any statute to find the tax residency position of a given taxpayer. Hence, it is required to interpret such information from the primary sources i.e. various verdicts and judgements of the relevant cases which are argued on the basis of specific tax legislations and tax rulings in order to ascertain the tax residency status in Australia of the taxpayer. Some of the factors which can contribute to find the tax residency positions under resides test are outlined below (Gilders et. al., 2014).
Location of permanent residence place
Number of visits made to country of origin or to abroad
Reason and frequency to visit on foreign territory with special consideration to the country of origin
Nature of professional, social and personal ties of taxpayer with Australia
Number of fixed capital asset owned by the taxpayer in Australia which provides an indication towards the intent on behalf of the taxpayer to reside in Australia on constant basis. Also, driving of large number of fixed asset in Australia will also provide the commitment of taxpayer to make Australia as a permanent abode place. This can be viewed in the verdict of The Commissioners of Inland Revenue v. F L Brown (1926) 11 TC 292 case (Coleman, 2011).
Involvements of the taxpayer in personal, educational or professional bonds with Australia provide an efficient factor to define the future plan or activity of residing in Australia.
183 day test
As per tax ruling TR 98/17, there are two basic conditions that must be fulfilled in regards to satisfy the 183 day test (CCH, 2012).
The taxpayer must have stayed in Australian territory for a minimum of 183 days in the given financial year. The continuity of stay is not required in the calculation of total number of days in a complete income year.
There must not be any suspicion on the part of Income Tax Commissioner with respect to the intention on behalf of the taxpayer to reside in Australia on permanent basis.
If the concerned taxpayer does not fulfil any of the above terms and conditions, then he/she does not pass the 183 day residency test. Therefore, the person cannot be recognised as an Australian tax resident.
Superannuation test
This test is very specific in nature and examines the tax residency status for officers who are working for Australian government and posted on foreign territory by Federal government in order to satisfy the job obligations. It is also needed that the taxpayer must have contributed in any of the two government superannuation schemes named as Public Sector Superannuation Scheme or Commonwealth Superannuation Scheme. If the concerned taxpayer has satisfied the condition of superannuation test, then any other test is not required to determine the tax residency status of that individual (Deutsch et. al., 2016).
Case facts:
England is the country of origin of the given taxpayer Juliette, who was famous for her dance and choreography. A USA based musical company had enacted an employment agreement with Juliette to do choreography for the new musical event, which was to be held in Australia. The duration of the contract is 24 months from March 15, 2015 and will terminate on March 15, 2017. Juliette had expected to receive the contractual amount of AUD$70,000 on her Swiss bank account after an interval of six months. Her job obligation was supposed to begin from March, 2015 but she arrived in February, 2015 in order to make a bus tour visit around Australia. In the same month of February, she had to go back to her country of origin to take care of her ill mother. She came back to Australia to join her job on May 1, 2015. With regards to residing in Australia, she had leased a flat located in Sydney and eventually she owned a personal flat in August 2015. She was attracted towards her co-choreographer Romeo and eventually got wedded with him on September 1, 2015. She had begun to live with Romeo in her owned flat. However, her mother fell serious ill and needed whole time care, thus Juliette went back to England on October 15, 2015 but maintained constant touch with Romeo through phone. Also, she kept on passing choreography notes to Romeo so that the employer does not suffer on account of her absence. Her mother passed away on April 10, 2016, and finally Juliette returned back to Australia on April 15, 2016.
Test – Tax residency status of Juliette for financial year 2015-2016
Test 1 (Domicile test) – Not applicable as Juliette did not have Australian domicile in accordance with the Domicile Act 1982.
Test 2 (Resides test) – The purpose of visit to Australia is due to the employment contractual obligations which was started from 15 March 2015. But she had to leave Australia and revisited to her native country England, because of un-well status of her mother. From the given information it was concluded that she had stayed in Australia only for shorter period of three month in a financial year. This duration of stay was insufficient to predict the intent on the part of Juliette to make Australia as a permanent residential place. She had not maintained any personal tie during this time. Also, Juliette did not own any fixed capital asset in Australia in this time period. These factors provide a conclusion that Juliette had not fulfilled the obligations of resides test.
Test 3 (183 day test) –Juliette did not pass the terms and condition of this test because, she did not reside in Australian territory for 183 days in this particular financial year and another fact is that she had no motive to stay in Australia for long in near future, thus test also failed.
Test 4 (Superannuation test) – Not applicable, Juliette was not Australian government officer, who was residing in abode due to employment obligation.
|
Domicile test |
Not satisfied |
|
Resides tests |
Not satisfied |
|
183 day test |
Not satisfied |
|
Superannuation test |
Not satisfied |
Test – Tax residency status of Juliette for financial year 2015-2016
Test 1 (Domicile test) – Not applicable, Juliette does not have Australian domicile.
Test 2 (Resides test) –The application of the test can be viewed on the basis of the below mentioned outline
She had formed a personal relation in this time period by getting married with her colleague Romeo in Australia.
Professional relation with Australia due to the commitment of job obligations, it can be observed from the evidences that she was actively fulfilling her job responsibilities when she was residing in England in order to take care of her sick mother. She kept providing choreography notes to her husband Romeo, which was an essential part of her service towards the company. She also insured that there would not be any kind of choreography work loss in regards of her absence in Australia.
She was having a strong intent to make a permanent residence within Australia.
Her stay in England was not out of intent but more out of obligation towards her ailing mother who required 24 hour care.
Test 3 (183 day test) – Juliette satisfied the terms of 183 day test as the length of residing in Australia for the financial year 2015-2016 comes out exactly equal to 183 day. This is exactly the same number of days, which is necessary to satisfy the 183 days test.
Number of day calculation based on the given information
Total number of days resides in Australia = number of days resides in Australia in between (1st July, 2016 to 15th October, 2016) + number of days resides in Australia in between (15th April, 2016 to June 30, 2016)
= 183 days
Therefore, from above calculations, it can be finalized that Juliette had stayed in Australia for 183 days in the financial year 2015-2016, and also had the intention of Juliette to reside for long terms in Australia indicated by the presence of owned residence and Romoe.
Test 4 (Superannuation test) – Not applicable as Juliette is not Australian government officer.
|
Domicile test |
Not satisfied |
|
Resides tests |
Satisfied |
|
183 day test |
Satisfied |
|
Superannuation test |
Not satisfied |
Conclusion
Based on the case analysis and above mentioned arguments with respect to the relevant law and legislation, it is evident that Juliette is termed as tax resident in Australia for 2015-2016 as she had successfully fulfilled the terms and conditions of 183 day test and residency test in accordance to tax ruling 98/17.
She is not recognised as a tax resident in Australia for the financial year duration of 2014-2015 because she has not fulfilled the requisite set of terms and conditions of any of the tax residency tests highlighted in the tax ruling TR 98/17.
2.The given case requires computation of the rental income for George’s property that is rented from the time of purchase only. The taxation rules allow for various expenses that are incurred to be deducted from the rental income received so as to arrive at the portion of the income that would be taxable (Deutsch et. al., 2016). The various deductible expenses are highlighted below (ATO, 2015).
Repairs and maintenance of damage caused due to general wear and tear and due to damage in storm or any other natural calamity.
Decline in value of the depreciable assets present on the rented property
Any capital works aimed for improvement of property life
Expenses related to management of property
In wake of the above, the income statement of George’s rented property is shown below.
Management Commission = (5/100)*13900 = $ 695
Roof Top capital deduction = (2.5/100)*15000 = $ 375
The depreciation expense taken into consideration in the above rental income statement has been computed in the manner shown below (Gilders et. al., 2014).
The various terms mentioned in the rental income statement have been offered an explanation in the given section as outlined below.
Deductions on expenses incurred on repairs of damages caused on account of wear and tear and due to natural calamity is permissible. However, it is imperative that wear and tear related repairs and maintenance are immediately deductible only if the property is rented as per TR 97/23. Thus, in the given case, expenses incurred on general repair and maintenance, fence repainting towards the front side, damaged front door repairing would all comprise as deductible expenses as the property has been rented from the time it was purchased by George (Deutsch et. al., 2016).
Besides, any expenses that relate to property management are deductible as per ITAA 1997 provisions and therefore the 5% management commission would also be deducted from the rent to arrive at the taxable rent income (ATO, 2015).
The fibre roof has been damaged but instead of being fixed, the owner has replaced the roof with a new roof made of different material which is long lasting and hence would add to the effective life of the property. In case of the roof being repaired, the expenses would have contributed to repair and maintenance but here the expense amounts to capital work and typical deduction for such expenses in @ 2.5% per annum which continues for 40 years (ATO, 2015).
There is decline in the value of the assets that are installed on the property on rent and using the prime method, depreciation has been computed and this contributes to the expenses that may be deductible (ATO, 2016).
References
Statutes and Legislations
Income Tax Assessment Act, ITAA, 1936
Income Tax Assessment Act, ITAA, 1997
Case Laws
Federal Commissioner of Taxation v Applegate case
The Commissioners of Inland Revenue v. F L Brown (1926) 11 TC 292
Tax Rulings
Taxation Ruling TR 97/23
Income tax ruling IT 2650
Websites
ATO (1998), Taxation Ruling TR 98/17. Retrieved on August 31, 2016 from https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR9817/NAT/ATO/00001
ATO (2015), Rental Properties 2015, Retrieved on August 31, 2016 from https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/Rental-properties-2015.pdf
ATO (2016), Rental Property Expenses, Retrieved on August 31, 2016 from https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Investments,-including-rental-properties/Rental-property-expenses/
Books
Barkoczy, S. (2013), Foundation of Taxation Law 2013, North Ryde: CCH Publications,
CCH (2012), Australian Master Tax Guide 2012, Sydney: CCH Australia Limited
Coleman, C. (2011), Australian Tax Analysis, Sydney: Thomson Reuters (Professional) Australia,
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P. and Snape, T. (2016), Australian tax handbook, Pymont: Thomson Reuters
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2014), Understanding taxation law 2014, LexisNexis/Butterworths.
Woellner, R. (2014), Australian taxation law 2014, North Ryde: CCH Australia
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