Taxation For Tax Settlement Subject – Rules, Laws And Residency Test

Relevant rules and laws

Discuss about the Taxation for Tax Settlement Subject.

The tax settlement subject to the particular tax paying individual has to be done on the basis of the assessment mentioned in tax ruling 98/17. Although for calculating the residential status of the individual, the section 6(1) of the Information Technology Association of America is remarkable. Hence, as per the law of Australia, there are few certain combination of important criteria and determinants which is known as “Residency Test”. This type of test are important type of criteria which have the ability to forecast the tax position of residential status of that particular tax payer.

The most important to be noticed is that when that particular tax payer has satisfied that fundamental criteria of the specific test then only that particular individual shall be entitled as a resident of Australia and will be eligible to pay tax on his/her residential status for that particular accounting year (Barkoczy, 2015).

The important areas of domicile test are as follows (Gilders et.al., 2015):-

It is appropriate to those persons who are staying for a long period still retaining the domicile of Australia.

That particular taxpayer should contain the permanent accommodation in Australia

If these conditions are not fulfilled by the individual then that particular individual will not be categorized as the resident of Australia. There are some specific framework that must be assessed for enlighting the permanent accommodation as mentioned in IT 2650 which comprises of the area of the permanent address of the resident in abroad, the the time span of staying in Australia as well as outside the country Australia, the objective of the individual is to stay in foreign country or not. These are the certain aspect which must be taken into account by the income tax head for calculating the residential status of the individual for that particular accounting year.

This type of test incorporates the word reside which does not contain any particular information about individual statutes.  The particulars of the Residential tests are described below:-

There are number of reasons to reside in Australia in support of the particular individual residing in Australia but the most important cause for the staying is taken into consideration for calculating the residential status and also for calculating the amount of tax levied on that particular person. If the individual who comes to Australia as a tourist then there are very less possibility of residing permanently in Australia but if the individual is coming to Australia for any training purpose or for any educational purpose then only there is a high possibility of residing in Australia (Nethercott, Richardson &Devos, 2016)..

Domicile test

There are different types of links on which the particular individual is living within Australia which may include educational, professional or any combination of these. These may be few reasons for which the individual prefers to stay permanently in Australia. The head of the income tax department of Australia should carefully find out the reasons for staying in Australia.

Buying and keeping a capital asset for a long period of time by the particular individual can be considered as the main reason for staying in Australia for permanent basis. The capital asset may be in the form of building, large machine, land, flat, motor vehicle etc. Which seems that the individual has a plan of residing permanently in Australia. This is discussed in the section The Commissioners of Inland Revenue v. F L Brown (1926) 11 TC 292.

Living and social activities which generally involve membership of various small or large community clubs, playing sports in local sports team competitions, enrolment of children at school located in Australia. These mentioned activities related to the social life of the taxpayer are an indication towards the establishment of a permanent residential home in Australia (Barkoczy, 2015).

These test determines the residential test of the governmental employees of the Australia. It is required that the concerned taxpayer must involve in the fund scheme of either Public Sector Superannuation or Commonwealth Superannuation Scheme. If the taxpayer continuously and actively participates in either of the above mentioned schemes,, then in such cases there is no any need to opine any other residency test in order to comment on the tax resident status of these individuals. If the concerned taxpayer is satisfying the superannuation test, then his/her children specifically younger than sixteen year will also be recognised as tax resident (CCH, 2015).

The individual tax payer will be treated as the resident of Australia if that individual stays in Australia for more than half of the accounting year in Australia as well as he have an objective of staying more in Australia. It is also to be noted that the individual should be present in Australia without any break (Hodgson, Mortimer &Butler, 2016).

The famous dancer Julliet is originally the resident of England and accepted a 24 months legal contract with a company of USA. The agreement was supposed to be started on march 2015 in Australia on a private musical theatre. The duration of the agreement is march 2017. The payment she supposed to get as per the agreement is AUD$70000 which is to be transferred in her Swiss bank account. She decided to make a tour in Australia before starting of her agreement for which she reached to Australia within February 2015 by selling some of the furniture and giving her flat on lease. But her mother still resides in England as her mother was badly ill. For this reason she came back to England on 28.02.15. but she again have to come back to Australia on 28.05.15 to complete her job. Then she took a flat in Sydney where she can live in. In between she fall in love with her dance partner Romeo and they got married. Now in the meanwhile when she was enjoying her married life as well as her job she get to know that her mother was seriously ill and having a tension of her mother she returned to her mother on October 15, 2015 and her mother expired on 10.04.15 and she came back to her husband on 15.04.15.

Residential test

Calculation of the residential status for the accounting year 2015-16 and 2016-17:-

According to the case study it is concluded that Julliete is not staying in Australia still her birth and she is not the resident of the country for the accounting year 2015-16 as she cannot fulfil the basic criteria of domicile test. Thus she is not classified as a resident of Australia and did not have to pay tax.

From the information collected from the question it has been noticed that she only stayed one month in Australia while visiting the country as a tourist and 2 months while working as the employee of the Australian based company. Therefore the days spent by her is not sufficient to declare her as the resident of the country as the days spent are less than 183 day test. But for the accounting year 2016-17 she has spent a lot of days in Australia such as from (01.07.16 to 15.10.16) + (15.04.16 to 30.06.16) which is equal to 183days. So, for the accounting year 2016-17 she can be declared as the resident of Australia and have to pay tax as per the residential status prevailing in the country.

For the financial year FY2015 she had not performed the required aspects of resides test like no personal or social ties, not taken ownership of any fixed asset, resided just for three months) thus she would not be entitled as tax resident of Australia based on the resides test in the FY2015.

Therefore it has been concluded that Julliete has been treated as the resident of Australia because she has fulfilled the basic conditions of 183 days for the accounting year 2016-17 but for the accounting year 2015-16 she cannot be declared as the resident of the country as she haven’t fulfilled the basic condition of 183days completion.

The earning statement of rental property of George on the basis of the given information:-

Details	Total ($)
Annual rent	13900
Less:- Expenditure
Repairs	6000
Commission of the management @ 5%	695
Expenditure for repainting	2500
Fixing for expense	375
Capital reduction for the replacement of roof top	375
Door fixing expense	1000
Depreciation on asset	616.7
Taxable expenses	11186.7
Income from rental property	2713.3

Depreciation schedule:   The basic method of calculating depreciation os used to calculate the reduction in value of the different asset (Barkozcy, 2015).

Details	Cost of the property	Life of the property	Year of use	Usage of asset life	Depreciation
Stove	900	12	0.58	.08	43.77
Carpet	3500	10	.58	.1	204.25
Hot water service	2000	12	.58	.08	97.26
Furniture and fittings	5000	13.33	.58	0.08	218.89
New furniture and fittings	1200	13.33	.58	0.08	52.53
Total					616.7

Capital reduction = 2.5% of capital cost incurred = 2.5% of 15000 = $ 375

Commission for agent = 5% of annual rental earnings = 5% of 13900 = $ 695

Explanation of various items of the statement:-

Any expense spent on repairs of the damage that the property incurs due to normal wear and tear is reduced for the purpose of tax. Further, if any damage is occurred because of any natural calamity and of it is repaired by the owner then this amount would be included in the repair and maintenance and deduction would be claimed for the same (Gilders et. al., 2015).

The expenditure on roof would be capital expense and annual deductions @ 2.5% pa should be charged till every the expense is accounted for. If the roof would have been fixed, then the expenditure would have amounted to repair (ATO, 2015).

The depreciable assets present at the property would tend to undergo value erosion on an annual basis which would be reflected as the depreciation expense taking into consideration the effective life of each asset as in the given case shown above. (ATO, 2016)

Reference:- 

ATO (2015), Rental Properties -2015, Retrieved on September 4, 2016 from https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/Rental-properties-2015.pdf

ATO (2016), Rental Property Expenses, Retrieved on September 4, 2016 from https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Investments,-including-rental-properties/Rental-property-expenses/

Barkoczy, S. (2015), Foundation of Taxation Law 2015, North Ryde: CCH Publications

CCH (2015), Australian Master Tax Guide 2015, Sydney: CCH Australia Limited

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W. and Ting, A. (2015), Principles of Taxation Law 2015, Pymont:Thomson Reuters