When is a company incorporated outside Australia a resident of Australia?
Who is a resident of Australia?.
Modelling the impacts of a cut to company tax in Australia. Centre for Policy Studies?
Doubts about the Central Management and Control Residency Test for Companies?
Taxation compliance is mandatory in Australia. Failure to comply with taxation laws can lead to penalties or criminal proceeding leading to imprisonment. Taxation in Australia is collected by Australian Taxation Office (ATO) on behalf of the Federal Government. The Australian financial year start on 1st July and ends 30th June next year (Woellner et al., 2010). The Australian taxation law treats residents and foreigners differently when determining tax obligations. The residency test with involve a four criteria tests that are; where an individual resides, behavior while in Australia, physical presence in Australia and nationality (Hemmings, and Tuske, 2015). It is therefore important to understand one’s or a company’s residence status for tax obligation in order to minimize tax payable and avoid being charged for non-compliance. The following write-up is a taxation advice for Helena, Maxwell, and Van Diemen’s Architecture Ltd on tax issues arising from their different residency situations for tax purposes in Australia.
The residency test has to be done to determine Helena’s residence status in different situations while in Australia. First, Helen is not a citizen of Australia and originates from Scotland. Secondly, Helena has worked a company with operations in Australia on a contract of 12 months. Lastly, Helena terms in Van Diemen’s Architecture Ltd has changed from a 12 months contract to permanent employment that means she will have to settle in Australia. Each Helena’s situations have different tax obligations in regard to residence status that she needs to understand.
For the purposes of tax, Helena will not be treated as a residence of Australia for 2016/2017 tax year and therefore will not be taxed. However, Helena will be treated as a residence of Australia for 2017 -2018 tax year for tax purposes. In IT 2607 ruling, it was determined that an individual entering Australia for less that 6months during a tax year will not be taxed. Therefore, Helena’s stay in Australia for 2017/2018 tax year does not satisfies section 6(1) of Income Tax Assessment Act of 1936 to be a residence of Australia for purposes of tax. For 2017/2018 tax year, Helena will be taxed as a residence of Australia. This means she will be considered as a temporary resident. Helena despite working in Australia for this tax year, she has a permanent residence outside Australia. Helena temporary residence status for tax year 2017-2018 fit to Australian temporary residence definition that include Migration ACT 1958 and Social Security Act 1991 definitions of a temporary resident. To break down, Helena was in Australia to work for only 12 months and had no relative or spouse in Australia. She wasn’t a resident or had a spouse in Australian to be considered for social security purpose. In terms of behavior while Australia, Helena had good ties to social and living engagements that show she is a residence of Australia. Helena’s interest earning bank account interests will be withheld at 10% for tax purposes. The status of a temporary residence for Helena will end when she applies for permanent residency. In this case, Helena will pay taxes for income only earned in Australia and can claim for superannuation and Medicare levy for tax refund.
After Helena has been offered a permanent position in the company and has decided to settle in Australia, her residence status and tax obligations will change. Her status will change to permanent residence. Helena will satisfy several residential tests for tax purposes. First, Helena’s good ties with the society will be considered for permanent resident (Khoo, McDonald, and Hugo, 2008). Secondly, Helena satisfies residential test of where an individual residence in accordance to ITAA 1936 and TR 98/17 ruling. She is in Australia for more than 6months in a tax year and ordinarily resides in Australia. This means that Helena will have to declare income earned either inside or outside Australian when filing tax returns. According to Australian Tax Law, a permanent residence will be taxed on all income earned within and outside Australian within a tax period. Therefore, she will have to declare about her flats in Glasgow and interest earning bank account. She will also pay for superannuation and Medicare levy that are not subject to refund. Helena will also be eligible to claim benefits from the Australian tax system. These include tax-free thresholds, tax offsets, and general low tax rates compared to temporary residence. Therefore, Helena will be treated the same as other Australian residences
Maxwell is faced by two major tax situations according to Australian tax law. The first situation is on Maxwell’s visits to Helena in Australia during the Christmas and Easter holidays and relocation from Edinburgh to Tasmania in Australia.
Maxwell’s visits to Helena do not meet any residential tests for taxation purposes. He will also not be taxed as a resident for 2017/2018 tax year. According to section 6(1) of Income Tax Assessment Act 1936, Maxwell does not meet more than six months criteria to be taxed in both circumstances as an Australia resident (Woellner et al., 2010). He arrived in April with Helena and a tax year ends on 30th June. Therefore, Maxwell will not declare or file tax returns for 2017/2018 tax year in Australia.
On the other side, Maxwell has decided to relocate and settle in Australia together with Helena. For the following tax years, Maxwell will be considered as an Australian resident and will be required to get a tax file number (TFN) that he will be using to file tax returns. According to FC of T v Applegate 79 ATC 4307, a migrant becomes a resident of Australia from the day they arrive in Australia with an intention to settle permanently or at a considerable period of time. Therefore, Maxwell is a residence of Australia according to subsection 6(1) of 1936 Act that states a resident of Australia is an individual or resides in Australia in reference to ordinary definition of the word reside for purposes of taxation (Hemmings, and Tuske, 2015). This entails that he will be required to declare all his income earned while in Australia. Maxwell will therefore be required to file returns for income earned from his flats in Glasgow. Maxwell will then be eligible for tax benefits for 2018/2019 tax year as other Australian residents.
Van Diemen’s Architecture
Van Diemen’s Architecture Ltd is a foreign company that is incorporated in England. The company has it majority shareholders and head office in United Kingdom where decisions are formally signed. The company’s first operations in Australia were in February 2017. The company has to pass the residence criteria to pay company taxes as a resident company. In order for a company to pass residence test, it must be incorporated in Australia, carries on businesses in Australia and has either its voting power controlled by Australian shareholders or its central control and management is in Australia (Burnett, 2015). Van Diemen’s Architecture Ltd central management is in England and any formal decision for the company in Australia has to get verified from the headquarters. The local directors in Tasmania are only incharge of the company direction at local level. The company majority shareholders are also across the United Kingdom and not in Australia. Therefore, Van Diemen’s Architecture Ltd is not incorporated in Australia nor controlled in Australia according to ITAA of 1936. Hence Van Diemen’s Ltd is a non residential company in Australia. This means that the company will be required to submit ordinary and statutory income that is only earned in Australia. This is different to a residential company that will have to submit all income earned inside and outside Australia for taxation (Jones, Passant, and McLaren, 2016). In reference to Malayan Shipping Co Ltd v. FCT, a company is a residence of the country it incorporated in. Therefore, taxation of income from all sources will lead to double taxation of the company unless a special taxation agreement exists or are made between the country and Australia (Thampapillai, 2016). In the Bywater; Koitaiki Para Rubber Estates Ltd v FCT case, it was determined that central management and control referred to key elements that involve high level decisions that set a company policies, determine operations and directions that a company follows to make transactions (Dixon, and Nassios, 2016). This established a difference between control and direction and day to day management of activities. Therefore, the three directors of Van Diemen’s Architecture Ltd are incharge of day to day operations and it not an act of central control and management.
In summary, Helena, Maxwell, and Van Diemen’s Ltd will be subject to different taxation obligations as residents of Australia. Helena will not be taxed for 2016/2017 tax year while she will be taxed as a temporary residence in Australia for 2017/2018 tax year. Helena will then apply for a permanent tax residence in order to accrue tax benefits as an Australian residence. Maxwell will not be eligible for taxation for 2017/2018 tax year. Maxwell should therefore obtain Tax File Number and apply for permanent residence which will mature after six months. On the other side, Van Diemen’s Ltd will be taxed as a non residence. This is because the company does not meet residential criteria as it incorporated in England, has its management and control outside Australia and majority of it voting shareholders are residents of United Kingdom. Therefore, each situation is unique and each person needs to act differently in order to comply with the taxation law.
Burnett, C., 2015. When is a company incorporated outside Australia a resident of Australia?. Tax Specialist, 18(5), p.198.
Dixon, J.M. and Nassios, J., 2016. Modelling the impacts of a cut to company tax in Australia. Centre for Policy Studies, Victoria University.
Harding, C., 2012. Who is a resident of Australia?. Concise Collection of Tax Fundamentals, A, p.181.
Hemmings, P. and Tuske, A., 2015. Improving Taxes and Transfers in Australia.
Jones, D., Passant, J. and McLaren, J., 2016. Doubts about the Central Management and Control Residency Test for Companies. J. Austl. Tax'n, 18, p.121.
Khoo, S.E., McDonald, P.F. and Hugo, G., 2008. Temporary skilled migrants in Australia: employment circumstances and migration outcomes. Canberra: DIMIA.
Thampapillai, D., 2016. Foreign Employment Income and Double Tax Avoidance Agreement: Australia's Possible Governance Failure.
Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2010. Australian taxation law. CCH Australia.