Taxation Ruling: Financial Income Year Essay

Question:

Discuss about the Report for Taxation Ruling of Financial Income Year.

Answer:

1. Issue

The critical issue in this case is to examine the tax residency status of Juliette for the income year FY2015 and FY2016 based on the tax ruling TR 98/17 and other relevant rulings and legislations.

Rule

According to the tax law of Australia, the tax residency of persons can be determined with reference to the norms described in the subsection 6(1) of ITAA, 1936. There are certain specific tests in order to decide the tax residency of an individual for a particular financial or income year which are defined in the tax ruling TR 98/17 (ATO, 1998), There are four major tax residency tests that are available to ascertain the tax residency status of an individual in Australia

  1. Domicile Test
  2. 183 Day Test
  3. Residency Test
  4. Superannuation Test

If the concerned individual satisfies any of the above mentioned tests of tax residency, then he/she would be considered as Australian tax resident for that particular assessment period. The imperative condition in this scenario is that these residency tests will examine the tax residency of the concerned person for the same financial year and not for next year or for past year. Hence, it can be said that these residency test need to be applied on an annual basis considering the various facts (Gilders et. al., 2015). A brief discussion about these residency tests is described below

  1. Domicile Test

It also termed as Abode Test as per the tax ruling. This test is applicable for those persons, who have Australian domicile but are currently residing on the foreign territory due to the involvement in the personal or professional commitments or other specific purposes. There are two essential conditions that must be satisfied by the individual in order to pass domicile test (Nethercott, Richardson & Devos, 2016).

  • The concerned person must have Australian domicile according to the norms of Domicile Act, 1972.
  • The person should have a permanent residence with in Australian region as discussed in Levene v. I.R.C.(1928) A.C.217

Hence, if the concerned person has fulfilled the above conditions of domicile test, then in such cases he/she will be declared as a tax resident of Australia for that particular financial year. The location of the permanent abode of the concerned tax resident is also a pivotal element that would be taken into consideration. These elements are highlighted in the tax ruling IT 2650. The Tax Commissioner also follows this tax ruling to determine the location of permanent abode taking all case facts into cognizance (Barkoczy, 2015).

  1. 183-Day Test

There are two major provisions of 183 day test highlighted in tax ruling that must be satisfied by the concerned person in regards to pass 183-Day test (CCH, 2015).

The concerned person must reside in Australian territory for a minimum period of 183 days in the given financial year. It is not essential that this stay is of continuous basis and may be conducted with breaks.

There should not be any doubt by the concerned income tax authority i.e. Tax Commissioner in regards to the willingness on the part of the concerned person to make Australia as a permanent residence place in future. It is not essential that the present intent must be satisfied in future, but the intent and willingness to reside in Australia on permanent basis is essential.

If any of the above mentioned provision is not satisfied from the part of the concerned individual then, this test cannot be passed to ascertain the tax residency (Sadiq et. al., 2015).

  1. Residency Test

The essential factors of residency test as per the highlighted part of tax ruling are discussed below (Hodgson, Mortimer and Butler, 2016).

  • Prime intention to reside in Australian Territory
  • Personal and Professional Relations in Australia
  • Fixed assets in Australia
  • Social interactions

A brief outline about the above highlighted factors, which are considered the pivotal factors in order to examine the tax residency of the concerned individual, is presented below.

  • Prime intention to reside in Australian Territory

It has been observed that there are many reasons for the taxpayer to reside in the Australian territory but the prime intent or main reason is accountable in order to apply the residency test. For example, any temporary abode caused by travelling cannot be the taken into consideration as it would be insignificant.. If educational or employment commitment is the main objective to reside in Australia, than this can be assumed significant under this test. It indicates the willingness on the part of the concerned person to make permanent residence in Australia in upcoming future. The duration of stay in Australia is another crucial element in this regards which is highlighted in the FC of T v. Pechey 75 ATC 4083; (1975) 5 ATR case. Any employment for a shorter period will not be liable for an Australian tax residency due to its insignificant duration of stay (Deutsch et. al., 2015).

  • Personal and Professional Relation

The nature of the ties that the concerned taxpayer has in Australia is imperative factor. This factor also depends on the relation of the taxpayer with the country of origin. This was highlighted in the Peel vs The Commissioners of Inland Revenue (1927) 13 TC 443 case. The nature of the tie on the part of the concerned taxpayer can be professional level or personal level. This indicates the extent of willigness of the taxpayer to make a permanent abode in Australia in the near future (Barkoczy, 2015).

  • Fixed assets in Australia

This factor of tax residency involves the number of fixed asset maintained by the concerned taxpayer, who is inhabiting in Australian territory and it can be viewed in the judgment of The Commissioners of Inland Revenue v. F L Brown (1926) 11 TC 292 case. Retaining high amounts of fixed asset in Australia highlights the long term plan of the individual to stay in Australia (Gilders et. al., 2015).

  • Social Relations

The exclusive participation in social occasions in order to develop social relations with the residents and also by taking the membership of clubs and community firms showed the involvement of the concerned taxpayer in the social sphere. This also suggests the willingness on the part of the taxpayer to stay in Australia for long term. If the living life style of the individual in Australia is similar to that in country of origin, then also it implies that the Australian tax residency be conferred (Sadiq et. al., 2015).

  1. Superannuation Test

This test is applicable only for Australian government officers and employees, who are residing on foreign land. Their tax residency can be obtained on the basis of the involvement of the officers in either of the below mentioned superannuation schemes of government (CCH, 2015).

  • PSSS (Public Sector Superannuation Scheme)
  • CSS (Commonwealth Superannuation Scheme).

Application

Facts about the case:

In this particular case study, Juliette was a well-known dancer whose country of origin is England. A United State based company enacted an employment contract with Juliette in England. The contract was in regards to offer choreography for a new stage musical show at a private theatre located in Australia. The contract was of two years starting from 15 March 2015 to 15 March 2017. It was decided that the company will credit the payment of AUD $70,000 after every six month of employment in the Swiss bank account of Juliette. The employment was stated to start in March, 2015. However, she came to Australia in the month of February, 2015 in order to make a bus trip to visit Australia. She had to return back to England in the same month due to unexpected health issue of her mother. On May 1, 2015 she came back for fulfilling her contractual obligations. Over a period of time, she was in love with a co-choreographer (Romeo) in the same company and leased a small flat situated in Sydney. In August, 2015 she purchased a flat and in September 1, 2015 got married with Romeo and started residing there with Romeo. After some time of marriage, she again went to England due to her mother illness in October 15, 2015. She stayed there with her mother till April 14, 2016. She came back to Australia then since her mother had passed away

Determination of tax residency status of Juliette based on the tax residency tests is indicated below.

For the period of 2014-2015

Domicile test cannot apply in this case because Juliette does not possess Australian domicile.

According to the figures given in the case, it has observed that Juliette has spent only three months in Australian territory in the time duration 2014-2015. Hence, she has spent only three month in a particular financial year also she was not involved in any personal tie or relation in Australia. Additionally, she did not own any fixed asset in Australia in this duration. Therefore, Juliette cannot fulfil the requisite of residency test.

Juliette did not stay in Australia for the minimum duration of 183 days. Hence, 183-Day test is not applicable in this scenario.

Juliette is not a government employee of Australia, hence this test also not applicable.

2.) For the period of 2015-2016

Domicile test cannot apply in this case also, since she does not possess Australian domicile.

It has observed from the mentioned information that Juliette was involved in the personal as well as profession relation during the period of 2015-2016. She got married to Romeo and also she was performing her employment commitments with the help of Romeo, when she was taking care of her mother in England. Beside this, she also bought a house in Australia where she was residing with husband Romeo. Hence, it is apparent that the facts above tend to satisfy the essential conditions that are required to pass this particular residency test.

She spent 183 days in Australia which can be calculated from the below figure

(Duration from July 1, 2016 to October 15, 2016)+ (Duration from April15, 2016 to June 30, 2016) = 183 days

Also, her mother got expired in England, which was her country of origin which is why she had to go to England. Hence, there was no intent on the part of Juliette to reside in her country of origin. She was willing to settle on permanent basis in Australia with her husband Romeo and had also bought a house in Australia.

Hence 183-Day test is also satisfied based on the above arguments

Superannuation test fails in this case, because Juliette was not a government employee of Australia.

Conclusion

Based on the above analysis of the case, it can be concluded that during the time period of 2014-2015, Juliette cannot be considered as Australian tax resident due to the failure of all four respective residency tests of tax highlighted in the tax ruling TR 98/17. Although, Juliette is termed as an Australian tax resident for the time period 2015-2016, because she has passed both residency test and 183 day test described in the tax ruling TR 98/17.

2. As per the case details, George has a rental property and the objective is to derive this rental property’s income statement taking into consideration all the deductions available on account of repairs and maintenance, other expenses, capital works deductions and depreciation. This is summarised as shown below (ATO, 2015).

Calculations

The relevant calculations are summarised below.

Management Commission is 5% of the income = (0.05)*13900 = $ 695

Deduction for capital works in on account of longer lasting roof replacement = (0.025)*15000 = $ 375

The depreciation schedule for the property is shown below.

The explanation with regards to the various items that are used for computation of rental income is given below.

In the given case, the damaged roof is not repaired but replaced with a new roof which has an additional life. This would imply capital spending instead of repairs in line with IT 2167 made for the increasing the value of the building and also its life. As a result, deduction would be available on this cost @ 2.5% per annum for 40 years (ATO, 2015).

The expenses that the taxpayer incurs in regards to the rental property management would be deductible and therefore the management commission deduction has been claimed in the rental property income statement (ATO, 2015).

The general expenses related to rental property repair and maintenance are deductible provided the damage is on account of renting or damage in any natural calamity. Here such costs have been included as part of expenses to compute the net income from property (Taxation Ruling TR 97/23)

The decline in the value of the assets of the property has been calculated as shown in the depreciation schedule above and it has been done in accordance with the prime method. The ATO allows deduction for this provided all the assets are qualified assets which is true in the given case. Also, it is noteworthy that for assets whose total cost is lower than $ 300, then instead of following the prime method, the total cost could be claimed as depreciation only when the property is bought (ATO, 2016)

References

ATO (1998), Taxation Ruling TR 98/17. Retrieved on August 20, 2016 from

ATO (2015), Rental Properties 2015, Retrieved on August 20, 2016 from

ATO (2016), Rental Property Expenses, Retrieved on August 20, 2016 from

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

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

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P. and Snape, T. (2015), Australian tax handbook, Pymont: Thomson Reuters

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2015), Understanding taxation law 2015, LexisNexis/Butterworths.

Hodgson, H., Mortimer, C. and Butler, J. (2016), Tax Questions and Answers 2016, Sydney, NSW, Australia: Thomson Reuters.

Nethercott, L., Richardson, G. & Devos, K. (2016), Australian Taxation Study Manual 2016, Sydney, NSW, Australia: Oxford University Press

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

Tax rulings, Legislations and Cases

Income Tax Assessment Act, ITAA, 1936

Income Tax Assessment Act, ITAA, 1997

Domicile Act 1972

Taxation Ruling TR 98/17

Taxation Ruling TR 97/23

Income tax ruling IT 2650

Income tax ruling IT 2167

FC of T v. Pechey 75 ATC 4083; (1975) 5 ATR

Levene v. I.R.C.(1928) A.C.217

Peel vs The Commissioners of Inland Revenue (1927) 13 TC 443

The Commissioners of Inland Revenue v. F L Brown (1926) 11 TC 292

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