Australian Taxation Law Legislations and Tax Rulings

Question: Describe about the Australian Taxation Law for Legislations and Tax Rulings. Answer: 1. Issue To determine if Juliette is a tax resident of Australia for the financial years FY2015 and FY2016 based on the relevant tax legislations and tax rulings. Rule Historically, the tax residence of entities has been decided on the basis of resident definition outlined in subsection 6(1), ITAA 1936. For individuals, subsection 6(1), ITAA 1936 is not sufficient and therefore the various tax residency tests highlighted in the tax ruling TR 98/17 are deployed to confirm whether a given individual would be an Australian tax resident for the given period or no (ATO, 1998). The four tests for ascertaining the tax residency status are mentioned below. Domicile Test Residency Test 183 Day Test Superannuation Test It is noteworthy that in order for Australian tax residency to be conferred, the taxpayer needs to comply with atleast one of the above tests listed above. Also, these tests need to be applied on an annual basis so as to determine tax residency for a particular year as tax residency conditions may be fulfilled in a particular financial year but not in the next year and vice versa (Sadiq et. al., 2015). The relevant tests which are used for tax residency status are briefly outlined below. Domicile/Abode Test This test is used as the relevant tax residency tax for those individuals who have the Australian domicile but stay outside Australia due to professional commitments or any other particular reason. In order to pass this particular test, the individual needs to satisfy two main conditions (Hodgson, Mortimer and Butler, 2016). Firstly, the concerned individual should possess an Australian domicile as per the terms and conditions mentioned in the Domicile Act, 1972. Secondly, the concerned individual should have his/her permanent abode (as defined in Levene v. I.R.C.(1928) A.C.217) inside Australian territory only. If any of the two conditions listed above is not fulfilled, then the concerned taxpayer would have deemed to have failed this test (Gilders et. al., 2015). It is noteworthy that various factors are taken into consideration for determination of location of permanent abode of the given taxpayer. These principles have been detailed in the tax ruling IT 2650 and are adhered to by the Tax Commissioner while ascertaining the validity of this test (Nethercott, Richardson Devos, 2016). Residency test The meaning of the word reside does not find any mention in any of the relevant statutes meant for this purpose. As a result, the contours and the precise application of this test is gained from the relevant cases decided in this regard along with the relevant income tax rulings (Gilders et. al., 2015). Based on these, the pivotal factors to be considered are outlined below. Central purpose of residing in Australia It often happens that the concerned taxpayer may be residing in Australia for a plethora of reasons but only the central or main reason should be taken into consideration as has been derived from various cases. While reasons such as casual travelling are termed as temporary reasons but residence for purposes of employment and/or education are hailed as permanent reasons as these are usually symbolic with the underlying person having intention to make Australia permanent abode in the near future (Sadiq et. al., 2015). The stay length in Australia is a critical factor as has been highlighted by the decision in the FC of T v. Pechey 75 ATC 4083; (1975) 5 ATR case. Additionally, any stay meant for employment which is expected to last for only a few months would be considered insignificant and short and hence tax residency would not be given in such cases (Barkoczy, 2015). Nature of Ties (Personal and Professional) The extent of ties that the concerned taxpayer has in Australia as against the country of origin is a key decision making factor as has been highlighted in the decision reached in the Peel vs The Commissioners of Inland Revenue (1927) 13 TC 443 case. It is imperative to note that the relevant ties are not limited to only professional ties but also include the personal especially in terms of location of family. This factor is significant as it enables the Tax Commissioner to understand the commitment along with involvement level of the taxpayer with Australia (Gilders et. al., 2015). Assets maintained in resident country Another significant factor driving the tax residency decision is the quantity of fixed assets under possession of the taxpayer who is currently residing in Australia as has been highlighted in the decision of The Commissioners of Inland Revenue v. F L Brown (1926) 11 TC 292 case. The significance of this factor stems from the fact that possession of fixed assets is considered as indicative of the long term commitment to stay in the country where the fixed assets are based (Sadiq et. al., 2015). Social arrangements The nature of social arrangement developed by the concerned taxpayer in Australia is a critical factor in tax residency determination. The social ties are indicated through the membership of various clubs along with community organisations. Normally, as an accepted precedent if the concerned taxpayers life in Australia similar to the corresponding life in country of origin than Australian tax residency is conferred on the individual (Deutsch et. al., 2015). 183 day test For passing this particular test, the concerned taxpayer has to necessarily fulfil the two conditions that have been highlighted below (Sadiq et. al., 2015). A stay of atleast 183 days in Australian territory is mandatory in the tax year under consideration. This stay may or may not be continuous in nature. There must not be any suspicion from the end of the income tax Commissioner with regards to the concerned taxpayers intent of making Australia permanent abode in the long run. Further, it is not imperative that in the future this must actually be operationalized but intent has to be present. In case any of the conditions listed above are not complied with, then this test would have deemed to be failed and the concerned taxpayer would not be recognised as an Australian tax resident. Superannuation Test This test is highly specific and only used when the concerned taxpayer whose tax residency has to be determined is a government official serving outside Australia. The tax residency in such cases is determined on the basis of the membership of couple of superannuation schemes which determine the tax residency status of the concerned taxpayer. All other factors which have been considered above such as length of stay in foreign land would not be taken into consideration in this particular case (Nethercott, Richardson Devos, 2016). Application The relevant facts of the given case are summarised below. The country of origin of Juliette is England and she is a famous dancer. Juliette came to Australia with the main purpose of employment since she was hired by a US based private theatre management company to choreograph a musical stage show in Australia. The contract was for two years and was expected to terminate in March, 2017. The proceeds for the contract were diverted to the Swiss account of Juliette and the contract was enacted in England. Her job was expected to commence in March, 2015 but she arrived earlier in February, 2015 with the intention of embarking on a two month bus trip around Australia. Juliette returns to England by the end of February since her mother was ill but returned to Australia on May 1, 2015 to fulfil her contractual obligations. She leases a flat in Sydney but subsequently in August 2015 buys a flat to start living in with Romeo. The two subsequently got married on September 1, 2015. 4 Subsequently on October 15, 2015, she returned to England to take care of her mother who required 24 hour care. She stayed there till April 14, 2016 while her mother expired on April 15, 2016. She returned back to Australia and Romeo on April 15, 2016. Tax residency test- Application for 2014-2015 Domicile Test Cannot be applied in the given case as Juliette does not have an Australian domicile. Residency Test It is a relevant test to be applied here. Juliette had come to Australia mainly for employment purpose but the same was expected to commence from March end 2015. But before she could commence her work, she had to leave Australia due to her mothers illness. Hence, during the year 2014-2015, Juliette spent only three months in Australia during the financial year. For one month she was acting as a casual traveller, while the remaining two months were spent on employment. Also, she did not have any personal ties in Australia but had significant personal ties in England (i.e. country of origin). Additionally, during the year, Juliette did not purchase any fixed asset in Australia. Considering the above, it may be concluded that Juliette did not satisfy this test. 183 day test - It is a relevant test to be applied here. But this test is not satisfied as Juliette does not comply with either of the condition. During the financial year, she spent only three months (i.e. February, May, June) and hence did not stay for 183 days. Further, she had no intention to make Australia permanent home and hence this test is not satisfied. Superannuation Test Cannot be applied since Juliette is not a government officer serving outside Australia. Tax residency test- Application for 2015-2016 Domicile Test Cannot be applied in the given case as Juliette does not have an Australian domicile. Residency Test This test is relevant for the given case. It is apparent from the given information that Juliette has significant personal and professional ties in Australia. She got married to Romeo and also is keeping up with her professional commitments through Romeo even though she was in England for a majority period. She has also bought a house in Sydney where she has moved in with Romeo. Additionally, she has intention to settle in Australia only which was also her childhood dream. Further, during her stay in England also, she was in constant touch with Romeo and was stuck only because of her mothers illness. Hence, the residency test is satisfied in the given case. 183 day test One of the conditions with regards to tax residency i.e. intention of settling down in Australia is satisfied by Juliette. Total period of stay in Australia = (1st July, 2016 to 15th October, 2016) + (15th April, 2016 to June 30, 2016) = 183 days Hence, even this test is passing since Juliette did stay in Australia for a period of 183 days during this year and also wanted to make Australia the permanent abode. Superannuation Test Cannot be applied since Juliette is not a government officer serving outside Australia. Conclusion On the basis of the above discussion, it is apparent that Juliette is an Australia tax resident for 2015-2016 as the residency test and 183 day test are both satisfied by Juliette. However, she is not an Australian tax resident for 2014-2015 since none of the tax residency tests outlined in the tax ruling TR 98/17 are satisfied. 2. The statement indicating the taxable income that would arise from the given rental property is shown below (EtaxAccountants, nd; ATO, 2015). Particulars Amount Amount Rent income $ 13,900.00 Less: Expenses Management Commission $ 695.00 Repair Maintenance $ 6,000.00 Front fence repainting $ 2,500.00 Door fixing $ 1,000.00 Deduction for capital works $ 375.00 Depreciation expense using prime method $ 616.70 Cumulative Expenses $ 11,186.70 Income (Rental Property) $ 2,713.30 The calculation of depreciation using the prime method is shown below. Particular Asset cost Asset Life (Years) Years for which held Percentage of asset life Depreciation Expense ($) Stove 900 12 0.58 0.08 43.77 Hot Water services 2000 12 0.58 0.08 97.26 Carpets 3500 10 0.58 0.1 204.25 Furniture and fittings 5000 13.33 0.584 0.08 218.89 New Furniture and Fittings 1200 13.33 0.584 0.08 52.53 Total 616.7 The explanation of the terms related to the above income statement is offered below. The roof is replaced and it is a capital spending which would enhance the buildings value along with the effective life and therefore a contribution at the rate of 2.5% would be added in the form of capital works (Taxation Ruling IT 2167) Any expense that is incurred with regards to management of the rental property is deductible and thus deduction has been taken in the income statement (ATO, 2015). The various expenses in relation to repair and maintenance of rental property are also deductible and hence deductions are claimed for the same in order to calculate the net income derived from the given rental property (Taxation Ruling TR 97/23) The depreciation has been computed using the prime cost method and deduction is allowed for the same. The various assets that are given here are termed as qualified asset. Further, if the assets cost is less than $ 300, then the entire depreciation can be claimed in the same year or else the depreciation would be claimed over the years (ATO, 2016) References ATO (1998), Taxation Ruling TR 98/17. Retrieved on August 20, 2016 from https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR9817/NAT/ATO/00001 ATO (2015), Rental Properties -2015, Retrieved on August 20, 2016 from https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/Rental-properties-2015.pdf ATO (2016), Rental Property Expenses, Retrieved on August 20, 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 Deutsch, R., Freizer, M., Fullerton, I., Hanley, P. and Snape, T. (2015), Australian tax handbook, Pymont: Thomson Reuters EtaxAccountants (n.d.), 27 Valuable Rental Property Tax Deductions: Dont Forget to Claim These Expenses, Retrieved on August 20, 2016 from https://www.etax.com.au/rental-property-expenses/ 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 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