Residency Status

Discuss about the Foundations of Australia Taxation Law.

The report is based on the case study for assessing the residential status for the purpose of the tax. The case study is based on the Taxation law of Australia, which will help in getting clear and advance knowledge in respect of Australia taxation with the applicability of law in practical issue. The report mainly concentrates on the specific area of the federal taxation system, income tax, fringe benefit, etc., The report contains the detailed explanation of the law, acts, and policies coming under Australian Taxation. The case is related with Stephanie Rogan, her husband Ronald and Rogan Advertising in which both of them are an employee. The assessment will be done by looking to relevant law and rules related to taxation ruling and residency test of the Australia. During the residency test, four of the major test has been taken into consideration.

The Residency Status and measurable income of taxpayer of Australia are stated under section “6 – 5(2)” and “6 – 10(4)” of “ITA Act 1997”. These sections will provide rules and regulations for the assessment of statutory income which will be received from any source of income.  So, it is very necessary for determining the residential status of a person as well as company for paying tax, prior for calculating income (Austlii.edu.au.2016).

The “section 6 – ITA Act 1936” is applicable for an individual. It states the individual is said to be a permanent resident of Australia if he is living in Australia for six months or more of income year or a participant in the Superannuation Fund. Under this section, there is four test of residency, i.e., ordinary concepts, permanent place of Adobe test, superannuation fund test and 183 – day test. “Para 19 under IT 2650” defines that an individual was leaving the Australia for a temporary time will be considered as resident in Australia, the as per the ordinary test an individual will be taken as resident of Australia for assessing the tax. “Para 21 under IT 2650” defines that an individual leaving the Australia for temporary time will be taken as domicile, unless and until he is settled as a taxpayer by the another domicile. In the given case both Stephanie and Ronald are resident Australia for computing tax which is applicable on the under the given rules, i.e., under “Section 6 – ITA Act 1936” and “IT Ruling no. 2650” (Law.ato.gov.au.2016).

Stephanie’s Measurable Income

The “section 6 – ITA Act 1936” is also applicable in the case of Australia. It is defined as company will be taken as resident company only if it has origination in Australia or carry out its operation or the enterprise is controlled or the shareholder of the company is situated in Australia. In the above case study Rogan Advertising is fulfilling all the criteria, so it is considered as resident company for assessing the tax.

The statutory income will be coming “under section 6 – 5 of ITA Act 1997”. It is defined as income got as per ordinary concept and using it as ordinary income. The income which is under measurable income, whereas it is not an ordinary income can be referred to statutory income is coming under section 6 – 10 – ITA Act 1997. The ordinary income will be coming under section 6 – 5 of ITA Act 1997 like income arise from personal use, income from operations of business, income arise from property and from schemes of profit making (Ato.gov.au.2016). Taxation Ruling 2001/8 explains that personal service of business will be applicable only to those person whose ordinary and statutory income are only achieved through personal skill and individual effort. Rogan Advertising is running its business only through personal skill and individual effort so it will be coming under personal service business. Rewards and payments received which will be incidental to employment will be coming under service of personal business. In the given case study Rogan Advertising is giving salary of $ 80000 to Stephanie this salary is coming under personal exertion so it will be included as measurable income. Ordinary income is the profit which is earned from the business. Measurable income of resident who is the shareholder of a company will have given the dividend from the income of company comes under “Section 44 – ITA Act 1936”. “Under Section 6 ITA Act 1936”, if a company receives dividends will be considered as passive income and will be considered as measurable income. Income from property is said to be rent and will be considered as ordinary income so it is taxable under section 6 ITA Act 1936 (Legislation.gov.au.2016). The rent will be equally distributed because it is jointly owned and income will be taxable. Income received from personal service income will be considered as primary because the income is received from personal skill and effort of the person paying tax is coming “under section 84 – 5 of ITA Act 1997”. On the given case, Stephanie is receiving income by giving lecture to the student of Monash University, which is coming under personal service so it will be considered as measurable income (Austlii.edu.au.2016).

Ronald’s Measurable Income

Under section 6 – 5 ITA Act 1997 says that income achieved from personal exertion will be considered as ordinary income. Income got from personal exertion will be coming under income achieved about employment. In the above case study, Ronald is employed in Rogan Advertising and getting salary of $ 80000 this salary in coming under personal exertion and it will be coming under measurable income of the person paying tax. Income from rent is an ordinary income, that to if the property is jointly owned then the income will be distributed proportionately among the taxpayer. In the above given case, the property is jointly owned by the Ronald and Stephanie, even it was leased on rent, so income received from that source will be coming under measurable income of Ronald (Legislation.gov.au.2016).

Income which is received by company is almost under the head of measurable income. The income which is subject to tax is called as measurable income. Measurable income of company will be included in Ordinary course for operating business like selling of the trading stocks and giving services. The proceeds from the earning and excluding the profit of the business are coming under the measurable income of the company. Measurable income of company does not include income from hobby, prizes and gifts which is not related to the business. The amount which will be coming under measurable income of the company is decided on the accounting method is to be followed by business. Basically, there are two accounting method, first is cash basis and actual basis. The exact process for measuring income according to Taxation rule is earning method. Deduction can be claimed on the expense of the business only when the expense is used for running the business and earning it. “Taxation Rule – 97/7” defines the incurred term. The incurred term is not defined under general of “Para 6 of Taxation Rule 97/7” when expense will incur. The general rule will be only applicable if taxpayer will be required to pay and also has not yet paid in the present year but he is presently under the liability of tax. If operating expense have actually incurred it can be claimed as deduction in the present year. So these expense will be included in wages, salary etc. Expense which has capital nature will be claimed over a time period. The cost which is relation to asset and has life for more than a year, in that case total cost will not be treated as current year purchased rather depreciation is calculated. In the above given case study Rogan Advertising is giving advertising services and  fees received through this will be coming under measurable income. Received fees from the company are not mentioned in the given case study so accurate measurable income cannot be determined. The expenses related to salary are. For measuring the income, the salary related with expense will be get deduction so it will not be included while assessing the income. Operating expenses are also subject to deduction, but in the case study amount for that income is not given, so accurate deduction amount cannot be determined (Austlii.edu.au.2016).

Conclusion

On the basis of analysis, it can be said that the salary which is received by Stephanie and Ronald from the Rogan Advertising will be taken into consideration which is $ 80,000 for both of them. Then in case of Rogan Advertising the amount of salary will be treated as expense. Even the dividend received will be coming under assessable income as well as there are no franking credits are available. Similarly, the fees received as salary from Monash University will be considered as personal service income and will be coming under measurable income. Finally, to conclude the above given case study it can be said that Australian Taxation is one of the complex method for assessing the income as well as resident status.

Reference and Bibliography

Ato.gov.au. (2016). Home page | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/ [Accessed 20 Sep. 2016].   

Ato.gov.au. (2016). Residency tests | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/Work-out-your-tax-residency/Residency-tests/ [Accessed 20 Sep. 2016].

Austlii.edu.au. (2016). Australasian Legal Information Institute (AustLII). [online] Available at: https://www.austlii.edu.au/ [Accessed 20 Sep. 2016]. 

Australian Public Service Commission, 2013. Capability review: Australian Taxation Office. Canberra: Commonwealth of Australia.

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

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Greenville, J., Pobke, C. and Rogers, N., 2013. Trends in the Distribution of Income in Australia. Melbourne: Productivity Commission

Law.ato.gov.au. (2016). IT 2650 – Income tax: residency – permanent place of abode outside Australia (As at 8 August 1991). [online] Available at: https://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2650/NAT/ATO/00001 [Accessed 20 Sep. 2016].   

Legislation.gov.au. (2016). Federal Register of Legislation – Australian Government. [online] Available at: https://www.legislation.gov.au/Series/C2004A05138 [Accessed 20 Sep. 2016].   

Sawyer, A., 2013. Rewriting Tax Legislation-Can Polishing Silver Really Turn It into Gold. J. Austl. Tax’n, 15, p.1.

Smith, J.E., Raabe, W.A., Maloney, D.M. and Young, J.C., 2014. South-Western Federal Taxation 2015: Essentials of Taxation: Individuals and Business Entities. Cengage Learning

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016.Australian Taxation Law 2016. Oxford University Press.