Determining Tax Residency Status

Issue

To determine whether Kit is a tax resident of Australia and how the salary and investment income would be taxed taking the residency status into consideration.

Rule

The tax liability on the received income of the taxpayer depends on the tax residency position of taxpayer. The total income derived via all the respective sources (domestic or international) would be considered for tax if the individual is a tax resident of Australia accordance of the Section 6-5(2) of ITAA 1997 (Barkoczy, 2016). Further, the tax liabilities would be limited and would be applied to the income which is derived from Australia only if the taxpayer is classified as foreign tax resident.  Moreover, if the income is received from international sources then the foreign taxpayer is not bounded to pay the income tax on this income under the Section 6-5(3) of ITAA 1997 (Woellner, 2014).

Subsection 6 – 1 of Income Tax Assessment Act 1936 comprises of the provisions related to determining the tax residency position of individual taxpayers. Tax residency of individual can be determined with the help of the residency tests listed in the Tax Ruling TR 98/17. These residency tests are domicile test, superannuation test, resides test and 183 days test.  The applicability of the test depends on the various aspects related to the taxpayer (Gilders et. al., 2016).. The imperative aspects regarding these are can be seen with the aspects that if the individual has passed any residency test for the respective tax year then he would be classified as “Australian Tax Resident” irrespective of the fact that he fails or passes in the other residency tests (Deutsch et. al., 2016).

Domicile Test

The test is used when the taxpayer is residing in another country for any significant reason but is Australian resident.

Conditions of domicile Test  (Sadiq et. al., 2016).

• Domicile of Australia according to the rules of Domicile Act 1982.
• Permanent residence of taxpayer must lie within Australia.

The imperative conditions regarding the location of permanent residence of taxpayer are listed below in accordance with IT 2650 (Barkoczy, 2016).

• No intention of the respective taxpayers for making foreign land as a permanent residence.
• Magnitude of the actual stay of taxpayer in foreign land and resultant deviation from expected stay.
• Presence of several imperative ties of taxpayers between Australia and foreign country where he is residing
• Presence of having any asset in Australia or in foreign land

When the taxpayer is a foreign resident and visiting Australia for any purpose, then this test is applied to find the tax residency. The essential criteria of resides test is listed below (Gilders et. al., 2016)..

• Total number of visits to foreign lands and their underlying duration
• Period of stay in Australia a long with intensity of personal and professional ties along with social arrangements worked out while in Australia.
• The purposes for which the taxpayer has come to Australia
• Acquiring or maintaining fixed assets in Australia

Tax authorities would also take a note of the citizenship of the concerned individual while checking resides test (Coleman, 2011).

A foreign resident who has resided for minimum 183 days during the assessment year and would also have plan to create the permanent resident in Australia,  then it would be concluded that taxpayer is an Australian tax resident for the tax year (Woellner, 2014).

Residency Tests

Superannuation test

The taxpayers who are the officers or executives of Australian government stationed abroad and have investments in selected Superannuation schemes then he would be classified as an Australian tax resident (Sadiq et. al., 2016).

Application

Case Facts

• Taxpayer Kit is a permanent resident (PR) of Australia.
• Kit also retains his Chilean citizenship.
• He has been recruited by United States Company but signed employment contract in Australia.
• He has to live in oil rig coast of Indonesia in the accordance of employment.
• Kit has purchased a house in Australia three years ago. In this house, he had resided with his family before leaving for job.
• Kit and his wife have a joint bank account with Westpac Bank (in Australia) where his employment salary is credited.
• Kit gets one month off for every 3 months of service which he utilises to meet his family in Australia or go on a holiday to South America especially Chile.

It is apparent from the above highlighted case facts that Kit is a permanent resident of Australia and hence, the only applicable residency test is “Domicile Test” because 183 days test and resides test is applicable to foreign residents and superannuation test is applicable only for executives and officers of Australian Government.

Kit possess Australian domicile because he is a PR of Australia and also, he has not shifted his permanent residence form Australia. Moreover, the essential aspects under IT 2650 are provide evidence that Kit’s permanent abode is in Australia only. He has fixed asset and bank account in Australia. His family members are living in Australia only and there is no motive of Kit to reside in other country on permanent basis. Therefore, it can be concluded that Kit has satisfied the two essential conditions of domicile test.

Conclusion

After checking the residency test under the highlights of tax ruling TR 98/17 it is apparent the taxpayer Kit is classified as “Australian Tax Resident” and the income from international sources and from Australian sources would be accountable for taxation. Hence, the salary from employment and dividend income from shares of foreign companies would be liable for tax in Australia.

Facts:

• Company had very limited budget to start mining.
• Irrespective of the low budget, a mine land had been acquired by company.
• Mine was sold to other company.
• Compensation was in the form of the shares of the respective company.
• Shares had resulted n sizable profit to investors of taxpater

Argument of taxpayer: Mere conversion of land asset to share asset.

Judgement: Court decided that the act of acquiring the land irrespective of the low working budget would indicate the hidden purpose of the company. This purpose was mainly to develop huge profit through the sale and same had been replicated in reality (Barkoczy, 2016).

“Income – Assessable income from isolated transaction of profit intent”

Facts:

• Company had acquired the land for mining coal.
• Mining had been operated for several years.
• Land became ripe and could not be used for mining and thus, decided to make it suitable for domestic reasons.
• Subsequent partitions were created on land and requisite developed was made.
• Significant profit had been received on the account of sale of land.  

Argument of taxpayer: It was realisation of land asset in the most valuable manner.

Judgement:  Court noticed the circumstances in which developmental works were performed and decided that the argument of the taxpayer was right. The decision of land liquidation was not with the profit purpose and it was to use the exhausted land asset in the most efficient way possible (Jade, 2017).

“Income – Capital receipts from Realisation of capital asset”

Facts:

• The taxpayer was a company involved in fishing business which had purchased a beach land for drying of shacks..  
• The original shareholders sold the company to new shareholders whose primary business was real estate development and trading business.
• For the beach land, the new shareholders made necessary development and division and sold at significant prices.
• They performed necessary modification in the existing article of association of taxpayer to facilitate land business.

Argument of taxpayer: Sale amounted to realisation of asset i.e. beach land.

Judgement: Company had used the new beach land for their real estate development business only. Further, modified article of association and the division on land indicated the purpose of taxpayers was to derive high income (CCH, 2016a).

Domicile Test

“Income – Assessable income from business action”

 Facts:

• Taxpayers started a “small cattle business” on land.
• They used all their money to start the business.
• Taxpayers did not have sufficient business skill to sustain the business and hence, business failed.
• They were facing financial crisis.
• They forced to sell the part of land in order to gain money to resolve the financial crisis.

Argument of taxpayer: The sale of land was not to make profits and there was no intention to start a land trading business.

Judgement: Honourable court opined that the land sale was not with the intent of making profit. It was incurred so that the financial crises can be resolved. Moreover, there was no evidence that describes the involvement of taxpayers into business activity (CCH, 2016b).

“Income – Capital receipts from realisation of capital asset”

 Facts:

• Taxpayer received a land from his father.
• Took loan from bank to start farming by presuming that the profits would be used against the loan amount.
• Drought incurred which resulted in huge loss
• He was unable to pay the loan and hence, started facing significant health problems.
• To get out from these issues he sold a sizable section of land.
• Proceeds were utilized to discharge the loan and for medical treatment.
• Rest of the amount and unsold land was used for farming.

Argument of taxpayer: There was no motive to make profits through selling of land. It was executed due to loan and health problem.

Judgement:  Court agreed with the respective arguments of the taxpayer and decided that land sale was without profit deriving intention. Moreover, the division and selling was not repetitive in nature and he again started their traditional occupation of farming (CCH, 2016c).

“Income – Capital receipts from realisation of capital asset”

Facts:

• From the memorandum of the company, it was apparent that the land was bought for sand extraction.
• Company extracted sand for some year and when it was observed that the significant profit was not incurring from extraction due to exhausted land.
• Company decided to sale land for making maximum profit.
• Significant and attractive developments were performed on land.
• Sizable profit resulted from the sale of developed land.

Argument of taxpayer: The selling was mere realisation of land capital asset in the best possible manner.

Judgement: The argument was rejected by honourable court and it was dictated that the company initially bought the land for sand extraction and but later altered the purpose to construct attractive development to enhance the commercial value. Therefore, the action would not be classified under realisation of asset (Sadiq et. al., 2016).

“Income – Assessable income from isolated transaction of profit intent”

Facts:

• 5 blocks of land was bought by Crow.
• He conducted farming for a year.
• It was realised by Crow that huge profit could be derived if he sold the blocks with systematic divisions.
• 51 small and large size blocks were made on land.
• Systematically he was selling the blocks at premium prices.
• He also bought more land blocks to expand his business.  

Argument of taxpayer: The sale of land was realisation of capital asset.

Judgement: Honourable court rejected the argument of Crow and provided the ruling that the initial farming was closed by Crow and he started the division and selling business. Acquisition of new land assets was the testimony of business nature of Crow (CCH, 2016d).

“Income – Assessable income from business action”

Facts:

• It had been analysed by taxpayers that they could produce huge profit if the old property would be reconstructed and sold.
• The old property was purchased by the taxpayers.
• For enhancing the commercial worth, they borrowed fiancé from loan.
• Using the loan amount, they constructed three houses and made advertisements for sale.
• However, no potential buyer were ready to purchase the house at the demanded price and hence, they kept the houses for a year.
• After that the houses were purchased by prospective buyers at premium prices resulting in sizable profits.

Judgement: Court announced that taxpayers purchased the land with the motive of making profits from the consequent development and selling. Moreover, they borrowed amount for making advertisement and kept the houses to get any prospective buyers (CCH, 2016e).

References

Barkoczy, S 2016, Foundation of Taxation Law 2016, 8^th eds., North Ryde: CCH Publications,

CCH 2016a, FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR, Available online from https://www.iknow.cch.com.au/document/atagUio549860sl16841994/federal-commissioner-of-taxation-v-whitfords-beach-pty-ltd-high-court-of-australia-17-march-1982 [Accessed April 17, 2017]

CCH 2016b, Statham & Anor v FC of T 89 ATC 4070, Available online from https://www.iknow.cch.com.au/document/atagUio544343sl16788832/statham-anor-v-federal-commissioner-of-taxation-federal-court-of-australia-full-court-23-december-1988 [Accessed April 17, 2017]

CCH 2016c, Casimaty v FC of T 97 ATC 5135, Available online from https://www.iknow.cch.com.au/document/atagUio539843sl16716249/casimaty-v-fc-of-t-federal-court-of-australia-10-december-1997[Accessed April 17, 2017]

CCH 2016d, Crow v FC of T 88 ATC 4620, Available online from https://www.iknow.cch.com.au/document/atagUio545564sl16800674/crow-v-federal-commissioner-of-taxation-federal-court-of-australia-17-august-1988 [Accessed April 17, 2017]

CCH 2016e, McCurry & Anor v FC of T 98 ATC 4487, Available online from https://www.iknow.cch.com.au/document/atagUio539084sl16707683/mccurry-anor-v-fc-of-t-federal-court-of-australia-15-may-1998 [Accessed April 17, 2017]

Coleman, C 2011, Australian Tax Analysis, 4^th eds., Sydney: Thomson Reuters (Professional) Australia

Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2016, Australian tax handbook 9th eds., Pymont:Thomson Reuters,

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2016, Understanding taxation law 2016, 8th eds.,  Sydney: LexisNexis/Butterworths

Jade 2017, Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188, Available online from https://jade.io/j/?a=outline&id=64663 [Accessed April 17, 2017]

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 9^th eds., Pymont: Thomson Reuters,

Woellner, R 2014, Australian taxation law 2014, 8^th eds., North Ryde: CCH Australia,