Question 1IntroductionThe issue arising in the above case is to decide whether Jenny is a resident or non-resident for tax purpose in Australia. The definition of resident is set out in section 995-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) or Section 6(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA36). According to the assessable income in section 6-1(2&3) of ITAA97, if Jenny is considered an Australian resident for tax purposes, she will be taxed on income from all sources of income worldwide.
Legal PrinciplesResidency TestsThe below explain the four-different residency test to determine if a taxpayer is regarded as a resident for Australia tax purposes found in S6(1) ITAA36. Only one of the following test need to be satisfied to confirm tax residency. Under subdivision 768-R ITAA97 brought forward in 2006, grants a tax concession for a temporary resident. To be considered a temporary resident a taxpayer must hold a temporary visa granted under the Migration Act 1958 (Cth) and they and their spouse is not an Australian resident under the Social Security Act 1991, this grants tax concessions for Australian income to be taxed as if they are an Australian resident, but is exempt on foreign source income that is not connected with their Australian employment or services rendered.
Below the test will now be considered:A – Ordinary Concepts TestThis concept of ‘resident’ is a question of fact, this will depend on the circumstances surrounding each taxpayer. According to the ordinary concept of a residence, the common law test of where the taxpayer resides is seen in the case of FCT v Miller. A taxpayer is a resident if the taxpayer resides in Australia if (ATO TR 98/17): – If the taxpayer is physically present in Australia for some time of the year to be considered a resident under this test.- If a person is a visitor, the frequency, regularity, and duration of visits can be considered as seen in Lysaght case. – If a person is a visitor to Australia than the purpose of visits may be considered.- The maintenance of a place of abode in Australia during absences for the taxpayer’s use is an important factor to consider.
– Family, business, and social ties are evidence of residency. This is seen in Leven case. – Nationality will not normally be a relevant factor in consideration of residency where the other factors are clearly decisive. However, if the case is borderline then the nationality may be considered.
B – Domicile TestAn individual’s ‘domicile’ will decide the residency unless the Federal Commissioner of Taxation (FCT) is satisfied that the individual has a permanent place of abode overseas.According to the Domicile Act 1982 (Cth), there are two categories of domicile. Firstly domicile of origin is acquired at birth, where the place of abode is automatically the place of residence for tax purposes unless the commissioner is satisfied with a permanent place of abode overseas. Secondly, the domicile of choice is the intention to stay indefinitely outside of Australia as seen in the Applegate or Jenkins case. , After the two mention cases, the Commissioner issued a ruling to detail the factors to take into consideration in ascertaining a permanent place of abode. C – 183 Day TestUnder section s6(1)(a)(ii) of the ITAA97, a taxpayer will be treated as a resident if the taxpayer has been in Australia for 183+ days in a fiscal year (this does not have to be a continuous period) unless the Commissioner is satisfied that:- The person’s usual place of abode is outside of Australia and- The person does not intend to take up residence in Australia. Joachim case.
If the commissioner is satisfied the taxpayer will be treated as an Australian resident for tax purposes for the whole of the income year.D – Superannuation TestThis test is limited to Commonwealth Public servant and their families. Application2015/2016 Fiscal yearUnder the ordinary resident test Jenny does not satisfy the factors to prove sufficient evidence of residency, as Jenny arrived in Australia April 2016 and commenced living in motels for the rest of the fiscal year. These facts are comparable to the facts of the Levene v FCT case, where Levene was considered a non-resident as he lived in hotels until he signed a lease on a rental property. These facts also negate the tests of domicile as Jenny’s permeant residence is still considered Hong Kong.
The 183+ day test was not satisfied as Jenny only arrived 35 days before the end of the financial year. The Superannuation test does not apply as from the given facts Jenny is not a Commonwealth public servant. On the basis, Jenny is not considered to be a resident for tax purposes.2016/2017 Fiscal yearOn the facts presented Jenny can satisfy the ordinary resident test as she resident is a permanent dwelling as seen the in Levene case and Miller v FCT, Jenny signed a 9-month lease in early July. Also, other factors lead to residency status, as Jenny had more personal effects shipped over as well as her family came to visit in the time she was in Australia. The time spent in Australia also leads to a residency status as the lease was for nine months and Jenny is believed to intend on staying for at least that long. These factors while not conclusive on their own will together ague a strong case of Australian resident for tax purposes.Assuming Jenny was granted a temporary visa through the Migration Act and is not an Australia resident within the meaning of the Social Security Act, She will be granted tax relief on most foreign sourced income and capital gains.
Jenny will also be tax at the Australian resident tax rates, including the tax-free threshold. Conclusion As seen in the above case, Jenny may be considered a non-resident for the tax year 2015-2016, as Jenny was not in Australia for long enough or had the intention to stay in Australia permanently she could not satisfy any test sufficiently to be considered a resident for tax purposes.As the tax residency is a yearly based test, Jenny did suitably satisfy at least one of the tests in the 2016-2017 tax year, and could, therefore, be considered a resident for tax purposes. The following tax treatment Jenny will receive, will depend on the nature of the residency, whether she can be considered a temporary or permanent resident. The facts provided in the case could not conclude the tax residency.
Question 2IntroductionThe issue arising in the above case is to decide whether Lisa’s receipts show nexus to work performed and therefore are considered assessable income as understood in section 6-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA97), Or whether any part of the receipts is capital for giving up the right to income as in FCT v Woite. Legal PrinciplesUnder section 6-1 ITAA97, assessable income is defined as consisting of ordinary income, statutory income, exempt income, and non-assessable non-exempt income or NANE. As stated in s6-5 ITAA97 ordinary income is income according to ordinary concepts. The gain that is regarded by an ordinary man to be ordinary income character will be classed as ordinary income and, as such, assessable income. Many common law cases help define the definition, such as the case of Scott v Commissioner of Taxation. The courts have also provided four elements that mark income as ordinary, two essential prerequisites and two characteristics.
Below are the two prerequisites for ordinary income:- The income must be in the form of cash or be easily converted to cash, (FCT V Cooke and Sherden and Payne v FCT), and,- The income must be a real gain, as seen in Hochstrasser case. The two characteristics of ordinary income are:- A gain, that is regular or periodic is more likely to be considered ordinary income than a lump sum payment, Blake case. – The concept of flow was adapted from trust law and is understood that income that flows from capital. Income derived from personal exertion will constitute ordinary income seen through Moorehouse case and Brown case . To identify income as resulting from personal exertion the nexus must be made that the taxpayer receives a payment for work performed. This is an essential component for determining a receipt as ordinary income. Statuary income is defined under section 6-10 ITTA97, explains that not all income is ordinary. There are provisions defining which receipts are classified as assessable income in s10-5 ITAA97.
Section 15-2 ITAA97 reasons certain gains under employment are not ordinary income but are assessable under statutory income, the allowances provided in respect to employment or service. The first requirement for a gain to be assessable under s15-2 of ITAA97 is that there is an allowance, gratuities, compensations, benefits, bonuses, and premiums with the nexus to employment. The second requirement for s15-2 is that the gain is provided to the taxpayer, Payne case. The third requirement states that ‘what the taxpayer received is in respect of, or for or in, directly or indirectly to, any employment of or services rendered by the taxpayer’ (Sadiq, et al., 2017). The case of Smith v FCT the court held that it is easier for service-related income to be assessable under s15-2 than under s6-5. ApplicationThe annual salary for Lisa is $100,000, this receipt has a clear nexus to the services provided and shows the many indicia of ordinary income or regular, relied upon and the nexus for personal services.
The receipt for $400,000 can be classified as ordinary income if a nexus is to be shown for some personal service as seen in the Brent case. However, if the payment is to give up the right to income then it is capital, as in White. The conclusion, therefore, depends on the facts, but it appears that the taxpayer is paid as an inducement to enter an employment contract at the television station. Section 15-2 is also relevant if there are sufficient facts to deny the $400,000 being ordinary income. The $400,000 receipts will be statutory income under s 15-2 if they constitute a benefit etc, provided it is in respect of employment or services. From Smith case, there is the suggestion that the nexus test required for s 15-2 is easier to meet than for s 6-5, and the fact that this payment is an inducement to enter an employment contract would show it as arising out of future services.
ConclusionIn conclusion, the $100,000 annual salary can easily satisfy the requirements to be considered assessable under s6-5 as ordinary income. The $400,000 satisfies more nexus under s15-2 and is therefore considered assessable under statutory income. All income that Lisa has earned will have sufficient evidence to concluded as assessable income.?BibliographyAustlii Commonwealth Consolidated Acts, 1997. INCOME TAX ASSESSMENT ACT 1997. Online Available at: http://www8.austlii.
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