Rule
In general, the income of a person who is an Australian resident from all sources should be taxed, whereas if a person is not an Australian resident, then only income sourced from Australia will be taxed.[1] The issue of whether the taxpayer is an Australian resident or not can be determined through four tests for individuals and three tests for companies. On one hand, individuals who are Australian residents should satisfy at least one of the four tests of residence, including the resides test, domicile test, 183-day test and superannuation test.[2] Firstly, regarding the resides test, the residency of a taxpayer who is an Australian resident is characterized by several factors, including the time physically spent in Australia, the frequency, regularity and duration of visits, the intention or purpose of presence, the family and business or employment ties, the maintenance and location of assets, the social and living arrangements, and the nationality.[3] Secondly, in terms of the domicile test, if an individual has a domicile of origin at birth in Australia or intends to establish a home in Australia indefinitely, the individual will be considered an Australian resident.[4]
Nevertheless, the domicile test does not apply to individuals who have a permanent dwelling place outside Australia, which includes people who intend to and actually stay in the overseas country permanently, people who establish their home in the overseas country, as well as people who have been present in an overseas country for a long time continuously and do not have solid associations in Australia.[5] Thirdly, under the 183-day test, a taxpayer will be considered an Australian resident if the taxpayer has been physically present in Australia continuously or regularly for more than one-half of the income year, exclusive of circumstances where such a person has a permanent dwelling place outside Australia and does not have the intention to reside in Australia.[6] Fourthly, from the perspective of the superannuation test, individuals who enjoy Commonwealth superannuation funds are deemed to be Australian residents with their families.[7] On the other hand, companies that are Australian residents should fulfill at least one of the following three tests, including the place of incorporation test, central management and control test, as well as the controlling shareholders test.[8]
Firstly, under the place of incorporation test, regardless of other factors, a company that is registered in Australia is automatically an Australian resident.[9] Secondly, under the central management and control test, a company that is an Australian resident is characterized by two elements, which are carrying on business and exercising central management and control of the company in Australia.[10] The latter element can be evaluated by factors including the location in which actual core decision-making processes are developed.[11] Thirdly, under the controlling shareholders test, in addition to the element of carrying on business in Australia, a company whose voting power is controlled by shareholders who are Australian residents can also be regarded as an Australian resident.[12]
Application
Firstly, from the perspective of the resides test, although Peter, who worked for ABC Ltd in Brunei, and his wife, who accompanied him in Brunei, have not been physically and regularly present in Australia for two years, he and his wife can be considered tax residents of Australia in terms of other factors under the resides test.[13] To begin with, if Peter and his wife did not have the intention to live and stay in Australia permanently, they would sell their house in Melbourne and buy a house for long-term living in Brunei instead of just leasing a house.[14] It can be further proved that Peter and his wife intended to reside permanently in Australia, for Peter declined to extend his job tenure in Brunei for another year, which was offered by ABC Ltd when his two-year contract expired.[15] In addition, Peter has not only family ties in Australia, as his older married daughter has lived in Australia during his stay in Brunei (the same applies to his wife), but also business ties, which have been developed and maintained when he performed accounting in Australia.
[16] Besides, Peter and his wife have possessed a place of abode, which is located in Melbourne.[17] Moreover, when they returned to Australia, Peter restarted his accounting practice shortly afterward, with his wife acting as the receptionist, as part of their social and living arrangements.[18] Furthermore, it is strongly suggested that they are tax residents of Australia because Peter and his wife are Australian citizens.[19] In terms of the domicile test, although Peter and his wife, who moved overseas for Peter’s work needs, have continuously stayed in Brunei for an actual two years, they do not intend to stay in Brunei for a longer time, which can be proven by their temporary dwelling place in Brunei and their intention to make their home in Australia indefinitely when Peter’s work ended.[20] Therefore, although Peter and his wife, who have not been physically present in Australia for more than one-half of the income year of 2017, are less likely to be Australian residents on the basis of the 183-day test, through the previous tests, it can be proved that they do belong to the tax residents of Australia.[21]
Secondly, in accordance with the place of incorporation test, as the company is not registered in Australia but in Hong Kong, ABC Ltd cannot be considered an Australian resident.[22] In addition, from the perspective of the central management and control test, although all the members of the Board of Directors of ABC Ltd reside in Australia, the main business activities are carried out in Brunei, where the majority of the company’s plantations are located.[23] On the other hand, the board of directors in Australia of ABC Ltd adopted a form of decision-making in July 2016 under which some of the decisions made by the board of directors would be tentative. The final decisions that had significant impacts on the overall corporate policy of the company would be made by Peter and a representative of the board of directors in Brunei during Peter’s job tenure. Therefore, it can be inferred that the actual high-level decision-making processes of the company were carried out in Brunei rather than in Australia.[24] Therefore, it can be concluded that ABC Ltd should not be treated as an Australian resident.[25] Moreover, in terms of the controlling shareholders test, because ABC Ltd has mainly carried on business in Brunei, where the majority of the company’s plantations are located, and the residence of the majority of its shareholders who have controlled the voting power of ABC Ltd is located in Hong Kong, ABC Ltd should not be deemed an Australian resident.[26]
Conclusion
Therefore, Peter and his wife should be treated as Australian residents, whereas ABC Ltd cannot be deemed an Australian resident.
Second Issue
Issue
What is the nature of Peter’s behavior in carrying out an accounting practice solely when returning to Australia? Is it a business or just a hobby?
Rule
To evaluate whether the behavior is a business or merely a hobby, there are several factors that can be utilized.[27] Firstly, individuals and organizations that adopt a business-like manner, such as record keeping, are doing business.[28] Secondly, individuals and organizations that have the intention to gain profits are also considered to be doing business whether they actually get the profits or not.[29] Thirdly, the scale of activities should also be considered; that is, a behavior is more likely to be a business if the turnover, profit, capital, or number of employees is larger than what can be obtained by a hobby.[30] Fourthly, the repetition or regularity of business behaviors is also an influential factor in identifying the nature of a behavior.[31]
Application
According to the above rules, it can be asserted that Peter’s behavior in carrying out an accounting practice solely can be regarded as a business.[32] Despite the fact that Peter had billed only one client for the year ended 30 June 2017, from which it can be deduced that the scale and regularity of business activities are not in line with the above rules, Peter has not only adopted a business-like manner, such as having his wife as the receptionist and billing the client for $8,000, but also shown the intention to gain profits, as he charged the client fees of $8,000.[33]
Conclusion
Consequently, Peter’s behavior in carrying out an accounting practice solely when returning to Australia can be regarded as a business.
Third Issue
Issue
Are Peter’s salary, the rents from the two houses located in Melbourne and Brunei respectively, the income of Peter’s wife from teaching English casually in Brunei, the dividends from the investment company in Singapore, and the fees paid by Peter’s client for the accounting practice ordinary income (OI), and should this income be assessed?
Rule
The OI, which refers to ‘the income according to ordinary concepts’, includes wages, rents, dividends, earnings from business and so on.[34] A gain that can be considered OI should satisfy the following conditions: cash or cash convertible, a real gain instead of compensation for loss, regular payment, flowing from a source (‘fruit and tree’ concept), and expectation and dependence of the taxpayer.[35] In addition, OI usually comes from three sources: the rewards for personal services and employment, such as salary, gifts, prizes, payment for services and giving up a capital right, and salary sacrifice; income from business; and income from property, such as interest, rents and dividends.[36]
Application
Based on the above rules, Peter’s salary fulfills most of the conditions, such as being cash convertible, a real gain, a regular payment, and expected and depended on by Peter.[37] Therefore, Peter’s salary, which was paid by ABC Ltd for employing him as its manager in Brunei, belongs to OI that comes from the rewards for personal services and employment.[38] In addition, the rents from the two houses located in Melbourne and Brunei respectively, as well as the dividends from the investment company in Singapore, which satisfy all of the mentioned conditions, including being cash convertible, a real gain, a regular payment, flowing from a source, and expected and depended on by Peter, are clearly OI derived from property.[39] Besides, the income of Peter’s wife from teaching English casually in Brunei, which was a real gain that could be converted into cash, was paid regularly, and was expected and depended on by his wife, also belongs to OI that comes from the rewards for personal services and employment.[40] Moreover, according to the above rules, the payment from Peter’s client for his services seems to be OI that comes from Peter’s business through providing accounting services.[41] However, although Peter charged his client $8,000 for the accounting practice on 28 June 2017 and received the payment in cash from his client for these services in August 2017, the $8,000 cannot be considered OI in the financial year of 2017, which ended on 30 June, because the income could not be converted into cash during this period of time.[42] Furthermore, from the above analysis, it can be concluded that, as Peter and his wife are Australian residents, all the other income that Peter and his wife gained within the financial year of 2017, which ended on 30 June, should be assessable, excluding the cash payment that Peter received from his client in August 2017.[43]
Conclusion
As a result, Peter’s salary, the rents from the two houses located in Melbourne and Brunei respectively, the income of Peter’s wife from teaching English casually in Brunei, and the dividends from the investment company in Singapore are OI and should be assessed. However, the fees paid by Peter’s client in cash in August 2017 are not OI and cannot be assessed in the financial year of 2017, which ended on 30 June.
Bibliography
Textbook
Stephen Barkoczy 2014, Foundation of Taxation Law, 6th ed., CCH, Sydney, NSW
Cases
IRC v Lysaght (1928) AC 234
Levene v IRC (1928) AC 217
FCT v Jenkins (1982) 82 ATC 4098
Malayan Shipping Co Ltd v FCT (1946) 71 CLR 156
Ferguson v FCT (1979) 79 ATC 4261
FCT v Walker (1985) 85 ATC 4179
FCT v Cooke & Sherden (1980) 80 ATC 4140
Hochstrasser v Mayes (1960) AC 376
Eisner v. Macomber 252 U.S. 189 (1920)
Hayes v FCT (1956) 96 CLR 47
Lomax v Peter Dixon & Son Ltd (1943) 25 TC 353
Adelaide Fruit v DCT (1932) SASR 116
Legislation
ITAA97 s6-5(2)
ITAA97 s6-5(3)
ITAA36 s6(1)
Domicile Act 1982
Taxation Ruling Income Tax 2650
Corporation Act 2001
Tax Ruling 98/17
Tax Ruling 2004/15
- ITAA97 s6-5(2) & s6-5(3) ↑
- ITAA36 s6(1) ↑
- IRC v Lysaght (1928) AC 234 & Stephen Barkoczy 2014, Foundation of Taxation Law, 6th ed., CCH, Sydney, NSW. ↑
- Domicile Act 1982 ↑
- Taxation Ruling Income Tax 2650 ↑
- Stephen Barkoczy 2014, Foundation of Taxation Law, 6th ed., CCH, Sydney, NSW ↑
- Ibid ↑
- Above 2 ↑
- Corporation Act 2001 ↑
- Above 6 ↑
- Ibid ↑
- Ibid ↑
- Above 3 ↑
- Tax Ruling 98/17 ↑
- Ibid ↑
- Levene v IRC (1928) AC 217 ↑
- Above 14 ↑
- Ibid ↑
- Above 6 ↑
- FCT v Jenkins (1982) 82 ATC 4098 ↑
- Above 6 ↑
- Above 9 ↑
- Tax Ruling 2004/15 ↑
- Malayan Shipping Co Ltd v FCT (1946) 71 CLR 156 ↑
- Above 6 ↑
- Ibid ↑
- Ibid ↑
- Ferguson v FCT (1979) 79 ATC 4261 ↑
- Ibid ↑
- FCT v Walker (1985) 85 ATC 4179 ↑
- Ibid ↑
- Above 28 & above 30 ↑
- Ibid ↑
- Above 6 ↑
- FCT v Cooke & Sherden (1980) 80 ATC 4140, Hochstrasser v Mayes (1960) AC 376 & Eisner v. Macomber 252 U.S. 189 (1920) ↑
- Hayes v FCT (1956) 96 CLR 47, Ferguson v FCT (1979) 79 ATC 4261, Lomax v Peter Dixon & Son Ltd (1943) 25 TC 353 & Adelaide Fruit v DCT (1932) SASR 116 ↑
- Above 35 ↑
- Hayes v FCT (1956) 96 CLR 47 ↑
- Adelaide Fruit v DCT (1932) SASR 116 & above 35 ↑
- Above 35 & above 38 ↑
- Above 28 ↑
- FCT v Cooke & Sherden (1980) 80 ATC 4140 ↑
- Above 1 ↑
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