2019 .AFTL.Selected Solutions. Chapter 9 PDF

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Foundations of Taxation Law 2019

Solutions to Selected Study Questions – Chapter 9

Chapter 9 RESIDENCE AND SOURCE SOLUTIONS TO SELECTED STUDY QUESTIONS QUESTION 1 Fundamental concepts associated with the Australian income tax system are the concepts of ‘residence ’ and ‘source’. The se concepts are important because of the ‘general jurisdictional rules’ which provide that:

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residents are assessed on their ordinary and statutory income from all sources (s 6-5(2), 6-10(4) ITAA97), and

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foreign residents are assessed on their ordinary and statutory income from Australian sources (s 6-5(3)(a), 6-10(5)(a) ITAA97).

In addition, it is important to determine whether an individual is a resident or a foreign resident as different rates of tax apply to these two kinds of noncorporate taxpayers. Temporary residents will generally be taxed on Australian source income. Foundations of Taxation Law 2019 ¶9.1

QUESTION 3 For tax purposes, the definition of a ‘resident’ is located in s 6(1) ITAA 36. The circumstances under which individuals and companies are considered residents of Australia are outlined below. Individuals A person is a resident if they (s 6(1) ITAA 36): •

‘reside’ in Australia, being a question of fact and degree (the common law test. Note that this allows taxpayers to be resident in more than one jurisdiction ( Levene v IRC [1928] AC 217))

•

have a ‘domicile’ in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia (domicile test)

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have been in Australia, continuously or intermittently, for more than half the year unless the Commissioner is satisfied that his/her permanent place of abode is outside Australia and they do not wish to take up residency (183 day test), or

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is a member of an Australian superannuation scheme established by deed under the Superannuation Act 1990, an eligible employee for the purposes of the Superannuation Act 1976 (Cth), or a spouse or child under 16 of such a person is a resident of Australia (super fund test).

Corporations Corporations are residents of Australia if (s 6(1) ITAA36): •

they are incorporated in Australia, or

Foundations of Taxation Law 2019

•

Solutions to Selected Study Questions – Chapter 9

they carry on business in Australia, and either: – their central management and control is in Australia, or – their voting power is controlled by Australian residents.

The Commissioner’s views on central management and control following the Bywater Investments case are set out in TR 2018/5. Foundations of Taxation Law 2019 ¶9.2

QUESTION 5 Pablo is unlikely to be a resident of Australia for tax purposes because he does not satisfy any of the four tests for residency (see solution to Question 3 above). In respect of the income that he receives for working in Australia, the question is: where is it sourced? While there is no rule of law to this effect, the source of services income will generally be the place of performance of the services (FC of T v French (1957) 98 CLR 398, FC of T v Esftathakis 79 ATC 4256). This is a question of fact. Based on all the facts, it would seem reasonable to conclude that the source of the income for the one month period is Australia. As Pablo is a foreign resident (non-resident) deriving Australian-sourced income, this income is subject to Australian tax. It is noted that on the basis of the decisions in FC of T v Mitchum (1965) 113 CLR 401 and Evans v FC of T 81 ATC 4512, an alternative argument that the salary does not have an Australian source may be raised. If the income does not have an Australian source then in accordance with s 6-5 ITAA97, it will not be assessable in Australia. It is noted that Australia and Portugal do not have a double tax agreement, but if they did, it would be appropriate to check the provisions of such double tax agreement to see if any special rules apply. Accordingly in the absence of further information, it is concluded that the one month’s salary will be assessable in Australia because it has an Australian source. Foundations of Taxation Law 2019 ¶9.1, ¶9.2, ¶9.3

QUESTION 7 Jean-Claude as a temporary resident is subject to special rules of taxation under Subdiv 768-R ITAA97. The broad aim of Subdiv 768-R is to tax temporary residents (who might otherwise be treated as residents) in generally the same way as if they were foreign residents. On this basis, the foreign source income earned by Jean-Claude is generally treated as non-assessable non-exempt income, unless it is salary or wages earned while Jean-Claude was a temporary resident (s 768- 910 ITAA97). For example, dividends or capital gains without an Australian source will not be assessable in Australia. In relation to the Australian source income, Jean-Claude will be taxed on this in Australia. For example, if Jean-Claude makes a capital gain on the sale of Australian shares this will be assessable. Foundations of Taxation Law 2019 ¶9.4...