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The Assignment has 2 questions both about an individual's residency status and source of income and the impact on tax charged...

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BLO5539 – Australian Tax Law & Practice Assignment 2

Part A The period of question starts on January 14 2017 to an unspecified period in the future during which Robyn works for Victoria University as a coordinator in Kolkata. In order to answer if she is taxed on any part of her salary for the above period, it is important to determine if she was and would be an Australian resident during this time and if she was not, the source of her income. As salary or wage is ordinary income, s6.5(2) of the Income Tax Assessment Act 1997 (ITAA97) states that Australian residents are taxed on all sources of ordinary income while s6.5(3) rules that only Australian sourced ordinary income is taxable for non-residents. Section 6(1) in Income Tax Assessment Act 1936 (ITAA36) and as it follows in s995.1 of ITAA97 defines a resident as a person • • •

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who resides in Australia; or whose domicile is in Australia unless he or she has a permanent place of abode outside Australia; or who has been in Australia, continuously or intermittently, for more than half of the income year unless he/she has a usual place of abode outside Australia and does not have intention to take up residence in Australia; or who is a member of a Commonwealth superannuation fund or such member’s family.

In this case of Robyn, the third and fourth option, also called the 183 day test and superannuation test do not apply as the preceding only applies to incoming visitors and the latter is not satisfied due to Robyn not being an employee of the Commonwealth. With respect to the first ordinary concept test, the definition of “reside” is not specified in legislation and, as per TR 98/17 at 14, relies on dictionary definition like the Macquarie’s one as “to dwell permanently or for a considerable period of time”. In FCT v Miller, Latham CJ stated that a man resided where he lived. 1 However, physical absence does not make a person cease to be a resident.2 One must review all facts and consider factors including the person’s continuity of association with the country,3 the person’s intention and maintenance or severing of connections.4 Within information provided, nothing can be deduced with regards to Robyn’s ties in Australia, apart from the fact that she is single. Presumably, there is little evidence that supports her continuity of association with Australia apart from her assets, being the flat, the mortgage and the bank account with the last two serving the purpose of maintaining the first asset. The fact that she had rented out her flat effectively means she had severed her biggest tie with the country and she then was no longer living in there. However, if it could be shown that, for the time she works in Kolkata, she does come back to Australia to visit family or friends for some time of the year, thus effectively establishing her physical presence and strong tie with the country, it would be likely that she is a resident for such year for which she would be taxed on all incomes, ignoring impact of double-tax agreements. But as this is not provided as facts of the case, it holds that she was not and would not be resident for the relevant period.

Comissioner of Taxation v Miller (1946) 73 CLR 93 at 99 Keil v Keil [1947] VR 383 3 Levene v Commissioners of Inland Revenue [1928] 1 A.C 217 at 225 4 Gregory v Deputy Federal Commissioner of Taxation (1937) 57 CLR 774 at 774 and 778

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That leaves the second, the domicile test. In this situation, it is assumed that Robyn’s domicile of origin is Australia, which makes her Australian resident unless it can be proven she switched to her domicile of choice or that she has a permanent place of abode outside Australia as per s6(1) ITAA36. Section 10 of Domicile Act 1982 states that a person acquires a domicile of choice once he or she has the intention to make an indefinite home in that country. Here it appears that Robyn does have the intention to be in Kolkata for an “indefinite” period which entailed the fact that she was going to work there for an unknown period which can effectively imply that her domicile had changed upon the time of such intention. In Landy v FCT, O’Loughlin reiterated that a person who has changed domicile by choice and have a place of abode in that country will have a permanent place of abode there.5 She also had a place of abode in Kolkata, being the university provided accommodation which would have been available to her for all her duration working there. This could be used as reason to conclude that she had a permanent place of abode outside Australia, yet is a rather weak test due to its subjectivity. Rather than referring to s10 of Domicile Act, one should be looking out for an objective analysis,6 without the subjective question of the person’s intention. In discussing the concept of permanent place of abode, two tiers of the word ‘permanent’ are discussed: description of the place of abode and the period of time. Sheppard J, in Applegate v FCT, mentioned that, in describing the place abode, ‘permanent’ means something more than ‘temporary’ or ‘transitory’.7 Furthermore in the appeal case, Fisher J reaffirmed that a permanent place of abode is a ‘fixed and habitual’ place which is available for the person whilst in that country and that it is important to consider continuity, duration of presence and durability of association. 8 The later was an emphasis of time. It has been satisfied that the provided flat in Kolkata is a permanent place of abode with respect to its ‘nature and quality’ as it would have been always available to Robyn when she is in Kolkata.9 Robyn was going for an unspecified period, by principles in FCT v Applegate, indefinite in length is enough to justify duration and durability of the time the person is going for.10 It is then satisfied that Robyn had a permanent place of abode in Kolkata for the period of question. A conclusion is then reached that Robyn was not an Australian resident after January 14 2017. The next question will become if the salary she had been paid by Victoria University for the period working in Kolkata was sourced in Australia or not. Dixon CJ, in FCT v French, established that the source of personal exertion income is the place where the person performs the service, rather than the place of contract or place of payment.11 Thus this concludes that such income Robyn earned in Kolkata was sourced there and out of jurisdiction of Australian Taxation Office, i.e. no tax to be paid on that income for the period post January 14 2017. Overall, Robyn will be taxed on any amounts earned during the period of July 1 2016 to June 30 2017.

Landy v Federal Commissioner of Taxation [2016] AATA 754 Federal Commissioner of Taxation v Applegate (1979) 9 ATR 899 7 Applegate v Federal Commissioner of Taxation [1978] 1 NSWLR 126 at 134 8 Federal Commissioner of Taxation v Applegate (1979) 9 ATR 899 at 16-17 9 Ibid 10 Ibid 11 Federal Commissioner of Taxation v French (1957) 98 CLR 398 at 421-422 5

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Part B In answering this question, the first step is to determine whether Paul is a cash tax payer or an accrual tax payer. The first one implies that Paul is only taxed on money he has received while the second means that he is taxed on what is due and owing to Paul, i.e. only those amounts equivalent to the service he has provided during the relevant period (July 1 2016 to June 30 2017). Factors that should be taken into account in deciding the proper accounting method includes nature of the profession and actual mode in which it is practised,12 as well as records and books kept in the business.13 The facts given in this case show that Paul owns a single person business earning income from specialised knowledge and skill in golfing whilst no significant remarks were made on his bookkeeping and capital equipment. His business with turnover of the year being less than $50,000 is also deemed a small business by s328.110 ITAA97 as it follows in s995.1. In this instance, as per ruling TR98/1 at 18, a receipt or cash basis can be used when calculating Paul’s assessable income which is in line with principle set out in Commissioner of Taxes (SA) v Executor Trustee & Agency Co of South Australia Ltd, in which Dixon J stated that receipt basis of accounting truly reflected income for most professionals.14 Hence it can be satisfied that Paul is a cash taxpayer and his assessable income includes all receipts during the income year. This then brings up the second issue, the prepayments Paul received for lessons he has not provided, i.e. the 2 months of classes of the group starting in June 2017 and all classes for group starting September 2017. In Arthur Murray (NSW) Pty Ltd v Commissioner of Taxation, Barwick C.J, Kitto and Taylor JJ at 318 concluded that income received prior to service being provided could not be regarded as income.15 Furthermore, Paul advised clients that he would refund should they be unable to participate and thus Paul has an obligation to refund the money if he does not run the class. The aforementioned reasons infer that for the $28,800 received in advanced for the 3 prepaid courses, payment for classes post June 30 2017 is not assessable for the relevant income year. It is also to note that 2 clients out of the 20 starting the March 12-week-course were directed to pay for repairs of David’s damaged golf buggy on Paul’s behalf. As a cash taxpayer, the question is if the amount that was never paid directly to him will amount to his assessable income. With regards to this, s6-5(4) of ITAA97 specifies that you are constructed to have derived the income as soon as it is dealt with on your behalf or as you direct. Inevitably in this instance, Paul is deemed to have derived that amount of income which is hence included in his assessable income. The final issue is to determine if the $10,000 payment Paul received from Doreen in June was assessable. Things that need to be considered are if the gift was expected, if the receiver has already been fairly remunerated for his service or if the payment was meant to be replacement Commissioner of Taxes (SA) v Executor Trustee & Agency Co of South and Australia Ltd (1938) 63 CLR 108 at 127 13 Federal Commissioner of Taxation v Dunn (1989) 20 ATR 358 at 360 14 Commissioner of Taxes (SA) v Executor Trustee & Agency Co of South and Australia Ltd (1938) 63 CLR 108 at 128 15 Arthur Murray (NSW) Pty Ltd v Commissioner of Taxation (Cth) (1965) 114 CLR 314 at 318

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for remuneration16 and frequency of payment, i.e. lump sum versus regular payments.17 Ultimately, the nature of the receipt is given more weight in this assessment as opposed to the giver’s intention.18 The facts given are very much similar to those of FCT v Harris, in which the payment that was a once-off lump sum, of which Paul had no knowledge or would have expected would not be regarded as income.19 Furthermore, in Scott v FCT, Windeyer J stated that an unsolicited gift would not be part of the receiver’s income merely because generosity was inspired by goodwill traced to gratitude of services rendered.20 The fact that Doreen gave Paul the money for the excellent teaching 5 years ago has two implications: first, the service was provided 5 years ago and so, due to time lapsed, the gift would have no nexus to such income-earning activity; second, Paul would have been fully remunerated for his service 5 years ago as nothing was mentioned on any amount owed to Paul by Doreen. By principle established in Scott v FCT on gracious payments in conjunction with a fully paid service and all above stated reasons, the payment is a personal gift and is not assessable. Overall, amounts that will form part of Paul’s assessable income include $6,000 private lesson tuition, full payments for classes starting in March and payments for classes that took place in June (4 classes).

Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 Federal Commissioner of Taxation v Blake (1984) 15 ATR 1006; Federal Commissioner of Taxation v Harris (1980) 42 FLR 36 18 Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 19 Federal Commissioner of Taxation v Harris (1980) 42 FLR 36 at 1012 20 Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 520

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References Applegate v Federal Commissioner of Taxation [1978] 1NSWLR 126 Arthur Murray (NSW) Pty Ltd v Commissioner of Taxation (Cth) (1965) 114 CLR 314 Comissioner of Taxation v Miller (1946) 73 CLR 93 Commissioner of Taxes (SA) v Executor Trustee & Agency Co of South and Australia Ltd (1938) 63 CLR 108 Federal Commissioner of Taxation v Applegate (1979) 9 ATR 899 Federal Commissioner of Taxation v French (1957) 98 CLR 398 Federal Commissioner of Taxation v Dunn (1989) 20 ATR 358 Federal Commissioner of Taxation v Blake (1984) 15 ATR 1006 Federal Commissioner of Taxation v Harris (1980) 42 FLR 36 Gregory v Deputy Federal Commissioner of Taxation (1937) 57 CLR 774 Keil v Keil [1947] VR 383 Landy v Federal Commissioner of Taxation [2016] AATA 754 Levene v Commissioners of Inland Revenue [1928] 1A.C 217 Scott v Federal Commissioner of Taxation (1966) 117 CLR 514

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