Assessment Solutions Of Tax Residency Determination- LAW361

LAW361 Taxation Law

Subject Code :
LAW361
Country :
AU
University :
University of Tasmania

Question:

Jacinta Wells, aged 33 lives in Melbourne and works as a management consultant. She is employed by Staedler Ltd, an American company specialising in the development of information systems for the publishing industry. In March 2016 Staedler won a tender contract to install a new computer system for EZI Ltd, located in Singapore. As a result, on 1 April 2016, Jacinta was posted to Singapore for one month to arrange installation of the system. Due to technical difficulties in the installation, Jacinta’s stay was extended by a further three months. Initially, her salary of $8,000 per month was paid into a bank account in Melbourne. However, from 1 May her salary was paid into a Singapore bank account. Upon completion of her work in July 2016, EZI presented Jacinta with two airline tickets and voucher for a holiday in London valued at $8,000. EZI also offered Jacinta a three-year consulting job with the company with an annual salary of 100,000 and a car. As an incentive to join EZI, and to compensate for her leaving Staedler and having to move permanently to Singapore, she was offered $40,000. This was to be paid in two instalments - $20,000 on joining the firm and $20,000 after one year of service. Jacinta accepted the offer on 1 September 2016. Prepare a report advising Jacinta as to the assessability of the above amounts in Australia for the tax years 2016/17 and 2017/18. Your written response to this assignment must be presented in a report format. Bullet points are not acceptable.

Important: You must cite relevant cases and legislative references – (as footnotes) - to support your answers. Your response must also provide reasons that explain and support your answers. Responses that merely state the facts and decisions in the cases without any analysis of the issues raised will not earn much marks.

Answer:

Issue

The central issue based on the given facts is to tender advice to taxpayer (Jacinta) in relation to the payments that she has received during the two tax assessment years namely 2016/17 and 2017/18.

Tax Residency Determination

In the given case, it is apparent that Jacinta has received income from both domestic and also international income sources, hence the subject of tax residency gains relevance. As per s. 6-5(2), in case of Australian tax residents, any income which is obtained from any source irrespective of the geographical location of the source would be considered for tax purposes in Australia (Krever, 2016). In sharp contrast, s.6-5(3) highlights that for foreign tax residents, the income that is earned from sources based in Australia during the given assessment (Woellner, 2014). This difference in tax treatment leads to the subject of tax residency assuming importance. The subject of tax residency has been outlined in s.6(1) ITAA 1936 (Reuters, 2017). For individual taxpayers, TR 98/17 highlights the various tests that are outlined below (Gilders et. al., 2016).

Residency Test – This test is applied to ascertain the tax residency of only foreign resident staying in Australia and hence would not be useful in the given case.
183 day Test – This test is applied to ascertain the tax residency of only foreign resident staying in Australia and hence would not be useful in the given case.
Domicile Test – This test is applied to ascertain the tax residency of Australian residents who are staying outside Australia and hence would be useful in the given case since Jacinta is an Australian resident and shifts to Singapore.
Superannuation Test – This test is applied to ascertain the tax residency of those Australian government employees who may be stationed aboard and clearly this would be useful for the given taxpayer.

Since only the domicile test is applicable, hence this test is discussed in detail so that the same can be applied for Jacinta.

Domicile test

In order to fulfil this test for tax residency, the taxpayer essentially needs to satisfy the two conditions that are highlighted below (CCH, 2013).

1. The taxpayer needs to have an Australian domicile.

2. The taxpayer’s permanent abode should be based inside Australia despite residing outside the country for fulfillment of personal or professional obligations.

In the given test, the determination of domicile is quite objective and straight forward. However, the same cannot be concluded about the permanent abode since it is difficult to ascertain the same especially when the taxpayer is staying abroad currently but has future intent to get back to Australia (Coleman, 2011). In such situation, IT2650 is significant since it enables the outlining of the key factors that Tax Commissioner normally considers for the determination of the permanent abode (Sadiq et. al., 2016).

3. Intention on taxpayer’s part to come back to Australia along with the period of stay in foreign land

4. The deviation of the actual stay period in foreign land from that of the intended period along with the underlying reason for the same.

5. The extent of lies (both in personal and professional sphere) existing for the taxpayer both in Australia and the foreign country would be considered imperative.

6. Also, the number of trips and frequency with which the taxpayer visits Australia when abroad.

7. The act of setting a home outside of Australia.

There may arise a situation where the taxpayer for professional reasons has to abroad for years but the taxpayer may have intention to return to Australia after the professional reason is over. In this context, the decision taken in Applegate per Franki J 79 ATC at 4314 case is imperative as it specifies that if the taxpayer has to remain in foreign land for a period exceeding two years, then it would be concluded that there has been a shift in the permanent above which would lead to the conclusion that the underlying taxpayer is not a Australian tax resident (Deutsch et. al., 2016).

Jacinta’s tax residency for the two years needs to be ascertained in the light of the above law. The relevant details of the case highlight that the Jacinta accepted the EZI offer on September 1, 2016 based on which there was a requirement for Jacinta to move to Singapore for three years. Considering the professional engagement in excess of two years, the verdict of the Applegate per Franki J 79 ATC at 4314 case would be referred to and hence it would be appropriate to conclude that Jacinta would not be an Australian tax resident for the period that follows her acceptance of the offer. Therefore, for the complete assessment year 2017/2018, Jacinta would not be categorised as an Australian tax resident and instead considered as foreign tax resident (Nethercott, Richardson & Devos, 2016).

However, assessability of the tax residency for the period leading to August 31, 2016 from the beginning of assessment year 2016/17 still needs to be considered. In this context, it is essential to note that the tender from Singaporean firm commenced in May 2016 and Jacinta was supposed to be in Singapore only for a month. Otherwise she was residing in Australia only. Clearly, this one month period would not imply in shifting of permanent abode. Even though, this period was stretched by another two months, but it was on account on professional requirements. Further, after this, the taxpayer was on vacation for a month before returning back from Australia. Hence, it would be appropriate to conclude that for the period of assessment year 2016/17 leading up to September 1, Jacinta will be categorised as tax resident of Australia (Woellner, 2014).

Income Assessment

As discussed above, in accordance with s. 6-5(3), any income that is obtained by Jacinta after September 1, 2016 would be taxable only if it has the underlying source as Australia. However, in line with the facts of the case, there does not seem to any income post her Singapore migration that arises from Australia and therefore the assessable income in Australia for this period would be zero (Barkoczy, 2017).

However, the monthly salary that Jacinta derives from his foreign employer before accepting offer from EZI would be categorised as assessable income in accordance with s. 6(5) ITAA 1997 (Woellner, 2014).

Further, the benefit extended by the company in the form of holiday voucher and air tickets would not be considered a gift since even though it is voluntary, it is arising due to the service offered by Jacinta and hence this would be taxable since it would be considered as statutory income which would contribute to assessable income in line with s.6(10) (Gilders et. al., 2016).

The compensation which Jacinta receives for moving to Singapore would be taxable to the extent it is received before she moves to Singapore. Once she moves to Singapore on a permanent basis, no proceeds received would be taxable in Australia since it would be income derived from foreign sources (CCH, 2013).

References

Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9^th ed. Sydney: Oxford University Press.

CCH (2013), Australian Master Tax Guide 2013, 51^st ed., Sydney: Wolters Kluwer

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

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., & Snape, T. (2016) Australian tax handbook. 8th ed. Pymont: Thomson Reuters.

Gilders, F., Taylor, J., Walpole, M., Burton, M. & Ciro, T. (2016) Understanding taxation law 2016. 9^th ed. Sydney: LexisNexis/Butterworths.

Krever, R. (2016) Australian Taxation Law Cases 2017. 2^nd ed. Brisbane: THOMSON LAWBOOK Company.

Nethercott, L., Richardson, G., & Devos, K. (2016) Australian Taxation Study Manual 2016. 8^th ed. Sydney: Oxford University Press.

Reuters, T. (2017) Australian Tax Legislation (2017). 4^th ed. Sydney. THOMSON REUTERS.

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, & Ting, A (2016) , Principles of Taxation Law 2016, 8^th ed., Pymont: Thomson Reuters

Woellner, R (2014), Australian taxation law 2014 7^th ed. North Ryde: CCH Australia

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