Australian Taxation Law experts, $40 Fixed ACC3TAX Assignment, 18hours from now

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ACC3TAX – 2018/1 Week 1 INTRODUCTION TAX FRAMEWORK

Livia Gonzaga

Week 1 – Contents

Subject Overview

Australian Tax System Overview and Introduction to Income Tax

Principles of Ordinary and Statutory Income, Income Tax Equation

Residence and Source

Note: Some of the slides in this presentation contain audio explanations which can be accessed by clicking on the sound icon . Transcripts are available at the ‘notes’ section of each slide. These audio notes are designed to enlighten some of the tax concepts and legal provisions, however they are NOT to be taken as the only source of explanations. You MUST always read the textbook chapters in order to understand the full contents of the topics taught in this subject.

Livia Gonzaga

Subject overview

Part 1

Livia Gonzaga

Welcome to ACC3TAX!

Why study Tax?

How to study Tax?

At home, before workshops:

Read textbook chapters assigned in Subject Learning Guide.

Read workshop slides and listen to embedded explanations.

During workshops:

Listen to your lecturer/tutor's explanations.

Write your own answers to workshop questions.

Check any issues, discuss any questions.

Livia Gonzaga

LEARNING RESOURCES
Mandatory (Legislation)	Core Tax Legislation and Study Guide	Barkoczy, 2018, 21st ed	OUP
Mandatory (Textbook)	Foundations of Taxation Law	Barkoczy, 2018, 10th ed	OUP
Mandatory (Exercises)	Australian Taxation Study Manual	Nethercott, Devos & Gonzaga, 2017, 27th ed	OUP

Welcome to ACC3TAX! In this subject you will understand the basic aspects of the Commonwealth income tax legislation and the income tax implications for individuals and businesses, including calculation of tax liabilities.

Taxation is a highly demanding subject but it is also extremely rewarding. Those who put in the necessary effort – and here we’re looking at at least 5 hours of study per week – will realise that tax implications are present in nearly every aspect of business administration, and also in your everyday life. Understanding how the tax system works empowers you with the knowledge of how and why citizens must give away a share of their personal earnings, and why, in reality, taxation is not as unfair as it seems to those who do not understand it.

Over the next 12 weeks we will cover several different aspects of income taxation, including the concepts of income and deductions, capital gains tax and fringe benefits tax, taxation of corporate entities, partnerships, trusts, and finally tax avoidance and tax administration. This week we will start with the basic concepts of the tax framework and the principles of residence and source.

This subject is delivered on a blended mode, meaning that workshops will be taught on the assumption that students have studied the assigned chapters and weekly slides. Workshops are fast paced and the in-class explanations are designed to enlighten the most important aspects of each topic preceding the practical exercises.

Each week builds upon the previous one, therefore the topics, concepts and practical activities will naturally become more complex as you progress into the subject.

All communications in relation to ACC3TAX are via LMS, therefore it is essential that you check the LMS page at least twice a week.

Finally, ensure you review topics on a weekly basis and not just before assessments. There are review questions – all of them from the Australian Taxation and Study Manual with answers at the end of the book – which are assigned in the Subject Learning Guide to assist you with your review. If you have any questions or if you’re having trouble understanding any topics, ask your questions in class and make the most of your lecturer/tutor’s consultation time.

Summary of Assessments Note: This is a SUMMARY. Students MUST refer to the Subject Learning Guide for details on assessments.

Livia Gonzaga

CHRONOLOGICAL SUMMARY OF ASSESSMENTS
Date	Assessment	Assessment
Week 5	Workshop test 1 (in class) Quiz 1 (online)	Workshop test 1 (in class) / Quiz 1 (online)
Week 8	Quiz 2 (online)	Quiz 2 (online)
Week 9	Group assignment due (online via Turnitin)	Group assignment due (online via Turnitin)
Week 10	Workshop test 2 (in class)	Workshop test 2 (in class)
Week 12	Quiz 3 (online)	Quiz 3 (online)
Weeks 13-16 (Central Examinations Period)	Final Exam	Final Exam
SUMMARY OF ASSESSMENTS WEIGHTING
Assessment	Comments		Weight
2 Workshop tests	The 2 workshop tests are worth 15% collectively. Each test will be marked out of 15 marks but only the best score will count towards the overall result. E.g. Test 1: 10/15 Test 2: 6/15 Final tests score: 10/15		15%
3 Online quizzes	The 3 online quizzes are worth 10% collectively. Each quiz is worth 5% (marked out of 5 marks) and only the best 2 scores will count towards the overall result. E.g. Q1: 2.5/5 Q2: 3/5 Q3: 4/5 Final quizzes score: 7/10		10%
Group assignment	The group assignment is worth 15% and will be marked out of 15 marks.		15%
Final Exam	The final exam is worth 60% and will be marked out of 60 marks.		60%
Total			100%

Passing ACC3TAX Note: This is a SUMMARY. Students MUST refer to the Subject Learning Guide for full details on subject requirements.

Livia Gonzaga

For example: A student achieved 38/40 in the internal assessments however achieved only 14/60 in the final exam (therefore having failed the hurdle of 45% in the final exam). This student would have a final result of 52-SAHE and would need to sit the supplementary exam and achieve at least 27/60 marks in order to pass the subject, regardless of the overall of 52/100. If this student fails to clear the hurdle on the supplementary exam, their final result for the subject will be “F”, with no numerical score.

In order to pass ACC3TAX, you must fulfill both the following requirements:

Achieve an overall score of at least 50% (50/100 marks); AND

Achieve the hurdle requirement of 45% (27/60 marks) in the final exam.

SAHE Result: A student who is able to achieve an overall score of at least 50% but fails the hurdle in the final exam has NOT passed the subject. In this case, their final result will be “SAHE”, meaning that they will need to pass the hurdle in the supplementary exam in order to pass the subject. If they pass the hurdle in the supplementary exam, the original numerical score for the subject will stand and the grade will be converted into a pass. If they fail to pass the hurdle requirement again on the supplementary exam, their final result will be converted into an “F” grade, even if their overall numerical score was originally more than 50. An “F” result stands for “ungraded fail”, applicable when a student fails to meet hurdle requirements, therefore failing the subject.

Australian Tax System Overview Introduction to Income Tax

Part 2

Livia Gonzaga

Australian Tax System Overview

Definition/purpose: Tax is “a compulsory contribution to the support of government, levied on persons, property, income, commodities, transactions, etc.” (Oxford English Dictionary)

Australian Tax System Overview:

Operates at 3 levels Federal (e.g. income tax); State (e.g. Stamp Duty) and Local (e.g. Council Rates).

Direct (income tax) and indirect (GST)

Social, economic (revenue and intervention) and public policy

Income year: 1 July to 30 June each year

Progressive vs Proportional

Principle of Legality

Australian Taxation Office (ATO) is the Tax Authority in Australia

Taxpayers must lodge annual tax returns (self-assessment system)

Tax File Number (TFN) for individuals / Australian Business Number (ABN) for businesses

Livia Gonzaga

Audio 1 – Definition/Purpose of Taxes

You might have heard a phrase commonly attributed to Benjamin Franklin that goes along the lines of ”Nothing is certain but death and taxes”. While it may seem absurd to put death and taxes in the same level, this phrase illustrates one of the most important characteristics of the concept of tax, which is the fact that taxes are compulsory. You must pay your taxes, and if you fail to do it for whatever reasons, there are consequences that can apply to you.

But why are taxes compulsory? Taxes are compulsory because the government depends on that revenue for the provision of public services and infrastructure and for the performance of governmental functions. This gives us the main function of taxation, which is basically to fund the many attributes and functions of the public administration.

Now that you know that taxes are compulsory payments for the purpose of funding government purposes, you must also remember other two important characteristics of taxes, the first one being that taxes are not fees for services rendered; and finally, taxes are not penalties.

Why can’t we say that taxes are fees paid for the execution of public services? Because the idea behind the whole taxation system is that the Government collects that money and the Government decides how to spend it within the sphere of public administration and public spending. The Public Administration is accountable for how it decides to spend the revenue from taxes, which is why, every year, the Parliament votes the budget.

Taxes are not penalties either, even though many people feel they are being penalised by taxation. The purpose of taxation is to finance the execution of governmental functions and the provision of public infrastructure and public services. A penalty has a different legal definition, a penalty is the consequence that applies where there is an offence or a crime, both of which must always be defined by legislation. But if you fail to pay your taxes or to fulfil your tax reporting obligations, then yes, you may be subject to a penalty, which is not a tax in itself.

So, summarising it in an informal way, it can be said that taxes are the price that we pay for living in a civilized society.

Audio 2 – Overview of the Australian Taxation System

Now that you know what taxes are, let’s take a quick look at how the Australian tax system works.

In Australia, we have federal taxes (such as Income Tax), state taxes (for example Stamp Duty) and local taxes (such as council rates).

Taxation will be direct where taxes are imposed directly on income or on property (for example, income tax, Stamp Duty), and will be indirect where taxes are applied through a chain, usually on consumption, as it is with GST. Indirect taxes are “value added taxes” meaning that they apply to the value that is added to goods and services during the manufacturing or supply chain.

Taxation also plays an important role in being a strong social and economic driver. A good example are the excise taxes which apply to commodities such tobacco and alcohol. If the Government wishes to discourage the consumption of tobacco, this can be easily achieved by increasing taxation on cigarettes. The same thing goes for alcohol products.

Conversely, taxation can drive economy by means of tax incentives and exemptions, as well as by tax expenditures. These are always a result of public policy, and it is important to know that exemptions and other incentives, just as well as taxes themselves, only exist by force of legislation, which takes us to the principle of legality.

The principle of Legality determines that taxes can only be created and applied by force a legal statute. This means that the Government cannot impose a new tax overnight, there is a legislative process which must be observed for taxes to apply. Also, as a consequence of the principle of legality, the primary sources of Australian Tax law are essentially the Constitution and the statutory law, including the Income Tax Assessment Act 1997 and 1936, as well as other sparse and specific legislation. However as Australia follows the Common Law system, case law is also considered a source of tax law, although hierarchically below legislative provisions. Case law, also known as precedent cases, may dictate how certain provisions must be interpreted and applied, and taxpayers and Courts rely on case precedents to justify their actions. Another secondary source of Australian Tax Law are the rulings and determinations issued by the ATO in relation to matters of public interest.

The Australian Tax System is mostly progressive. A progressive system is one in which the tax rates increase with the increase of the tax base, meaning that the more you earn, the more you should pay (noting that there are many factors affecting a taxpayer’s final tax liability). This doesn't mean, however, that the rates will always be proportional. For example, there is an exemption threshold of $18,200 which applies for individuals, meaning that if you earn up to $18,200 per year you don't pay any tax, but if you earn more than that, you will pay income tax at 19%, 32.5%, 37% up to a maximum of 45% which applies where your income exceeds $180,000 per year. This shows that the rates are progressive, but not proportional. On the other hand, the taxation of companies is both progressive and proportional, because companies pay tax at a general flat rate of 30% and there is no exemption threshold, meaning that they pay tax on every dollar earned.

The Australian Taxation Office is the tax authority in Australia. Individual taxpayers (natural persons) are identified by the Taxpayer File Number (or TFN). When you get a job, the first thing your employer asks you is for you to provide your tax file number so that they can withhold the income tax which applies to your income. At the end of the income year, which runs from 1 July to 30 June each year, all taxpayers must account for their assessable income and deductions in order to self-assess their tax liability and pay the amount of tax due. This is done by lodgement of an annual tax return.

In the next slide you will find some information regarding the current tax rates.

Australian Tax System Overview

Individuals: Marginal Tax Rates (MTR)

Companies: 30% flat rate (generally), 27.5% small businesses (as of 1 Jan 2016)

Complying Superannuation Funds: 15%

Non-complying Superannuation Funds: 45%

Partnerships: partnerships are not separate taxpayers as they lack legal personality for tax purposes. Partners are taxed at MTR on their share of partnership income.

Trusts: trusts are not separate taxpayers either. The income from the trust is taxed either in the hands of the beneficiaries (MTR or other rate, depending on beneficiary legal status) when paid as benefits, or in the hands of the trustee (generally at top MTR) if the if trust income is not distributed to beneficiaries

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Principles of Ordinary and Statutory Income, Income Tax Equation

Part 3

Livia Gonzaga

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Final Tax Liability (or refund)

Calculating an Individual’s Tax Liability

Livia Gonzaga

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Taxable Income

It is the starting point for the calculation of tax liability

Income tax rates and other levies (especially Medicare Levy) apply to the Taxable Income

Assessable Income

Includes Ordinary Income (s 6-5, e.g. salaries, wages, business income, rents) and Statutory Income (several provisions, e.g. royalties, dividends)

Excludes Exempt Income

Deductions

Expenses incurred in the process of generating assessable income, excluding private/capital expenses.

General deductions (s 8-1, e.g. utility bills, commercial rent)

Other deductions (e.g. tools of trade, protective equipment)

Step 2. Apply MTR (see table) to Taxable Income (s 4-10 ITAA97)

May also calculate Medicare Levy at this stage (it will be added to the final tax liability)

Step 4.

Subtract Tax Credits and Refundable Tax Offsets

Add ML (MLS if applicable), HECS Repayments (offsets don’t reduce ML)

Step 1. Income Tax Equation

Net

Tax Payable

Step 3. Subtract Offsets (rebates)

Gross Tax Payable

This slide outlines the steps for calculating an individual’s tax liability. In general these are also the same steps that apply for corporate entities, which we’ll study in more detail on week 10.

In the grey area of the flowchart you will find the Income Tax Equation, which is the first step in the calculation of a tax liability. The income tax equation will give you the amount of taxable income, which is the value on which rates and other levies (such as the Medicare Levy) will apply.

The taxable income is equal to the assessable income minus deductions.

Assessable income includes ordinary income (which is income earned as a result of an income producing activity and which is also regular, repeated, recurrent and expected – for example, salaries), and also statutory income, which will include several types or categories of income specifically provided in the legislation which are subject to taxation (for example, royalties and dividends).

Deductions are amounts which correspond to expenses that you incurred for and in the process of generating your assessable income, with exception of private and capital expenses. Deductions will be subtracted from the assessable income, and the result will be the taxable income.

Once you have the taxable income, the second step is to apply the correct rate. Where the taxpayer is an individual, they will be subject to the Marginal Tax Rates (see slide 14). Where the taxpayer is a corporate entity, they will be subject to the corporate rates which can vary between 30% for large corporations and 27.5% for small businesses.

The application of the tax rate will give you the gross tax payable. This is not the final tax liability.

The third step will be to reduce the gross tax payable by any applicable non-refundable offsets (also known as rebates). Offsets are generally a result of tax policy and may be applicable due to various reasons and for various purposes (slide 13 contains more information on offsets). However the important thing to keep in mind at this stage is that offsets will directly reduce a taxpayer’s final tax liability, because they apply after the application of the tax rate.

You are now at the fourth step, where you have the net tax payable. In this step you will subtract any tax credits – which are basically tax that you already paid – for example, withholding tax that applied to your salaries. Also in the fourth step you will add the amount of the Medicare Levy, which is calculated by applying a rate of 2% on your taxable income. Where the taxpayer is a single individual earning more than $90,000 per year and doesn’t have private health insurance, the Medicare Levy Surcharge must also be applied (but for the purposes of our subject, we will not be covering MLS). If the individual has a HECS debt, the repayments are also calculated on the taxable income and added at this stage.

Now you have reached the end of the calculation and you should have the final tax liability (where the individual has to pay taxes) or you may reach a negative value, which means that the individual is entitled to a refund.

All of these steps develop in the course of the self-assessment process, whereby taxpayers are required to lodge a tax return where they will disclose their income and self-calculate their tax liability. Obviously all the information provided by the taxpayer will be subject to the scrutiny of the ATO (we’ll see this in more detail on week 12).

Principles of Ordinary and Statutory Income

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Common principles/characteristics Both Ordinary Income and Statutory Income are included in the Assessable Income. For either type to be assessable, there must be a nexus with an income earning activity (e.g. payment for services, capital gains from the sale of a capital asset, etc.) Analyse the character of the receipt in the hands of the recipient (what it represents for the recipient) and consider the motive of the person making the payment (e.g. an employer paying salaries to an employee = salaries are ordinary income for the employee) Cash or convertible into cash (i.e. includes non-cash benefits as long as there is a nexus with the income producing activity – s 15-2 ITAA97)
ORDINARY INCOME (s 6-5)	STATUTORY INCOME (s 6-10 and others)
Defined by case law, influenced by: residence of taxpayer derivation of income source of income exempt income Defining characteristics: Recurrent, expected, periodical, repeated (excluding capital gains) Examples: salaries and wages, business income, rents, interest (all s 6-5), etc.	Defined by legislation (statutes). Several provisions in the ITAA97 and ITAA36. ITAA97 s 10-5 (summary list of statutory income provisions) In many cases statutory income will require additional calculations before being included in the assessable income. Examples: annuities s 15-2, allowances s 15-2, capital gains Div 100 + s 102-5, royalties s 15-20, Dividends s 44(1) ITAA36, etc.

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Deductions vs Offsets

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Common principles/characteristics Tax Offsets and Tax Deductions both have the same effect of reducing the final tax liability of a taxpayer. Generally offsets only apply to resident taxpayers
DEDUCTIONS	OFFSETS (REBATES)
Deductions are allowable in relation to expenses incurred for and in the process of earning assessable income. Deductions are subtracted from the assessable income before the application of the tax rate, thus reducing the taxable income and indirectly reducing the tax payable. General deductions – s 8-1 ITAA97 (more on week 7) – e.g. utility bills, commercial rent, etc. Specific deductions (several provisions - more on weeks 8 and 9) – e.g. protective equipment, capital works, depreciation, repairs, car expenses, etc.	Offsets are available to some taxpayers as a result of tax policy, usually to reduce the tax burden or to avoid double taxation. Offsets are applied after application of the tax rate (see slide 12), thus directly reducing the tax liability. Examples: Low Income Rebate (ITAA36 s 159H; 159N) – Max value (2017/18) $445. Reduced by 1.5 cents for every $1 by which taxable income exceeds $37,000. Rebate phases out at income of $66,667 or more. MyTax automatically calculates this offset. Franking credit Tax Offset (ITAA97, s207-20) – offset equal to franking credits attached to distribution (more on week 10)

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Marginal Tax Rates (MTR) 2017/18

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Taxable Income	Tax Rate and Tax Payable (Residents)	Tax Rate and Tax Payable (Non-Residents)
$0 - $18,200	Nil	32.5% on every dollar (no tax-free threshold)
$18,201 - $37,000	$0 + 19% on excess of $18,200
$37,001 - $87,000	$3,572 + 32.5% on excess of $37,000
$87,001 - $180,000	$19,822 + 37% on excess of $87,000	$28,275 + 37% on excess of $87,000
$180,001 and above	$54,232 + 45% on excess of $180,000	$62,685 + 45% on excess of $180,000
Medicare Levy: 2% on the Taxable Income (s 251S(1)(a) ITAA36). Applies to residents only.
FYI only (not examinable): Resident single individuals earning more than $90,000 per year without private health insurance (hospitals cover) for themselves and for their dependents per year are subject to the Medicare Levy Surcharge (MLS), which is charged at progressive rates of 1%; 1.25% or 1.5% on ‘income for surcharge purposes’ (note this is different from general taxable income), depending on income and family status.

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Taxation of Residents v Non-residents

Residents	Non-Residents
Progressive rates (MTR), tax free threshold of $18,200	No tax free threshold
Worldwide taxation: taxed on all income (ordinary and statutory) sourced in Australia AND overseas – s 6-5(2) and 6-10(4) ITAA97	Source Taxation: taxed only on income (ordinary and statutory) sourced in Australia – s 6-5(3)(a) and 6-10(5)(a) ITAA97
Medicare Levy – ITAA36 s 251S(1)(a)	No Medicare Levy – ITAA36 s 251U(1)(d)
Eligible for rebates (offsets)	Not eligible for rebates
CGT on all assets, either in or outside Australia	CGT only on Australian real property assets

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Example: Tax Payable – Resident Individual

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John Doe, an Australian resident with taxable income of $57,000 at the end of the current year.

Taxable income = $57,000  3rd MTR (32.5%). $3,572 + 32.5% > $37,000  $3,572 + 32.5% x $20,000  $3,572 + 6,500 = $10,072  Gross Tax Payable (ITAA97 s 4-10(3)) Gross Tax Payable – Offsets = Net Tax Payable Low Income Rebate (but offset is reduced because taxable income is more than $37,000) $445 - [(taxable income - $37,000) x 1.5%]  $445 - [($57,000 - $37,000) x 1.5%]  445 - $300 = $145  $10,072 - $145 = $9,927  Net Tax Payable Net Tax Payable + (HECS Repayments + ML + MLS) – (Tax Credits + Refundable Tax Offsets) = Final Tax Payable or Tax Refund No HECS Repayments, no Tax Credits, no Refundable Tax Offsets, No MLS (because he is under the threshold of $90,000) ML = 2% x $57,000 = $1,140 Final Tax Payable = Net Tax Payable + ML $9,927 + $1140 = $11,067  Final Tax Payable (aka Final Tax Liability)

Same conditions as above, however now John had $12,000 paid in PAYG during the year.

Repeat steps 1 – 4 PAYG is a tax credit which corresponds to income tax that was paid in advance (generally withheld by employer or paid by self-employed people on a quarterly basis). Therefore PAYG is applied on Step 4. Final Tax Payable = Net Tax Payable + ML – credits $9,927 + $1140 – 12,000 = ($933)  Tax refund

Example: Tax Payable – Non-Resident

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Livia Gonzaga

Assuming the same conditions as above, how would your answer change if John were a non-resident?

As a non-resident, he would not be eligible for tax offsets, nor would be liable for ML. His tax liability would be as follows: Taxable income = $57,000. 32.5% on every dollar up to $87,000 32.5% x $57,000 = $18,525 Gross Tax Payable (ITAA97 s 4-10(3)) Offsets and ML As he is not entitled to tax offsets and is not liable for ML, his final tax liability is $18,525.

Foreign Income and Withholding Tax

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Foreign Source Income (Withholding Tax)

Where an Australian resident taxpayer derives foreign income (e.g. dividends, interest) and withholding tax was applied at the source, the taxpayer must include both the income AND the withholding tax as part of their assessable income (ITAA97 Div 770). The withholding tax paid overseas will be allowed as a foreign tax credit offset (s 770-10 and 770-70 ITAA97), up to the limit of the Australian tax payable on that income.

Example: In the current income year, John Doe, an Australian resident, received salaries of $57,000 and interest from his UK bank account of $850 (net of 15% withholding tax).

Taxable income = $58,000, being salaries = $57,000 (s 6-5 ITAA97) + UK interest = $1,000 (s 6-5 ITAA97) (interest must be grossed-up to include the tax that was withheld overseas. If he received $850 net of tax, then $850 corresponded to 85% of the original interest, therefore the pre-tax (gross) interest was $1,000). Taxable income x MTR = Gross Tax Payable(ITAA97 s 4-10(3)) $3,572 + 32.5% > $37,000  $3,572 + 32.5% x $21,000  $3,572 + $6,825 = $10,397  Gross Tax Payable Gross Tax Payable – Offsets = Net Tax Payable Foreign Income Tax Offset (s 770-70 ITAA97) = $150 (non-refundable) LITO (reduced because taxable income exceeds $37,000) = $445 - [(taxable income - $37,000) x 1.5%]  $445 - [($58,000 - $37,000) x 1.5%]  $445 - [$21,000 x 1.5%]  $445 - $315 = $130 $10,397 - $130 - $150 = $10,117  Net Tax Payable Net Tax Payable + (HECS Repayments + ML + MLS) – (Credits + Refund. Tax Offsets) = Final Tax Payable No HECS Repayments, no Tax Credits, no Refundable Tax Offsets; No MLS (income under $90,000) ML = 2% of Taxable Income  ML = 2% x $58,000 = $1,160  Medicare Levy $10,117 + $1,160 = $11,277  Final Tax Liability

What happens when you are a resident and you derive income from a foreign source, and you pay withholding tax at the source? Are you going to be taxed in Australia as well? The answer is yes, and this is because of the worldwide taxation of Australian residents.

However, the good news is that as a general rule, the withholding tax which you paid overseas becomes a tax offset when you calculate your Australian tax. But how do you do this?

When you’re calculating your assessable income, you will include your net foreign income (which is the amount you received from the overseas source after deducting the withholding tax), but you will also include the amount of withholding tax that you paid overseas, meaning you will end up including the gross amount into your assessable income. After subtracting deductions and obtaining your taxable income, you will apply the marginal tax rate, obtain the gross tax payable and at this point, the withholding tax paid overseas will become a foreign income tax offset that will reduce your final tax liability.

At the end, the foreign income tax offset will guarantee that in Australia you only pay the tax at your marginal tax rate.

Residence AND SOURCE

Part 4

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Residence and Source - Overview

Residence Taxation and Source Taxation: Countries (Australia included) are only authorised to tax income where there is a nexus of either residence or source between the income/taxpayer and the country. Generally countries tax residents on a worldwide basis, and non-residents on a source basis.

In Australia, this means that resident taxpayers are taxed on all their income, no matter where it is sourced (application of Worldwide Taxation - ITAA97 s 6-5(2) and 6-10(4)). However non-residents are only taxed on their income derived from sources located in Australia (application of Source Taxation).

Curious fact: The only exception to the above is the USA, which taxes individuals on the basis of their nationality (not residence). This means that American citizens must pay taxes in the US on all their income, no matter where they reside and no matter where the income is sourced. For this reason, many wealthy American individuals living overseas choose to relinquish their American citizenship to avoid paying taxes in the US (as well as in their country of residence).

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Tax Residence of Individuals

Tax Residency vs Civil Residency: individuals can be tax residents without being civil residents. This is because tax residency is predominantly assessed by economic and social criteria rather than by visa status. E.g. an international student undertaking a degree in Australia is a tax resident, even though they are not a permanent (civil) resident.

Dual residence: The application of the residence tests may lead (and frequently does) to the conclusion that an individual is a tax resident of two countries at the same time (dual residents). Australia has a vast net of Double Tax Agreements and other credit/offset mechanisms (e.g. Div 770 ITAA97) to avoid double taxation where a taxpayer is a dual resident.

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Summary of Case Law (application of Permanent Place of Abode and Resides Test)
Resident	Non-resident
Sneddon (2012) Iyengar (2011)	Levene (1928) Applegate (1979) Jenkins (1982) Murray (2012) Dempsey (2014

Tax Residence of Individuals - Tests

“Resides Test” and “Permanent Place of Abode Test” (TR 98/17, TR IT 2650)

The “Resides Test” and the “Permanent Place of Abode Test” largely overlap, both of them checking whether taxpayer lives in Australia by reference to: Physical presence in Australia, presence of family/social/economic ties Frequency, regularity and duration of visits Intention/purpose of presence in Australia Maintenance and location of assets (place of abode – where you sleep, eat, drink, have social ties) Employment ties Permanent home TR 98/17 (Residency status of individuals entering Australia), Para 16: ATO considers “a migrant who comes to Australia intending to reside here permanently is a resident from arrival”. TR IT 2650: sets out the ATO view on tests associated with residency in Australia (e.g. permanent place of abode)

183-Day Test

Predominantly concerned with residence status of people who visit Australia (e.g. students, visitors on holidays). Individuals are treated as residents of Australia if they remain in Australia for more than 183 days (consecutive or alternate). Exception: ATO may be satisfied that taxpayer is not a resident of Australia if the taxpayer’s usual place of abode is outside Australia, AND taxpayer has no intention to take up residence in Australia

Superannuation Test

A taxpayer who holds a superannuation account with an Australian superannuation fund is a tax resident.

Livia Gonzaga

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Tax Residence of Individuals – Cases

Levene (1928) – Permanent Place of Abode (non-resident)

Facts: A British subject who on medical advice spent the summers in England and the winters abroad . He had no fixed residence in either the UK or abroad

Court held: The person was a resident of the UK.

A person continues to reside where he has his settled or usual abode, though from time to time he leaves it for the purpose of business or pleasure.

A person who has his home abroad and visits the United Kingdom from time to time for temporary purposes without setting up an establishment in that country is not considered to be a resident there.

A man may reside in more than one place.

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Tax Residence of Individuals - Cases

Applegate (1979) – Permanent Place of Abode (non-resident)

Facts: Taxpayer was sent overseas to Vanuatu to establish an office for his employer. His intention was to remain overseas indefinitely. He was accompanied by his wife and left no assets in Australia.

Court held: Not a resident of Australia. Taxpayer’s place of abode was outside Australia.

The location of a taxpayer’s permanent place of abode must be determined annually.

Permanent place of abode does not mean that there should not be an intention to return in the foreseeable future. Permanent should not be interpreted as everlasting, it should be contrasted with temporary or transitory (TR IT 2650).

Important factors such as work, family and location of home were located in Villa.

Livia Gonzaga

Tax Residence of Individuals – Cases

Jenkins (1982) – Permanent Place of Abode (non-resident)

Facts: A bank officer was transferred to the New Hebrides for 3 years. Returned to Australia after 18 months due to ill health.

Court held: Taxpayer was a non-resident.

Although taxpayer’s stay overseas was for a fixed term, the taxpayer was a non-resident, as his permanent place of abode was outside of Australia (3 year term was considered significant).

A taxpayer’s intention to reside outside of Australia does not have to be for an indefinite period.

Livia Gonzaga

Tax Residence of Individuals – Cases

Murray (2012) – Permanent Place of Abode (non-resident)

Facts: Taxpayer was an Australian citizen with an extensive criminal record who, after being unemployed for a long time and thinking he did not have a future in Australia, decided to move permanently to Thailand to join his wife’s family. He set his permanent place of abode in Thailand between 2008 and 2010, however travelled to Australia on a frequent basis. Again in 2010 he was arrested while in Australia and issued with a Departure Prohibition Order.

Court held: The AAT decided that on the basis of his permanent place of abode being in Bali (permanent home, residency visa, family ties, business ties), he was not a resident of Australia during the period between 2008 and 2010.

Livia Gonzaga

Tax Residence of Individuals – Cases

Dempsey (2014) – Permanent Place of Abode (non-resident)

Facts: Taxpayer was an Australian engineer who was hired on an ongoing basis by a Saudi Arabian subsidiary of a multinational civil construction group between 2007 and 2010. During his stay in Saudi Arabia he lived on rented premises and paid for his own subsistence, had a Saudi driver’s license and was on a working visa which he renewed annually. He had short and infrequent holiday trips to Australia, his parent were deceased and he had very little contact with his siblings.

Court held: On the basis of his permanent place of abode (living arrangements) being in Saudi Arabia and based on his evidenced intention to remain in Saudi Arabia, the AAT decided that he was not an Australian resident during the relevant period.

Livia Gonzaga

Tax Residence of Individuals – Cases

Sneddon (2012) – Permanent Place of Abode (resident)

Facts: Taxpayer was an Australian citizen who was employed by an Australian company and posted to Qatar during the 2009 income year on a fixed-term contract. While he lived in Qatar, he maintained a property in Australia (which was being renovated while he was away), an Australian bank account, his mail remained redirected within Australia and he maintained close friendships and family ties in Australia.

Court held: On the balance of his nationality, history of movements, family and business ties with Australia compared to the foreign country concerned, the AAT decided that the taxpayer remained an Australian resident during the time he lived overseas.

Livia Gonzaga

Tax Residence of Individuals – Cases

Iyengar (2011) – Permanent Place of Abode (resident)

Facts: Taxpayer was an Australian citizen who was employed by a Qatari company on a fixed-term contract who lived in Dubai (UAE) and in Doha (Qatar) between 2008 and 2009. Although he argued that his permanent home was in Dubai, his wife remained living in their jointly owned property in Australia, and his two kids remained in Australia. He also left in Australia several personal and co-owned items such as cars, clothing and sports equipment.

Livia Gonzaga

Tax Residence of Companies

Residence of Companies - Tests
Statutory Test	A company is a resident of Australia if it is incorporated (created) in Australia.
Place of Business Test	If not incorporated in Australia, a company that carries on business and has it’s central management and control are in Australia, is a tax resident of Australia.
Voting Power Test	Failing the two tests above, a company whose voting power is controlled by shareholders who are residents of Australia is a tax resident of Australia.

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Summary of Case Law (application of Place of Business/Voting Power Tests)
Resident	Non-resident
Malaysian Shipping Co (1946)	De Beers (1906) Esquire (1973)

Tax Residence of Companies – Cases

De Beers Consolidated Mines (1906) (non-resident)

Court held: Company was a resident of the UK because central management and control occurred in the UK.

A company is normally a resident in the country or place where its central management and control are situated. That place will usually be where the directors meet to do the business of the company. This is a question of fact and degree.

Livia Gonzaga

Facts: Taxpayer was a diamond miner incorporated in South Africa, and the shareholders’ meetings took place in South Africa. Majority of directors lived in the UK, and directors’ meetings were held in London, where the “real control” occurred.

Tax Residence of Companies – Cases

Esquire (1973) (non-resident)

Facts: Company was incorporated in Norfolk Island with voting shares and directorships in Norfolk Island hands.

Court held: As company’s central management and control was in Norfolk Island it was not a resident of Australia.

***

Malaysian Shipping Co (1946) (resident)

Facts: Company was incorporated in Singapore. Controlling shareholder and one of the three directors was an Australian resident and owned all but two shares.

Court held: As company’s central management and control is in Australia, then it must be carrying on business in Australia, and therefore it is an Australian resident.

Livia Gonzaga

Source of Income

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Summary of Case Law (application of Source of Income Tests)
Source in Australia	Source outside Australia
Efstathakis (1979)	French (1957) Mitchum (1965)

No statutory definition of “source” in ITAA.

Firstly determine if taxpayer is a resident or not. If taxpayer is a resident, source generally is not a problem as residents are taxed on their income from all sources.

If taxpayer is not a resident, it is necessary to determine the source of income.

Tests to determine “source of income”

Place where taxpayer performs services

Place where contract signed

Place of payment

Source of Income – Cases

French (1957)

Facts: An Australian resident was employed as an engineer by an Australian company carrying on business in Australia and New Zealand. During the year ended 30 June 1951 taxpayer was in New Zealand for 17 days on his employer’s business and earned 110 pounds during this period (being income from personal exertion).

Court held: Source of income was where work was performed therefore income was derived from sources out of Australia. In the case of wages the source of income is where the place of employment (services) is performed.

Livia Gonzaga

Source of Income – Cases

Efstathakis (1979)

Facts: Taxpayer was a Greek national who applied for and took a position in Australia.

Court held: Salary paid by the Greek Government to a Greek national working in Sydney at the Greek Press and Information service was taken to have an Australian source because employment was in Australia and services were provided in Australia.

Livia Gonzaga

Source of Income – Cases

Mitchum (1965)

Facts: A movie actor normally resided in the USA. He entered into an agreement in Switzerland and came to Australia to act in a film which was partly shot in Australia. He was present in Australia for approximately 3 months. The remuneration was paid to him in the USA.

Livia Gonzaga

Court held: Source of income was outside Australia. Mitchum was using his creative powers or special knowledge to such a high degree that the place where those powers or knowledge was utilized was relatively unimportant. Other factors such as where the contact was made (Switzerland) and place where payment was made (USA) may be significant for determining the source.

End of Week 1

Thank you!

Livia Gonzaga