Residency Status Of An Australian Citizen And Taxation Of Income And Profit For A Company

Background of the Case Study

1a. An Australian resident are taxed worldwide for their income irrespective of the places or source derived by them (Trakman, 2015). The existing case study is concerned with the determining the residential status of Marty for being an individual and Planks Pty Ltd as the company. According to the Australian taxation law, the first test of determining the residential status of a person is conducting the “Resides Test”.

An individual dwelling in Australia will be considered as the Australian resident in the form of Australian occupant only if the person meets the criteria of domicile test and 183 days (Ato.gov.au 2017). As depicted from the current scenario, it is found that Marty despite being a occupant of Australia is involved in the development of web designing and platform for numerous companies throughout the world. The below listed residential test determines the residential status of Marty;

Domicile is regarded as the lawful concept of determining the domicile in accordance with the domicile act 1982. The domicile test is conducted to ascertain if the person has any permanent place of dwelling within or outside Australia will be treated as an occupant of Australia if the individual does not has permanent place of domicile out of Australia (Ato.gov.au 2017). Income tax rulings of 2650 defines that if an individual residing in Australia temporarily or working out of Australia but leaves Australia will be not be treated as the resident of Australia with the objective of taxation rulings at the time of their stay out of Australia.

A summarised domicile test is listed below

i. The purpose and the actual duration of stay out of Australia

ii. Expressing the intentions of returning to Australia during a particular phase of time

iii. The home establishment is out of Australia

iv. The duration and continuity of presence out of Australia

As evident from the case study, that Marty is treated as the occupant of Australia and maintains the residency of Australia even though he is engaged in the creation of web design out of Australia. The domicile test defines that original and the actual span of stay out of Australia for Marty is worked out in assessing the occupancy status while performing the domicile test (Sharkey, 2016). Furthermore, the domicile test defines that at the time of returning to Australia Marty has stated to return so that he could marry his love and settle in Australia for permanent basis (Ato.gov.au 2017). The span and length of stay away from Australia for Marty was two years, which ranged from 2012/13 and 2014/15. Marty returned to Australia following that period so that he can live permanently and will be treated as the Australia occupant for taxation purpose.

Residency Status of an Australian Citizen for Taxation Purposes

As defined under the 183 days test if a person is dwelling in Australia for no less than one half of the income year either incessantly and or in breaks an individual will be treated as the resident of Australia. In addition to this, the 183 days test lays down that if an individual is satisfies that their place of domicile is not in Australia and that person does not have any purpose of taking up the residency in Australia (Ato.gov.au 2017). The assumptions are stated below which are as follows;

i. From the existing scenario it is found that Marty from the fiscal period of 2012/13 did not lived in Australia and will not be regarded as the occupant of Australia for that phase.

ii. During the fiscal period of 2013/14 Marty had came back to Australia at the time of Christmas and stayed for only four weeks. Hence, the period of stay was significantly short and could not be treated as the Australia citizen during the period of 2013/14.

iii. During the year 2014/15 Marty came back to Australia with the purpose of spending time with his love and his span of stay for that period ranged from 1^stSeptember to 1^st The span of stay ranged for seven months or more than 183 days during the income year. Therefore, Marty will be treated as the Australia resident during the year 2014/15 and his income will be treated for assessment.

iv. For the year ended 2015/16 Marty had came back to Australia permanently so that he could marry the love of his life so that commence his family. Hence, Marty upon successfully meeting the criteria of 183 days for the year 2015/16 and he shall be treated as an occupant of Australia for that year.

The 183 days test defined above states that Marty will be treated as the Australia occupant because he had resided in Australia during the year 2014/15 for six months. At the same time, he had returned to Australia unless it is ascertained that the permanent place of dwelling is out of Australia and the person did not had any purpose of taking up the residency of Australia (Thampapillai, 2016). As it is understood from the case study that Marty after returning to Australia has laid down his intention of living in Australia on permanent basis by taking up the Australian residency.

Domicile Test

B: Organisations, Corporate limited partnerships and trusteeship is under the obligation of fulfilling the criteria so that it can be considered as the Australia resident. As evident from the following case study it is understood that Planks Pty Ltd as the tech business that is located in the Silicon Valley and was incorporated in the USA (Cao et al., 2015). To work out the status of residency for Planks Pty Ltd it is noticed that Marty was the sole director of the company during the year 2012/13 and he had not come to Australia nor did he undertake any managerial decisions. Hence, for the period of 2012/13 Planks Pty Ltd will not be considered as the Australian resident company for that period. In the year 2013/14 Marty came to Australia only for the period of four weeks and according to the residential test performed upon Marty his period of stay was generally considered as short and the managerial decisions was not taken in Australia.

Commencing from the period of 2014/15 Marty on his return to Australia stayed from 1^st September to 1^st April and Marty took the decisions relating to management from Australia. Therefore, for the period of 2014/15 Planks Pty Ltd will be treated as the resident company of Australia and the incomes will be considered for taxation. As defined under the taxation rulings of 2004/15 W that a company, which is not formed or incorporated in Australia but the business activities are carried in Australia or its central management, is located in Australia will be considered as the Australian resident company (Saad, 2014).

The earnings derived from such activities will be treated for the purpose of taxation. Despite the fact that Planks Pty Ltd was not formed in Australia but on the appointment of the Marty as the director of company for the period of 1^st September to 1^st April its central control and management constituted it to be Australian company. This is because Marty resided for that period in Australia and hence Planks Pty Ltd will be considered as the Australian resident company for that period. Another evidence to support Planks Pty Ltd to be an Australian company is that out of the five shareholders appointed by the company one of its shareholders lived in Australia and successfully fulfils the criteria of Australian resident company (Lombard, 2017).

C: 

183 Days Test

D:

While executing the business activities income derived from such activities will be treated for assessment. A person that has an investment property for the purpose of building or renovating with the objective of deriving profit and using the same for business purpose can be considered for tax implication and capital gains (Davis et al., 2015). From the existing scenario, it is found that Rommy executed the activities of business of selling wine from the farming of small amount of grapes and converting the same for wine at weekends that constituted as hobby. Rommy sold off 20 boxes in the local market disposed off another 20 boxes outside of his premises with the help of honesty box. As defined under section 995-1 (1) of the ITAA 1997 an individual carrying on the business of primary production the activities of the person will amounts to business activities.

From the following case study, it is understood that Rommy had regularly indulged in the activities of farming of grapes at his property during weekends regularly. The activities of the Rommy however does not constitute business however selling of wine made from the conversion of grapes attracts liability for tax and will be included in the assessable income. While calculating the assessable income an individual is under obligation to include the gross amount from his earnings in their assessable income derived from the ordinary course of business together with the profit. As held under Martin v. FC of T (1953) 90 CLR 470 at 474 the indicators should be taken into the consideration either in combination or as whole (Lang, 2014).  Hence, the sum of earnings that is generated from the activities of farming of grapes and converting the same into wine would be taken into assessable income.  

The capital gains or capital loss that is generated from the sale of asset includes the difference between the purchase cost and selling cost on its disposal (Auerbach & Hassett, 2015). A person at the time of paying tax on the capital gains is included in the income tax and cannot be treated under the separate tax even though it is considered as the capital gains tax. As noticed from the case study that Rommy had bought the land during the year 2000 at a cost of $500,000. Rommy sold off the land for $1,500,000 that resulted in capital gains from such sales. As per the Australian taxation office, an asset purchased on or after 20 September 1985 will be considered for capital gains tax unless it is specifically disqualified (Kaldor, 2014).

Taxation of Income

From the existing case study, it is discovered that Rommy had bought the land in 2000 and capital gains generated from the sale of property will be treated as the capital gains tax. Profit generated from the disposal of subdivided land can be considered as the capital gains or ordinary income based on certain circumstances (Gordon & Kopczuk, 2014). If a subdivided block of land is on which a person lives or sells the newly created land, income derived from such sales proceeds will result in capital gains, and it will be treated for capital gains tax (Faccio & Xu, 2015). As found from the case study that sale of subdivided block of land and profit generated from such sales proceeds will be considered as ordinary income and will be treated for assessment. The intention of Rommy at the time of entering in the transaction was to generate income and the income from disposal of subdivided land will be treated as capital gains and will be included in the assessable income.

Reference List:

Barkoczy, S. (2016). Foundations of Taxation Law 2016. OUP Catalogue.

Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W .& Wende, S.,(2015). Understanding the economy-wide efficiency and incidence of major Australian taxes. Treasury WP, 1.

Saad, N., (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075. 

Davis, A.K., Guenther, D.A., Krull, L.K. & Williams, B.M., (2015). Do socially responsible firms pay more taxes?. The Accounting Review, 91(1), pp.47-68.

Lang, M., (2014). Introduction to the law of double taxation conventions. Linde Verlag GmbH.

Trakman, L. (2015). Domicile of choice in English law: an Achilles heel?. Journal of Private International Law, 11(2), 317-343.

Sharkey, N. (2016). Departing Australia: a complex tax situation with possible benefits and hidden traps. Tax Specialist, 19(5), 180.

Thampapillai, D. J. (2016). Foreign Employment Income and Double Tax Avoidance Agreement: Australia’s Possible Governance Failure. Browser Download This Paper.

Lombard, M. (2017). Everything producers need to know about tax. Stockfarm, 7(2), 8-9.

Auerbach, A. J., & Hassett, K. (2015). Capital taxation in the twenty-first century. The American Economic Review, 105(5), 38-42.

Kaldor, N. (2014). Expenditure tax. Routledge.

Harding, M. (2013). Taxation of dividend, interest, and capital gain income.

Faccio, M., & Xu, J. (2015). Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(03), 277-300.

Gordon, R. H., & Kopczuk, W. (2014). The choice of the personal income tax base. Journal of Public Economics, 118, 97-110.

Legal database – View: Rulings: TR 97/11. (2017). Ato.gov.au. Retrieved 3 May 2017, from https://www.ato.gov.au/law/view/document?DocID=TXR/TR9711/NAT/ATO/00001

Residency – the resides test. (2017). Ato.gov.au. Retrieved 3 May 2017, from https://www.ato.gov.au/individuals/international-tax-for-individuals/in-detail/residency/residency—the-resides-test/

Residency tests. (2017). Ato.gov.au. Retrieved 3 May 2017, from https://www.ato.gov.au/individuals/international-tax-for-individuals/work-out-your-tax-residency/residency-tests/

Subdividing land. (2017). Ato.gov.au. Retrieved 3 May 2017, from https://www.ato.gov.au/General/Property/Land—vacant-land-and-subdividing/Subdividing-land/

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