Residential Status and Taxation in Australia
In the given case, the first thing which needs to be decided is that whether the person or entity is the resident of Australia or not. The taxation of Australia totally depends on the residents who are living and earning from there. For the next issue, it is to be determined that how the tax regulation of Australia would be affect the taxation structure of these individuals or the company. Each of the discussed personnel or entity has to follow certain regulations regarding the residential status in order to continue financial activities in Australia. The residential status affects the taxation on the salary income and capital gain income of any person or entity (Tran-Nam 2016). Apart from this, each of the discussed persons in the context does not serve the same purpose in this country. Van Diemen’s Architecture Ltd is a business entity, which means the tax structure of this entity will be different from Helena who is an employee of the company. Whereas Maxwell has come to the country in order to get his further degree. Along with this, he wants to get a job in order to accommodate the expenses (Ainsworth 2016).
There are certain laws and legislations which have been used in determining the issues. These specific laws are given below:
- section 6-5 of the Income Tax Assessment Act 1997;
- section 6-10 of the Income Tax Assessment Act 1997;
- section 995-1 of the Income Tax Assessment Act 1936;
- Taxation Ruling 98/17;
- Taxation Ruling 2017/D2;
According to the section 6-5 and section 6-10 of the Income Tax Assessment Act 1997, if a person or entity is regarded as a resident of this country then the earning of the person or entity from the sources of Australia or outside of Australia is taxable. The tax payable for that person will be calculated over the income that the person is earning from Australia or outside the country. For a non resident of Australia, the payable tax will be calculated over only the income that is being generated within the Australian resources (James et al. 2015). Thus, the residential status of a person or entity is very important in order to calculate how much tax would be payable by an individual or entity in accordance with the legislation of Australia. As the residential status is very important in terms of taxpaying, it is important to revise the residential status every year as it serves a vital role in the tax liability of a taxpayer.
In the section 995-1 refers that a person will be regarded as a resident of Australia if the person is eligible for paying tax under the legislation of Australia. The person or entity should be earn from the Australian sources, pay tax to the Australian government, in order to regarded as the resident of Australia as far as it is stated in the section 995-1 of Income Tax Assessment Act 1936.
Relevant Legislation, Case Law, and Rulings
The Taxation Ruling 98/17 provides a brief introduction about the residential status of any individual or entity. Under this particular ruling, it is clearly stated about the individuals who are eligible to pay tax under the legislation of Australia. The residential status and its terms and conditions are being discussed in this ruling. This is the ruling is used to determine whether the person can be regarded as the resident of Australia or not (Taylor et al. 2015). Apart from the ordinary meaning of the word resident, the term is also used for the purpose of taxation. If an individual is a resident of Australia in common meaning of the word resident then no further requirement is needed to determine the residential status of that person with any of the legislative methods. But if the individual is not a citizen of Australia, then there are four tests mentioned in section 6-1 of the Income tax Assessment Act 1936 to determine the residential status of an individual for tax purposes. The tests are mentioned below:
- Residential test according to the ordinary concept;
- The domicile test for permanent place;
- The 183 days test;
- The superannuation fund test;
According to Taxation Ruling 98/17, the taxation liability implies upon most individual who come to Australia in order to earn. The purpose of coming for the individuals can be different, such as: migrants, academics teaching or studying in Australia, Visitors on holiday or the workers who are working in Australia with a valid pre-arranged employment contracts (Tran 2015). The term resident can be observed both in statutory or ordinary meaning in taxation purpose. In paragraph 16 of TR 98/17, it is stated that if a person has come to Australia with an intention to reside here permanently, he or she will be regarded as a resident from arrival. There are other factors which determine the residential status of living in Australia, such as:
- Intention or purpose of presence
- Family and business employment ties
- Assets owned by the person and its maintenance
- Social behavior.
Apart from this, the time period of residing in Australia also determines the residential status of an individual. The Commissioner’s view of law is that a person who lives in Australia for more than 183 days can be considered as the resident of Australia. That means if a person is residing in Australia for that time span, regardless or his or her nationality, citizenship or domicile, he/she will be regarded as the resident of Australia and will be determined as eligible for taxpaying (Murray and Wright 2015).
To determine the taxation eligibility of foreign incorporated companies, the Taxation Ruling 2017/D2 is used as the primary legislation. The ruling determines how to apply the central management and control test of the residential status of any company. There are two criteria that need to be fulfilled in order to imply taxation on a foreign company operating in Australia (Duong and Evans 2016). These two criteria are:
- The company must be carries on business in Australia;
- The company has a central management and control in Australia.
Determining the Residential Status of Individuals
To examine if the company has meet these two criteria or not, four matters should be taken into consideration. Which are:
- Does the company carries on business in Australia?
- What is the central management and control system of the company?
- Who is responsible to operating the central management and the control of the company?
- Where is the central management and control system exercised?
As it was stated in the issues of this report, the taxation eligibility of Helena, Maxwell and Van Diemen’s Architecture Ltd is yet to determine. In this given case, Helena is not a citizen of Australia. But she is living in the country for a year. Now that she has a permanent job in Australia, she wants to settle in this country and start their family there. According to section 6-5 and section 6-10, as Helena is earning from Australian resources, she is bound to pay tax to the Australian government. But before this, the residential status of Helena needs to be confirmed in order to make better judgement (Mangioni 2015). To verify the residential status of Helena, the Taxation Ruling 98/17 needs to be discussed. As it is stated in TR 98/17, there are four testing methods to determine the residential status of an individual. In case of Helena, the 183 days test in most relevant. As Helena has lived for more than 12 months in Australia, there is no doubt that she is eligible for taxation under the Australian legislature. Apart from that, Helena has an Australian Bank account and is involved with a local social organisation. Now his partner Maxwell is also living with her. Thus the intention of living, family and employment ties, assets owned and social behaviour all indicates that Helena is completely eligible for paying tax to the Australian government (Verikios and Zhang 2015).
As for the residential status of Maxwell is concerned, he has just arrived in Australia in search of Jobs and to live with his partner Helena. But he has not spent more than six months in the country. So the taxation laws cannot be applicable. In order to be eligible for taxation in Australia, Maxwell needs to stay at the country for at least six months (Duong and Evans 20165).
In order to determine the taxation eligibility of Van Diemen’s Architecture Ltd, two requirements as stated in the TR 2017/D2 should be fulfilled. These two criteria have been discussed below:
According to Para 4 of TR 2017/D2 a company must carry on business in Australia in order to recognise as a resident of the country. In that case, the criteria for the company have been observed as a positive one. For the second requirement, the central management of the company needs to be identified within operating body of the company (Verikios and Zhang 2015). The central management and controls of the company has been discussed in the paragraph 6, 13 and 26 of Taxation Ruling 2017/D2. For this requirement, it was stated in the case study that 3 of the directors of the company has transferred to Australia in order to take over the management process (Umar et al. 2016). The directors are among the highest authority of the company and thus the central management and control of the company is totally eligible for fulfilling the requirements for taxation of Van Diemen’s Architecture Ltd (Machogu and Amayi 2016).
Determining the Residential Status of Companies
Conclusion:
From the case study, it is clear that both Helena and Van Diemen’s Architecture Ltd is eligible for paying tax to the Australian government. Thus it is suggested to both of them to file proper report in order to avoid any complexity regarding legal taxation procedure. As far as the case of Maxwell is concerned, as he has recently arrived in Australia to live in, he does not have to pay taxes. But after living six months in that county, Maxwell also have to start paying tax to the government of Australia according to the legislation of the country.
Reference
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