How Can We Simplify The Tax System? Discuss About The Statutory Priorities In Corporate Insolvency Law

Corporate Insolvency Law Statutory Priorities

The company in the given scenario is incorporated outside Australia and majority of its shareholders reside outside Australia. However, all the members of the board of directors reside within Australia and the central management and control of the company is exercised from Australia.

In the year 2016 the operations of the business in Brunei grew to such an extent that the Board of Directors decided that the decision taken in monthly meetings held in Sydney would be tentative and one of the Directors would have to visit Brunei to communicate and manage the business together with the plantation manager of the company in Brunei. The other decisions would continue to be taken by other members of the Board of Directors from Sydney.

• Peter (plantation manager):

In this scenario peter is a plantation manager of ABC LTD. he shifted to Brunei in the year 2015 under a contract for two years. While under employment he took his wife and daughter along with him and also leased a big house which came as package with the employment. He along with his wife also joined the local golf and bridge club. Their daughter was admitted to a boarding school.  While in employment, he rented out his house in Melbourne for two years (Gitman et al. 2015). The rent from the house was paid into his Australian bank account which was accessed by him using his Australian credit cards. Peter also received dividends from a Singapore company as a consequence of his investment in the shares of the company.

On returning to Australia Peter started his accounting services as a sole proprietor. He billed a customer by $8000 on 28^th June 2017 but cash was not received in respect of the transaction.

• Peter’s wife:

Peter’s wife accompanied him to Brunei and while in Brunei she took up a part time job as an English teacher. She also joined the local Bridge and Golf club.

After returning to Australia she assisted her husband in his profession as a receptionist.

• In order to determine the tax residence of a company the following criteria’s are looked upon by the statute under section 6(1) of ITAA36

1. Place of incorporation-

A company incorporated in Australia is automatically resident of Australia irrespective of any other factors.

1. Meaning of the central management and control-

1. Who exercises central management and control?
2. Where is the central management and control exercised?

The relevant case study to this includes Baywater Investments Limited & ORS vs. Commissioner of Taxation; HUA WANG Bank BERHAD vs. Commissioner of taxation.

• In order to determine the residency of an individual for taxation purpose the statute looks for the following criteria’s under TR 98/17

1. Ordinary test of residence-

An individual is considered to be resident if it is taken that the person is in Australia to reside. There is no single test in respect of determining whether the person is in Australia to reside or not several factors have to be considered (Saad 2014).

1. 183 day test-

Peter’s Residency Test and Tax Implications

If the person spends more than half the income year in Australia, whether continuously or with breaks he will be considered to have a constructive residence in Australia (Cardew 2017).

1. Domicile test-

A person is resident of Australia if his domicile is in Australia. Unless it is proved that his permanent abode is outside Australia and he has no intention of taking up residence in Australia (Al-Mamun et al. 2014).

• Domicile at origin of birth
• Choice of Domicile i.e. where the tax payer wants to make their home indefinitely.

The act is generally applied to the individual moving overseas, but not changing their domicile.

Federal Commissioner of Taxation vs. Applegate

In determining whether the tax payer is having permanent abode outside Australia or not the commissioner has many factors to consider in Ruling IT 2650.  

• The intended and extent of overseas stay
• The primary intention of staying in the overseas country, whether permanent or temporary.
• The location of the established home of the individual
• The durability of the Australian associates (for e.g. place of education of the taxpayer’s children.)

This test states the government employees of Australia posted overseas are residents of Australia.  

In case an individual is considered a foreign resident then only such ordinary and statutory income will be taxed which is sourced from Australia (Drew and Dollery 2015).

• Business income (sale of goods)-

1. Generally the place where trading activities of the company take place
2. Income arising out of a contract

• Rental income-

Where the property is situated

• Income from sale of property other than the trading stock-

Generally the place where the property is situated.

• Services-

FCT vs. French (1957).

• Interest-

The place where the contract was entered into and the place where the money was landed out.

• Dividends-

The place from where the company derived its profit.

Nominees ltd vs. FCT (1973).

• Royalties-

The place where the intellectual property is located from which the income is arising.

The business eligible for becoming the small business entity can adopt both cash and accrual basis. However the government encourages cash basis as it is easier to calculate GST in case of cash transactions (Symes 2016).

As per the provisions a SBE has a turnover of not more than $10 million.

In case of large firms, the accrual method is appropriate including large professional firms.

• ABC Ltd.

In case of the company, it is seen that the company is not incorporated in Australia. In addition to this the operations of the company is carried out in Brunei that is outside Australia (James et al. 2015). Hence, the company fails the first test. But, it has to be considered that during the year 2015 the management took decisions governing its operations from Sydney as it is mentioned that all the Board meetings of the members of the Board of Directors are conducted on a monthly basis in Sydney. In this case it has to be effectively justified whether the central management and control of the company was undertaken by the Board of Directors from Sydney i.e. Australia (McCluskey and Franzsen 2017). After factoring in the implications or the effects of the decisions taken, it can be prudently said that the company’s central management and control resided within Australia during the period of 2015.

Foreign Entity Residency Test and Tax Laws

For the period of 2016 one of the members of the Board had to move to Brunei in order to cooperate the functions of the business along with their plantation manager. It has been specifically said that the decisions taken by the rest of the board members was to be considered as tentative (McIntosh et al. 2015). It has to be collectively analysed with the fact that the operations scale in Brunei had reached such heights that the management was forced to establish personal contact for conduct of the business. This suggests that for the period of 2016 and onwards the place of central management and control was outside Australia (Pawson 2017).

• Peter:

In case of Peter the residency test have to be taken prudently. In the ordinary tests several factors have to be considered. The factors that go in favour of Peter include he has taken his wife and unmarried younger daughter with himself. He rented out his residence in Australia and took a big house on lease in Brunei. While in Brunei the couple mingled with the society quite well which is reflected by the fact that they became members of the local Bridge and golf club. All these factors indicate that Peter was aiming to reside in Brunei (Richardson et al. 2015). The factors that go against his residence in Brunei include the fact that he maintained his house in Australia and had just rented it out. He did not clearly mention about the extending hi employment period prior to expiry of his term of two years and he did come back to Australia after two years (Chomik et al. 2015).

In case of the 183 days test, he did not stay in Australia for more than 183 days for the period of two years that is 2015 to 2017.

The superannuation test is not applicable in the case of Peter as he is not a government employee.

After coming back to Australia, the business started by Peter has not crossed the turnover of $10 million in the year 2017 (O’faircheallaigh 2017).

In case of Peter’s wife, she left Australia along with her husband. There are many factors indicating that for the period of two years she decided to reside outside Australia (Forsyth et al. 2014). For instance she took up part time job as an English teacher and also became member of the local club of Bridge and Golf. She was not in the country for more than 183 days for the period of two years that is from 2015 to 2017. The tests of superannuation do not belong to her either (van den Nouwelant et al. 2015).

Conclusion

• ABC Ltd.:

For the period of 2015 the company was managing its business operations including supervision and control over the operations from Sydney. Hence, the company will be considered as resident due to fact that it has satisfied any of the three conditions of residence in case of a company. The reason is that the statute lays down that irrespective of the location of the location of the business and its corresponding operations, in case the central management and control is exercised within the country then it will be deemed that the company is a resident of Australia for tax purposes for that period for which the control and management was exercised from Australia.

For the period of 2016 and 2017 the management was shifted to Brunei. This can be concluded because of the fact that it is mentioned that one of the board members have to move to Brunei for the purpose of managing the upscale in the business along with the assistance of the plant manager. This suggests that during this period of two years the place of central management and control of the company was outside of Australia. Hence for these two years the company will be a foreign resident. Consequently for the period of 2015 the company will be liable to pay taxes for its come from all the sources and for the year 2016 and 2017 it will have to pay taxes in respect of only that income which have sourced from Australia.

• Peter:

For the period of two years that is 2015 to 2017 he will not be considered as a resident of Australia as he intended to reside in Brunei for those two years as he has not been able to satisfy even one of the four tests of residence. Hence, his income which was sourced from Australia will only be taxed and not any other income. This will include rent from his house on Melbourne, dividends from his investments in the Singapore Company. The income is to be considered as sourced from Australia because the rent has accrued from a property situated in Australia and the company has its income source in Australia.

Peter should follow cash method of derivation of income for his business as his business is entitled for Small Business Entity due to the fact that it has not crossed the turnover of $10 million in the year 2017.

• Peter’s wife:

For the period of 2015 to 2017 she will not be considered as the resident of Australia for the purpose of taxation as she has not been able to fulfil any of the three criteria’s of test of residency. Hence her income as a part time teacher in Brunei will not be taxed.

The income from the business of Peter will be clubbed with his income unless and until his wife for dissemination of her specialised skill and knowledge has received some consideration in the Peter’s business. 

Reference

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Cardew, R., 2017. Privatisation of infrastructure in Sydney, Australia. In Infrastructure Provision and the Negotiating Process (pp. 129-146). Routledge.

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Drew, J. and Dollery, B., 2015. A Fair Go: A Response to the Independent Local Government Review Panel’s Assessment of Municipal Taxation in NSW. Austl. Tax F., 30, p.471.

Forsyth, P., Dwyer, L., Spurr, R. and Pham, T., 2014. The impacts of Australia’s departure tax: Tourism versus the economy?. Tourism Management, 40, pp.126-136.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

James, S., Sawyer, A. and Wallschutzky, I., 2015. Tax simplification: A review of initiatives in Australia, New Zealand and the United Kingdom. eJournal of Tax Research, 13(1), p.280.

McCluskey, W.J. and Franzsen, R.C., 2017. Land value taxation: An applied analysis. Routledge.

McIntosh, J., Trubka, R. and Newman, P., 2015. Tax Increment Financing framework for integrated transit and urban renewal projects in car-dependent cities. Urban Policy and Research, 33(1), pp.37-60.

O’faircheallaigh, C., 2017. Mining and development: foreign-financed mines in Australia, Ireland, Papua New Guinea and Zambia. Routledge.

Pawson, M., 2017. How can we simplify the tax system?. Taxation in Australia, 51(9), p.468.

Richardson, G., Taylor, G. and Lanis, R., 2015. The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, pp.44-53.

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Symes, C.F., 2016. Statutory priorities in corporate insolvency law: an analysis of preferred creditor status. Routledge.

van den Nouwelant, R., Davison, G., Gurran, N., Pinnegar, S. and Randolph, B., 2015. Delivering affordable housing through the planning system in urban renewal contexts: converging government roles in Queensland, South Australia and New South Wales. Australian Planner, 52(2), pp.77-89.