Issue
In the given case situation; Jenny is working as an accountant in Hong Kong. She got a proposal from her employer to provide business advice for the establishment of business to a various former resident of Hong Kong residing in Australia. She entered in the frontiers of Australia on 25th April 2016. Her prior intention was to stay there for three months, and during these three months, she stayed in various motels. At the end of the three-month, her employer asked her to stay there for further 9 months. Due to this aspect; she leased an executive apartment near her workplace. During these 9 months, her parents visited twice. In the present case situation, the issue arises from the view of taxation that whether Jenny is a resident of Australia or not in accordance with the provisions of Income Tax Assessment Act 1936 and 1997.
In accordance with the provisions of Ordinary Income (Section 6-5) and Statutory Income (Section 6-10) of the Income Tax Assessment Act 1997 (ITAA 1997), if individual is an Australian resident than their sources of ordinary & statutory income will be inclusive of all income derived whether in direct or indirect manner and consider Australian as well as foreign earnings (Thampapillai, 2016). In this provision; it is also stated that in a situation where the individual is a foreign resident then the source of ordinary & statutory income will be inclusive of only s income derived in the direct or indirect manner in Australia. In this aspect; provisions of Section 7 of the Income Tax Rates Act 1986 (ITRA 1986) describes the differential tax rates depending on the fact that whether the individual is a resident or non-resident. Thus it is important to determine residential status as per provisions of Income Tax Assessment Act 1997.
An individual is considered to be a resident of Australia for tax purposes when it comes within the purview of the word “resident” which is defined in subsection 6(1) of the Income Tax Assessment Act 1936 (Jones, 2017). Further, the definition is covered in section 995-1 of ITAA 1997. Provisions of section 6(1) of the ITAA 1936 covers four distinct tests in order to determine whether an individual is a resident in Australia for the purpose of Taxation.
Initially individual has to satisfy common law test according to which individual is said to be resident if following cited aspects are satisfied:
- the purpose or intention of the individual’s there in Australia;
- The magnitude of which the individual’s household or occupational and employment work ties within Australia;
- the location and maintenance of the assets of the individual; and
- The social and living arrangement of the individual (Steen and Peel, 2015)
If this is not satisfied then following statutory tests are applied:
- Individual whose residence is in Australia, but if the Commissioner thinks otherwise that particular person or individual has a permanent place of living outside Australia, then the same wouldn’t be included in the definition of resident. For this aspect case provisions of Miller v FCT (1946) 73, CLR is applied (Sharkey, 2016).
- Individual who has continuously or intermittently been or stayed in the frontiers of Australia for more than one-half of the year of assessable income. However in the case where the commissioner is of the opinion that person has a permanent place of living outside Australia then the same wouldn’t be included in the definition of resident (Thampapillai, 2016).
- Individual who satisfies following aspects:
- A member of the superannuation scheme which has been executed by the deed under the superannuation act, 1990 or
- An eligible employee for the purpose of the Superannuation Act 1976 or
- Is the wife or husband or child under 16, of the persons covered in Para (A) and Para (B)
Legal provisions
In the given case; Jenny who was working as an accountant in Hong Kong moved to Australia for providing business advice to various former residents of Hong Kong residing in Australia. She reached Australia on 25th April 2016, and she stayed there for 12 months continuously or intermittently meanwhile her parents visited twice. As per the provisions of law for being a tax resident of Australia, a person has to qualify or meet any one of the following cited conditions below:
- The individual is covered under the meaning of resident as defined in subsection 6(1) of the Income Tax Assessment Act 1936.
- The individual has a permanent place of living in Australia.
- The individual has stayed continuously or in breaks for more than half year of income in territorial frontiers of Australia (Cassidy, 2017).
- The individual is the member of the superannuation scheme.
By considering the given case situation; in the Financial Year 2015-16 Jenny has not met or qualified any of the statutory tests mentioned above. She stayed there for only 65 days (4 Days of April + 31 Days of May + 30 Days of June) in Financial Year 2015-16 which is less than half year. In addition to this; she neither met the other three conditions, i.e. no permanent place of living in Australia, not covered under the definition of resident defined in subsection 6(1) of the Income Tax Assessment Act 1936 and she is not the member of the superannuation scheme.
Hence she is not a tax resident of Australia in the financial year 2015-16, but in the financial year 2016-17, she stayed in the political boundaries of Australia for more than one-half year of Income, so she qualifies for being a tax resident in 2016-17. However; if the Income Tax Commissioner has the opinion that Jenny has a permanent place of abode outside Australia, then he can adjudge Jenny as a non-tax resident.
Conclusion
Common law test is not satisfied by Jenny as primary conditions are not satisfied due to which
For the Financial Year 2015-16 Jenny is not an Australian Tax Resident, but for the Financial Year 2016-17, she is Tax resident because she has met one of the statutory conditions required to qualify residency test, i.e. she has stayed in Australia for more than one-half year of income in 2016-17. However, if the Commissioner of Income Tax is of the opinion that Jenny has a permanent place of abode outside Australia, then he may at his discretion can keep out Jenny out Tax Residency Bracket.
In the given case situation; a well-known personality was paid $400,000 as an encouragement to join the new television network. She accepted the work and got a further remuneration of $100,000 along with the lump sum payment. Thus in the present issue is determine whether both receipts of the $400,000 and the $100,000 is part of assessable income as per Australian taxation provisions.
Applicability of the cited provisions in the given case situation
To determine whether income is part of assessable income as per Australian taxation provisions the major problem arises from the aspect in the nexus of activity and is further taken into consideration (Freedland and et al., 2016)
Thus, ordinary income as per the Section 6(5) of ITAA97 or if any of the parts of the receipt is capital for relinquishing up the right to earn income under the FCT v Woite (1982) 13 ATR 579.
According to the Section 6-5(1) of the ITAA 1997, assesable income is inclusive of taxable income and income in terms of ordinary concept. Income under the ordinary concept is not described; however, it is assessed that whether income earned by people would normally consider being assessable income, by applying the concepts of income as per common law (Italia, 2015). Further in the case of FCT v Woit; it has been found that the payment for agreeing and signing a contract for not playing football for any other team and same was considered as a non-assessable capital receipt.
However, if the purpose of the payment is to provide the right to earn income, then it will be said as capital under Woite. Ultimately, it seems that the taxpayer was made payment as an incentive to enter into an agreement (Freedland and et al., 2016). Thus, payment is provided to them in order to render service in exchange, introducing nexus further making it as an ordinary income. The taxpayer has not provided any of the significant rights via agreeing to the agreement, and thus it is expected that the payment is made to them by doing something that is ordinary income as per Section 6(5). Further; Section 15(2) ITAA 1997 states that taxable income of a taxpayer is inclusive of all compensation, grant, benefits, gratitude and all which are related to the employment of taxpayer or the services provided by the taxpayer, and however it is exclusive of ordinary income.
The term derived is not always referred as earned. Derive actual meaning, in accordance with the Oxford English Dictionary, refers to draw, obtain, find, gain. It has become clear that unless and until an Act made particular provisions regarding the derived income, it will be identified via ordinary business application and commercial rules and accounting method to be implemented is that which “is computed to provided a substantially correct reflex of the taxpayer’s true income.”
Westpac initiated an inducement scheme purposely for employees that carry out study and research regarding to their operations, and payment payments will be made after the finish of degrees or course (Tolhurst, 2016). The aim of this scheme was to improve qualified expertise staff yet. In this case; court held that: -income is assessable as per the Section 26(e) ITAA 1936 and will be under the Section 15(2). Otherwise in the present due to alteration in section. Justification of court decision was that income was not “personal” gift-not ordinary income-and scheme was designed for improvisation efficiency and performance of workers so same will be considered as “an aspect of their employment.”
Conclusion
In accordance with case study of Higgs v Olivier [1952] Ch 311, the court stated that trade payment control which takes place at the contract’s life and is classically ordinary income
Salary of $100,000 is simply assessable as there is the presence of ordinary income and there is an apparent nexus between the recipes and services provided. However; the receipt of $400,000 is not as clear in comparison must be made with decisions like Woite and Jarrold v Boustead (1963) 41 TC 70 (Buchanan. and Consett, 2016). If there is the presence of nexus coming with services, then it will be considered as ordinary income as per the Brent v FCT (1971) 125 CLR 418.
Section 15(2) is reliable is, there is an adequate amount of facts to refuse the $400,000 being as ordinary income. The receipts of $400,000 will be considered as statutory income in accordance with Section 15-2 in case they comprise benefits etc., given in regards to services (Peiros and Smyth, 2017). Under Smith v FCT (1987) 19 ATR 274, recommendation is provided that the requirement of nexus test for the Section 15 (2) then it will be easier to meet terms than from Section 6(5), and the assume that the payment is an incentive to enter into employment agreement and will reveal it as arising out of future services.
Income |
Assessability |
Section |
Description of justification |
Annual remuneration of $100,000 |
Yes |
6-5(1) of the ITAA 1997 |
By applying above-cited provisions yearly salary of $100,000 is simply assessable as there is the presence of ordinary income and there is an apparent nexus between the recipes and the receipts reveals many income indicia that is regular depended on nexus with individual services. |
$400,000 as an encouragement to join the new television network |
Yes |
Section 15(2) |
The receipts of $400,000 will be considered as statutory income in accordance with Section 15-2 in case they comprise benefits etc., given in regards to services. |
Conclusion
Both the income earned by individual will be part of assessable income according to Australia taxation provisions.
References
Buchanan, R. and Consett, E., 2016. Section 974-80 ITAA97: The current state of play. Tax Specialist, 19(5), p.217.
Cassidy, J., 2017. The International Tax Implications of New Zealand Taxation of Real Property Owned by Non-residents (Offshore Persons). NZ Law Review, 2017, pp.235-323.
Freedland, M., Bogg, A., Cabrelli, D., Collins, H., Countouris, N., Davies, A.C.L., Deakin, S. and Prassl, J. eds., 2016. The contract of employment. Oxford University Press.
Italia, M., 2015. A taxpayer privilege for Australia (Doctoral dissertation, Victoria University).
Jones, S., 2017. The implications of changing your tax residency. Tax Breaks Newsletter, 2017(380), pp.5-7.
Peiros, K. and Smyth, C., 2017. Successful succession: Tax treatment of executor’s commission. Taxation in Australia, 51(7), p.394.
Sharkey, N., 2016. Departing Australia: A complex tax situation with possible benefits and hidden traps. Tax Specialist, 19(5), p.180.
Steen, A. and Peel, V., 2015. Economic and Social Consequences of Changing Taxation Arrangements to Working Holiday Makers. J. Austl. Tax’n, 17, p.225.
Thampapillai, D.J., 2016. Foreign Employment Income and Double Tax Avoidance Agreement: Australia’s Possible Governance Failure. Browser Download This Paper.
Tolhurst, G.J., 2016. The assignment of contractual rights. Bloomsbury Publishing.