Tax Residency Analysis for Lin
1 Issue
The main issue is to determine whether Lin is an Australian tax resident for the period ending on 30 June 2017.
Section 6(1) of Income Tax Assessment Act 1936 comprises the various aspects related to the tax residency in case of individual taxpayers. Further, tax ruling TR 98/17 highlights the host of residency tests that would apply to the concerned taxpayer to check the tax residency. There are four residency tests which have certain essential aspects which need to be fulfilled by the taxpayer in order to be classified as a tax resident of Australia. Domicile test, superannuation test, 183 day test and resides test are these four tests (Barkoczy, 2015). It is noteworthy that any individual who satisfies any test from these four residency tests, then he would be termed as an Australian tax resident (Sadiq et. al., 2016).
183 day test is applied to foreign residents only and not used to check the tax residency of Australian resident. The two main conditions of 183 day test are given below (Deutsch et. al., 2015).
- Taxpayer has resided on Australian land for at least 183 days in income year under consideration.
- Taxpayer’s intention to permanently settle in Australia.
Superannuation test is applied to the taxpayer who is a government officer of Australia and government authorities have stationed the taxpayer to foreign country to complete the professional duties. Another pivotal condition of this test is participation on behalf of taxpayer into a minimum of one of the two highlighted scheme of Australian government (Gilders et. al., 2016).
- Public Sector Superannuation Scheme
- Commonwealth Superannuation Scheme
There is no law or statute available in Australian context to describe the exact meaning of word resides. The judgement of various case laws is taken into account to test the residency status of foreign resident currently residing in Australia. There are some critical factors which must be noticed on behalf of tax authorities to comment on the tax residency (CCH, 2013).
- Reason or purpose to make visits to Australia
- Total duration of stay in Australia, frequency of visits and presence of any ties of taxpayer with Australia
- Strength of relations of taxpayer with the foreign country and with Australia
- Nationality of the taxpayer also plays a part if above factors are insufficient
This test is used to check the tax residency position of Australian residents only. The taxpayer would be recognised as Australian tax resident only if the below mentioned conditions are satisfied on behalf of taxpayer (Nethercott, Richardson and Devos, 2016).
- Taxpayer must have valid Australian domicile in accordance with the Domicile Act 1982.
- Permanent place of abode must be situated in Australia only as per the judgement extended in the Levene v, I.R.C. (1928) A.C.2017 case.
There are some essential conditions regarding to the permanent place of abode of taxpayer that must be taken into account as highlighted in tax ruling IT 2650 when the taxpayer has resided in foreign country (ATO, 1991).
- Intended and real amount of time of stay on behalf of taxpayer on the foreign land
- Intention to return to Australia after some definite duration or to make visits to any other foreign country
- Taxpayer’s action to alter the residence which has located in Australia
- Total duration of stay or willingness of extending the stay in foreign land
- Strength of various ties of individual taxpayer with any special place located in Australia
Further,the taxpayer who is Australian resident and has moved to foreign land for significant or indefinite time period in order to complete employment liabilities or to establish a business or company, then it would result in the shift of the permanent place of abode of taxpayer as per the highlights of F.C.of T.v. Applegate (1979) 9ATR 899. It is noteworthy that this would applicable if the duration of stay in foreign land would at least be 2 year or more. In this case, the taxpayer would not be termed as tax resident of Australia.
- Lin is the concerned taxpayer who moved from Malaysia to Australia along with his children and spouse several years ago.
- He purchased a home in Melbourne for his family to reside.
- Further, Lin works as auditor for the Australian subsidiary of a global shipping company.
- Company has extended an overseas assignment to Lin for which he has been posted to Singapore for a period of two year. Also, there is a probability that the period of stay may be extended for two more years.
- Company has offered attractive pay and working conditions to Lin and hence, Lin has decided to stay in Singapore and also lease an apartment for two years.
- His family remains in Melbourne.
- His family visit Singapore when Lin receives holidays.
- Lin does not make any visit to Australia during the income year.
It is apparent from the above information that Lin has resided in Australia for several years and hence, it can be assumed that Lin is a permanent resident of Australia. Moreover, there is no witness that indicates that Lin is a government officer. Therefore, it can be said that 183 day test, resides test, superannuation test would not valid. Hence, the only applicable residency test is domicile test. Lin is a permanent resident of Australia and hence, possess domicile of Australia. Secondly it is apparent that he has moved to Singapore for a period of 2 years and also has the intention to extend the stay for further two years. He has also leased an apartment for 2 years. Moreover, he did not make any single visit to Australia during income year. On holidays, his family travels to Singapore from Australia and stays with Lin. Hence, it can be said that from above aspects that Lin has shifted the permanent place of abode from Australia and his permanent place of stay is in Singapore now. Therefore, he has not satisfied the essential conditions of domicile test.
Tax Residency Analysis for Winnie
Conclusion:
It can be concluded from the above discussion that Lin does not satisfy any of residency tests and hence, would not be termed as tax resident of Australia because his permanent place of abode has shifted from Australia to Singapore.
There is a close link between the underlying tax residency of a particular taxpayer and the underlying tax liabilities that the person would have to pay to the ATO. In this regards, s. 6-5(2) and s. 6-5(3), ITAA 1997 are of particular importance. In accordance with s. 6-5(2), for an Australian tax resident, all the income derived from any source worldwide would be taxable in accordance with relevant Australian statutes (Barkoczy, 2015). However, for a foreign tax resident, in line with s. 6-5(3), only the income derived from sources based in Australia would be taxed in Australia while the remaining will be exempt from any tax in Australia (CCH, 2013).
In accordance to the information given for Lin, he is paid an equivalent salary of AUD 200,000 annually in Singapore dollar by the Singapore subsidiary of the global shipping firm. Besides, Lin for the given year has also derived a short term capital gains of $ 50,000 on account of the transaction in shares of Commonwealth Bank.
Taxation treatment – Australian tax resident
As per s. 6-5(2), all income would be taxed in this case. The employment income to the tune of AUD 200,000 would contribute to ordinary income as per s. 6-5 ITAA 1997. Further, capital gains tax or CGT would be applied on the short term gains of $50,000 and no discount would be available considering the gains are short term. Thus, both incomes would be reflected in the assessable income (Deutsch et. al., 2015).
Taxation treatment – Foreign tax resident
As per s. 6-5(3), only the income whose source lies in Australia may be taxed. Since te capital gains have been derived due to selling of shares of an Australian company, hence these would be subject to CGT and would be considered as assessable income under the aegis of statutory income (Gilders et. al., 2015).
Considering that Lin is a foreign tax resident, hence the latter tax treatment would apply in retain to the income generated.
2. The given case needs to be analysed in the existence of the following three possibilities.
Section 6(5) ITAA 1997
In accordance with s.6(5), any income that arises from the sale of land would be considered as ordinary income only if the underlying taxpayer is engaged in the business of land trading or real estate development. In such a scenario, land asset would be considered as a trading stock which is meant to be liquidated as a routine practice. In this case, all the proceeds obtained as revenue would be assessable income with relevant deductions available which would help in determining the taxable income (CCH, 2013).
However, in the given case, it is apparent the revenues derived from liquidating townhouses would not be recognised as ordinary income since Winnie was engaged in horse breeding business recently and wanted to liquidate the plot alongside the business but the buyer was not interested. Hence, the transaction is an isolated one and not regular which is requisite for ordinary income.
Possible Income Tax Consequences of the Real Estate Sale
Section 15(15) ITAA 1997
In accordance with s. 15-15, if the taxpayer enters any particular transaction which is isolated but entered into with the prime intention of making profit, then the profits derived in the process would be assessable income (Gilders et. al., 2016). Assuming that s.15(15) is applicable in the given case, then the profit would be derived as follows.
Cost of land = $ 1m
Incremental cost to build up 50 townhouses = $ 100,000 or $ 0.1 million
Selling price of 25 townhouses = $ 25 million
Hence, profit by selling 25 townhouses = $ 25 million – ($0.1/2) million – ($1/2) million = $24.45 million
However, in the given case, this section is not valid even though the transaction is of isolated nature. This is because it seems unlikely given the facts that the transaction is driven by the primary intention of profits. If this would have been the case, Winney would have never wanted to dispose the land with the horse breeding business. Further, attempts have been made by Winney to sell the land as it is and even there was attempt t auction the land but it could not fetch the estimated market price also. Thus, the construction of townhouses on the land has been undertaken by the taxpayer only because she was not successful in selling the land otherwise. Further, the land was earlier used for the horse breeding business but since the business exists no more, she is just realising the capital asset i.e. land (Sadiq et. al., 2016).
Section 108-5 ITAA 1997
In accordance with this, the proceeds derived from the sale of capital assets would be considered as capital proceeds and would be exempt from tax as only revenue receipts are taxed. However with regards to disposal of capital assets, in accordance with s. 108-5, capital gains may be derived which would be subject to CGT or capital gains tax (Barkoczy, 2015).
Cost of land = $ 1m
Incremental cost to build up 50 townhouses = $ 100,000 or $ 0.1 million
Selling price of 25 townhouses = $ 25 million
Total cost base of the asset = $ 1.1 million
Cost base proportionately adjusted since only half of the townhouses have been liquidated = (1.1/2) million = $ 0.55 million
Gross capital gains = 25 – 0.55 = $ 24,45 million
For individual taxpayers, net taxable capital gains can be computed using indexation method and discount method. Here, the discount method would be preferred as it would lead to lower CGT liability. In accordance with discount method, a rebate of 50% is available for long term capital gains i.e. capital gains made on assets which were held for more than 1 year as per s. 115-25 (CCH, 2013).
Hence, net taxable capital gains = 0.5*24.45 = $12.225 million
In the given case, since Winne has realised the capital asset in the best possible manner, hence capital gains would be taxable as highlighted above (Gilders et. al., 2016).
References:
ATO 1991, IT 2650, Australian Taxation Office, [Online] Available at https://law.ato.gov.au/atolaw/view.htm?Docid=ITR/IT2650/NAT/ATO/00001 [Accessed May 05, 2017]
Barkoczy, S. 2015, Foundation of Taxation Law 2015, 7thed., North Ryde: CCH Publications
CCH 2013, Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. 2015, Australian tax handbook 8th ed., Pymont: Thomson Reuters,
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. 2016, Understanding taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths.
Nethercott, L., Richardson, G. and Devos, K. 2016, Australian Taxation Study Manual 2016, 4th ed., Sydney: Oxford University Press
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
