Background Information
The main concern in the given case is to consider the various facts outlined and opine on the tax residency status of Marty.
The tax residency is dealt with subsection 6(1), ITAA 1936 which reflect on the various conditions that an individual taxpayer must fulfill in order to be termed as a tax resident of Australia. These tests have also been reiterated by tax ruling TR 98/17. The person concerned need not satisfy all these tests but has to satisfy atleast one of the four tests listed in the statute and reiterated in the various case laws and tax rulings (CCH, 2013). Additionally, a tax resident of Australia may be recognized as foreign tax resident in the next year and hence ascertaining needs to be done on an annual basis especially if there is a change of place of residence or underlying intent of leaving or permanently settling in Australia (Barkoczy, 2015). A brief description of the four applicable tests in this regard is as highlighted below.
A necessary condition for fulfillment of this test is that the concerned individual has to be a resident of Australia which implies that he/she needs to have an Australian domicile in accordance with applicable provisions of Domicile Act 1982. However, this condition is to be supplemented with additional requirement of having the permanent abode in Australia (Gilders et. al., 2016). The various factors that are to be considered significant for permanent abode location determination by the applicable tax authorities have been listed in tax ruling IT 2650 (ATO, 1991).
A relevant case which merits discussion here is Federal Commissioner of Taxation v Applegate (1979) ATC 4307. In accordance with the relevant details, the taxpayer in the given case has migrated overseas to discharge professional requirements as his employer wanted him to set an office in the foreign geography. However, there was lack of any particular time period in which this would be accomplished and thus when moving to the foreign country, the taxpayer had no idea as to as to when he would be able to return back to Australia on a permanent basis even though it was absolutely clear that he would eventually come back. The taxpayer had to come back only after two years as he fell sick and could nto even finish the work for which he went. The court decided that the taxpayer be regarded as non-Australian resident for tax purposes despite the intention of returning back of Australia. Further, it clarified that permanent in concept of “permanent abode” does not mean leaving Australia necessarily but essentially a substantial period of relocation to foreign land (ATO, 1991).
Marty Goodson’s Tax Residency Status
This is a statutory test which applies exclusively on officers of the Federal government which are deployed in foreign countries for fulfillment of their professional obligations. Their tax residency is determined on the basis of the certain superannuation schemes which the taxpayer needs to participate (Gilders et. al., 2016).
The focus of this statutory test is on the determination of tax residency for foreign residents who have to ensure their physical presence in Australia for a cumulative time period of minimum 183 days in the concerned tax year. There is no requirement for this time period to be of continuous nature. Besides, it is imperative that there must not be reasonable suspicion on Tax Commissioner’s part with regards to intent of taxpayer to settle in Australia (Sadiq et. al., 2016).
This is applied for non-residents of Australia where residency is determined based on a combination of factors such as purpose to arrive in Australia, nature of personal and professional relationships, social arrangements in place, visits to country of origin (Deutsch et. al., 2016).
In accordance with the given information, the relevant facts are summarized below.
- Marty is an Australian citizen but has established a company in Silicon Valley, USA in 2012 with a personal shareholding of 50%.
- During FY2013, Marty did not make any visit to Australia.
- During FY2014, Marty visited Australia for 4 weeks over Christmas so as to spend time.
- Marty has a house in Australia which has been rented to her sister rent free.
- Marty has also made some investments in commercial properties in Australia.
- During FY2015, Marty came to Australia to spend a period of 7 months with his girlfriend.
- During FY2016, Marty returned to Australia on a permanent basis to get settled with his girlfriend.
The applicable tests to determine tax residency in different tax years are highlighted below.
Domicile Test – Marty on account of being the citizen has Australian citizen. But since he has opened a company based in USA, it is likely that he intends to reside in US for a substantial amount of time. As a result, in line with the decision in the Federal Commissioner of Taxation v Applegate (1979) ATC 4307, it may be argued that the permanent abode has shifted to USA for a significant length of time and hence till the time he returns to Australia permanently, he would be classified as a foreign tax resident in accordance with this test. Hence, till the time in FY2016, when he returns to Australia, he would be categorized as a foreign tax resident.
Superannuation Test – This is not applicable since Marty is not a Federal government employee working abroad.
Resides Test – This is also not applicable in the given case as Marty is an Australian resident and further make only a visit to Australia during Christmas in FY2014 for a period of four weeks.
!83 day test – The condition of residing 183 days in a financial year was fulfilled in FY2015 when Marty did stay more than the stipulated period if 183 days but it is evident that at that moment there was no clarity as to whether he wants to come back and settle in Australia. Hence, the test has not been passed.
Planks Pty Ltd – Company Status
Conclusion
For the given period, till the time Marty does not permanently return to Australia, he would be regarded as a foreign tax resident.
The main issue is to determine if Planks would be considered as a Australian tax resident company or not.
The emphasis of the above part was on determining the tax residency of an individual taxpayer. However, the focus of the given discussion is on the relevant tests that can be utilized for testing the tax residency status of companies. As per ATO, for a company to be recognized as a tax resident of Australia one of the following two conditions has to be fulfilled (Nethercott, Richardson & Devos, 2016).
Condition 1: The company has been incorporated in Australia.
Condition 2: The company has not been incorporate in Australia but tends to carry on with business activities in Australia and manages to satisfy one of the two conditions stated below.
- The control and central management of the concerned company must be based out of Australia.
- The voting power tends to controlled by Australian residents
In relation to what constitutes as control and central management, tax ruing TR 2017/D2 clarifies that this would include policy and strategic decisions and not include the day to day mundane decisions. Additionally, this tax ruling does not assume that directors necessarily have the authority to take decisions and hence only the de-facto decision makers are considered vital with regards to application of the above test (KPMG, 2017).
The relevant facts of the given situation are highlighted below.
- In FY2012, a company named Planks Pty Ltd was incorporated in the USA.
- The company had 10 shares, out of which 5 were held by Marty while the remaining 5 were each given to five friends he had.
- One of these friends reside in Australia while the friends reside outside Australia
- The company has a worldwide business scope which would tend to include Australia as well.
- In FY2013, all the decision making by done by Marty who was the only director for the company.
- In FY2014, a board of directors was appointed which consisted of all US based residents but the staff still believed that Marty took critical decisions for the firm.
- In FY2015, Marty assumes the position of the managing director and continues to discharge duty even when he was staying with his girlfriend in Australia for a period of 7 months.
- In FY2016, Marty sold his share in the company to another investor and quit the company to return back to Australia.
From the above, it is apparent that the company is incorporate outside Australia but has business activities in Australia considering worldwide scope. Thus, based on whether the company manages to fulfill atleast one of the two conditions, the decision regarding tax residency would be taken.
Marty along with his Australian friend together have 60% of the share in the company. However, Marty for FY2013 is a foreign resident and thus this condition is not satisfied. Further, the CMC (Central Management and Control) does not lie in Australia since the sole director Marty operates from US only and does not visit Australia. Hence, the company is not a Australian tax resident.
Marty is a non-resident for the given year and hence majority shareholding does not rest with the Australian resident. Also, even if the de-facto decision maker is considered to be Marty, then also he was present in US only baring a month in Christmas holidays and hence the company is not a Australian tax resident.
The majority shareholding of Australian residents still remains unfulfilled. However, as the MD, Marty takes all the important decisions from Australia for 7 months and hence for that period, the company would be regarded as tax resident of Australia.
Conditions for Company Tax Residency in Australia
While staying in USA, Marty sold her share in the company and resigned from the position of managing director which implies that neither of the two conditions are fulfilled and the company would not be a tax resident of Australia.
Conclusion
Based on the above discussion, it may be concluded that barring the brief period of seven months when Marty was residing in Australia, the company would be considered a foreign tax resident. However, during those seven months, the company would be regarded as an Australian tax resident.
- The objective of the given question is to determine the tax residency of Marty in terms of his employment income. In accordance with s. 6-5(3), for foreign tax residents, only income generated from Australia would be taxable in Australia. Further, s. 6-5(2), ITAA 1997 indicates that for Australian tax residents, income from both foreign and domestic sources will be taken into consideration for tax liability computation (Barkoczy, 2015).
In the given case, till the time Marty comes permanently to Australia in FY2016, he would be considered as a foreign tax resident. Hence, any employment income generated from Australia would be taxable. Based, on the given facts, during a seven month period in FY2015, the company was considered an Australian tax resident, hence any employment income drawn during these 7 months would be taxable in Australia. Since the exact amount of the same is not known, hence the exact tax liability cannot be computed.
- The objective of the given question is to determine the tax residency of Marty in terms of his employment income. In accordance with s. 6-5(3), for foreign tax residents, only income generated from Australia would be taxable in Australia. Further, s. 6-5(2), ITAA 1997 indicates that for Australian tax residents, income from both foreign and domestic sources will be taken into consideration for tax liability computation (Sadiq et. al., 2016). From part (b), it is apparent that for a brief period of 7 months, when Marty was in Australia with his girlfriend, the company was considered an Australia tax resident.
Hence, barring that period, for all the other times, only the income that would be derived out of Australian clients and business would be considered for taxation in Australia. Additionally, from the revenue derived various deductible expenses would be subtracted in order to derive at the final tax liability. However, for the seven months i.e. from September1, 2014 to April 1, 2015, all the income of the company would be considered taxable in Australia irrespective of the source of the client and income being derived. However, since the exact amount of the same is not known, hence the exact tax liability cannot be computed.
To determine if any assessable income would arise for Rommy in light of the given facts.
In order for any proceeds to be recognized as assessable income as per ITAA 1997, it has to fall in either of the following two categories (Gilders et. al., 2016).
- Ordinary Income (Section 6-5, ITAA 1997)
- Statutory Income (Section 6-10, ITAA, 1997)
Besides this, any profits generated on account of a transaction of isolated nature which has been specifically entered with the intention of making money or profit would lead to assessable income in accordance with Section 15-15, ITAA 1997 (Nethercott, Richardson & Devos, 2016).
For any activity that the taxpayer undertakes, it is vital to distinguish between hobby and business (Deutsch et. al., 2016). While the former is done with the intention of recreation and entertainment, the later is performed with the intention of making profits or money. Also, the hobby is typically done on a limited scale, with limited investment of time and other resources and typically irregular. Business on the other hand tends to be done on a larger scale, tends to be organized and has higher allocation of resources to the performance of the same (CCH, 2013).
Any proceeds that may derive from hobby would be termed as tax exempt income. This is because the activity undertaken by the taxpayer is essentially not the profession or business of the taxpayer and is only a recreational activity, thus it is outside the ambit of ordinary income (Section 6-5). Further, since the proceeds are in cash or readily convertible to cash, hence it cannot be recognized as statutory income (Section 6-10) (Sadiq et. al., 2016). Besides, there was lack of intention to make profit in case of any activity carried out as hobby, hence, the income falls out of the ambit of Section 15-15. However, if it is noticeable that if revenue generation from an hobby gains regularity, then the same would be quantified as ordinary income and hence would contribute to assessable income (Barkozcy, 2015).
Additionally, with regards to subdivision of land, either capital gains tax can be applicable or income tax may apply depending on whether the gains made would be ordinary income or capital gains. In accordance with TR 92/3, ordinary income would result from subdivision, if the whole project has been carried out with the primary intention of extracting profit (Deutsch et. al., 2016). Also, it is noteworthy that capital gains fall within the ambit of statutory income in accordance with Section 108-5 and are levied capital gains tax. Further, for individual taxpayers, 50% discount on long term capital gains may be availed if the discount method is applied (Nethercott, Richardson & Devos, 2016).
Based on the given facts, it is evident that the property has been purchased in the year 2000 not for profit motive but with the intention of being a weekend retreat place. Further, it was used as a hobby farm and since this it is clearly stated that the activity was pursued over the weekend on a small scale, further confirms that the activity of growing grapes on the farm is hobby only. Also it is noticeable that even though that some revenues are derived on account of selling wine at a stall and also through honesty box, but there is nothing that suggests that this is a regular practice and hence in accordance with the discussion above it would be fair to conclude that the income derived from selling wine would not be assessable income.
Further, in relation of the land being sub-divided and sold, it is noteworthy that the land was purchased in 2000 and at that time, there was no intention of making profit from the land and infact it was purchased with the intention of acting as a weekend retreat. Hence, the process of subdividing the land and selling it for profit would be outside the ambit of Section 15-15. Instead, capital gains would result from the transaction which would contribute to the assessable income.
The total cost base of the land would be $ 500,000 since no incremental taxes and expenses have been listed during the holding period.
Proceeds from the sale of land = $ 1,500,000
Hence, capital gains = 1500000-500000 = $ 1,000,000
As the capital asset has been held for more than a year, hence the capital gains would be long term and thus 50% discount would be available to Rommy in accordance with the discount method.
Therefore, net taxable gains = 50% of 1,000,000 = $ 500,000
The above would be contributed to the assessable income as a result of the given transactions.
References
ATO (1991), IT 2650, Australian Taxation Office, Retrieved on April 26, 2017 from https://law.ato.gov.au/atolaw/view.htm?Docid=ITR/IT2650/NAT/ATO/00001
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., & Snape, T. (2016), Australian tax handbook (8th ed), Pymont: Thomson Reuters,
Gilders, F., Taylor, J., Walpole, M., Burton, M. & Ciro, T. (2016), Understanding taxation law 2016 (9th ed)., Sydney: LexisNexis/Butterworths.
KPMG (2017), Rebooting central management & control, KPMG Website, Retrieved on April 26, 2017 from https://home.kpmg.com/au/en/home/insights/2017/03/rebooting-central-management-control-16-march-2017.html
Nethercott, L., Richardson, G. & 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, & Ting, A (2016) , Principles of Taxation Law 2016( 8th ed)., Pymont:Thomson Reuters.
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