Australian Income Tax and Practice

AUSTRALIAN INCOME TAX
AND PRACTICE

TABLE OF CONTENTS
ISSUE..............................................................................................................................................1
RULES.............................................................................................................................................1
APPLICATION...............................................................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

ISSUE
Mr. Nguyen is an Australian living in Sydney for many has been working as an engineer
in a reputable firm. In 2015 he divorced his wife and kept primary residence purchased for
$150000 in 1990, and the spouse was given rental property and custody of their son. He moved
to Saudi Arabia for employment starting from 5th July 2016 signing an open ended contract. The
contract specified that the payment would be made in USD than can be deposited in bank of
choice. In this case Nguyen left on 1st July, 2016 and still at July 2019 working with same firm.
His salary was being in Australian account and has not rented the house of Australia. Address on
licence has not been changed and the gun licence has also not been handed over. Nguyen has not
informed income tax authorities about the seizure of his Australian tax residence.
He has filed returns for year 2017 and 2018 as non-resident of Australia in which income
sourced from Australia were declared. He used to visit Australia in every January and stayed
there for whole month with his son. Now the issues that are arising are that his income is subject
by ATO because he has filed return as non-resident even after getting his salary payment in
Australian account. Address also shows him as an Australian resident that is with authorities. Mr
Nguyen is suggested to amend the returns for 2017 and 2018 by ATO as resident. The laws state
resident is to pay tax on every income accruing to him worldwide. ATO has given assurance of
not imposing penalties if return is amended within 28 days. Mr. Nguyen wants an expert
suggestion for dealing with the case whether he should amend the return or not and other
possible suggestions.
RULES
Australian Income Tax
IT in Australia is laid by federal government over taxable income of corporations and
taxable incomes. Progressive rates are used for individuals for levy of income tax. Income tax is
an important revenue generating source in taxation system of Australia. Tax is collected by
Australian Taxation office for federal government. Difference between incomes which is
assessable after allowing deductions is taxable income1.
For understanding the tax situations residential status is to be determined first. The rules
that apply in Department of Home Affairs are not used for determining the residential status of
1 International tax for individuals. 2019. [Online]. Available through :
<https://www.ato.gov.au/Individuals/international-tax-for-individuals/work-out-your-tax-
residency/>.
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an individual. It means individual may not be as considered Australian or permanent citizen but
will be considered for tax purpose as Australian resident2.
Provisions for foreign income
If an individual for tax purpose is considered as an Australian resident than the
worldwide income will be taxed and it is to be declared in income tax return as foreign income.
It will include business incomes, pensions and annuities, investment incomes and capital gain
over foreign assets3. Income can have double taxation effect if source country withholds the tax.
For overcoming Australia has exemption and credit systems and has signed treaties with over 40
countries.
There is an exchange of financial information by participation with tax authorities of
foreign. This was held for getting whether Australian residents are complying tax laws of
Australia related to their foreign accounts. And hindrance of income will levy fines and
penalties. If an individual is working outside Australia or providing services outside Australia
than it will have to declare all incomes as if they were earned by him in Australia 4.
There are defined tests for determining the residential status of an individual such as
Residency Tests which is further divide into sub parts which are Resides test which is primary
test of residency tax. For determining residential status various factors are used. Domicile Test
says if domicile of individual is in Australia unless it is confirmed abode of individual is outside
Australia. Test of 183 day applies to only those who arrives Australia this test will consider as
resident if his presence exceeds above half of the income year with breaks or continuously.
As per income tax department 'Tax Resident' for Australia is defined as:
 Has lived in Australia always or has arrived Australia for living.
 Is residing in Australia for an income year exceeding half.
 Is an overseas student who is enrolled for study course whose duration exceeds six
months.
2 Mangioni, V., 2015. Land Tax in Australia: Fiscal reform of sub-national government.
Routledge.
3 International tax for individuals. 2019. [Online]. Available through :
<https://www.ato.gov.au/Individuals/international-tax-for-individuals/work-out-your-tax-
residency/>.
4 Freebairn, J., 2018. Federalism and Tax reform. Australian Economic Review. 51(2).
pp.262-268.
2

There are 3 tax scenarios for taxation of individuals residing abroad.
1. Individual remains tax resident of Australia and will be taxed on worldwide income,
credits will be given for foreign tax paid.
2. Individual remains tax resident of Australia and also becomes tax resident in foreign
country. If that country is under the treaty than tax levy ability will be excluded or
limited.
3. Individual can become in Australian laws non-resident and income will be charged only
that are accruing from Australian source5.
For ceasing to be Australian tax resident individual would be required to depart Australia for at
least two years with intention of living abroad, is accompanied by immediate dependents/family
and has sold out or rented house in Australia.
In Australia residents are required to pay tax for income which is earned from
employment in a broad. Resident has the opportunity of claiming offset for foreign income tax
where income is already taxed in foreign country.
Case Laws
Harding vs Commissioner of Taxation
The case highlights about initiative about timeliness of initiative and unpredictability which were
faced by departing Australian tax payers while interpretation and application of current
qualitative tax residency rules for individuals.
Mr Harding before 2006 has worked 15 to 16 years in Middle East after which he
returned to Australia with children and spouse and remained over there for 2009. During this
time he took up the position in Saudi Arab. Fully furnished apartment of 2 bedrooms was
occupied in Bahrain and it was planned that children and wife will live in family home in
Australia on temporary basis. After the schooling, in 2011 they will be moving to Bahrain. But
his wife refused to shift from Australia and they separated shortly. The issue at first instance was
addressed in court by single judge which was handed over in 2018, June. The decision stated that
Harding is tax resident of as per Australian Laws as he was not having permanent place of abode
outside Australia which means in Bahrain his accommodation was on transitory and temporary
basis. The court's decision was challenged by Harding by a further appeal about the tax residency
5 Christians, A., 2017. Buying in: Residence and Citizenship by Investment. . Louis
ULJ. 62. p.51.
3

and it was subsequently addressed by the bench of three judges (full court). And it was found
that Harding is not Australian tax resident for relevant year.
Issue was about the residency status of Mr Harding for year 2011. In the first instance,
commissioner's argument was about the place of abode. Enquiries were made for checking his
status in 2011 and all findings gave evidence of Harding’s stay in Bahrain in 2011. Court stated
that for identification of permanent place country or place should be considered in which he is
residing on permanent basis. Accommodation in Bahrain was considered as permanent place of
abode6.
Resides test said that Harding was not residing in Australia and this conclusion was
confirmed by full court. But the commissioner stated that family was residing in Australia and
also Harding was visiting Australia for staying in family home. Full court considered that
intention of Harding was of not returning to Australia after departure in 2009. Court further
clarified that place of living should be considered as home. Commissioner's argument was reject
by full court that tax payer was residing in Australia. The court finally decided that connections
and quality were supporting findings that Harding is not an Australian resident7.
APPLICATION
The present case is about the residential status of Nguyen as he left Australia for
employment in Saudi Arabia. The laws of income tax are different than other laws for deciding
the tax resident of Australia. The income tax laws of Australia provides for various provisions
for determining the residential status of individual. The laws has given tests for checking the
status of individual as resident. Nguyen has to first determine its residential status so that he can
argue about the returns that are filed for year 2017 and 2018.
The residential status is defined by giving resides test which talks about the physical
presence, purpose and intention, family and employment ties8. Considering this tests Nguyen was
not physically present in Australia in year 2016 and 2017 and visited only for one month.
6 Harding vs Commissioner of Taxation. 2019[Online]. Available
through :<https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/
2019/2019fcafc0029>
7 Hulse, K. and Yates, J., 2017. A private rental sector paradox: unpacking the effects of
urban restructuring on housing market dynamics. Housing studies. 32(3). pp.253-270.
8 Resides Test. 2019.[Online]. Available through
:<https://www.ato.gov.au/individuals/international-tax-for-individuals/in-detail/residency/
residency---the-resides-test/>
4

Nguyen departed from Australia with intention of not returning back and is still residing in Saudi
Arabia. Though his family was residing in Australia but he has divorced with his wife.
Second test was about place of abode known as domicile test. This test is about the
permanent home of individual in Australia. Domicile refers to place of origin or by choice is
permanent home. Degree of permanence should be there in place of abode and could be
contrasted over transitory and temporary place of abode. In this test Nguyen is residing in Saudi
Arabia and has left Australia. As per general rule he should be considered as tax resident as his
place of residence is in Australia9.
The issue is faced for not removing his status from the record of other authorities and was
receiving in his Australian account. As per the ruling in case of Harding vs Commission of
Taxation it was stated that mere accommodation is not to be regarded for place of abode rather
his intention of departure from Australia is to be considered. The case states that an individual is
considered as a non-resident if has left Australia with intention of not returning. Applying the
ruling in the case of Nguyen he has also departed Australia with intent of staying in Saudi
Arabia for ever. The argument of ATO cannot be considered viable as he cannot be considered
tax resident of Australia as per the ruling of above case. Getting of salary in Australian account
would not change his residential status or intention. The case is better explained by following
example.
B Australian tax resident has got job offer of working abroad for 3 years, with an option
of extending it to other 3 years. B his spouse along with children took the move. Property in
Australia was retained and was decided to be rented during their stay outside. B is not certain
about exercising the option to extend it for further 3 years10.
B over here is considered as foreign resident.
Reasons: length of physical absence is more than that is consistent in Australia in resides
tests.
Permanent place of abode is considered outside Australia because length of ti me
spending, establishment of home overseas. Fact of retaining is relevant but not persuasive for
9 Resides Test. 2019.[Online]. Available through
:<https://www.ato.gov.au/individuals/international-tax-for-individuals/in-detail/residency/
residency---the-resides-test/>
10 Ong, R., Wood, G. and Colic-Peisker, V., 2015. Housing older Australians: Loss of
homeownership and pathways into housing assistance. Urban Studies. 52(16). pp.2979-
3000.
5

overcoming other findings on other factors foreign income of Australian residents working
overseas, 2019.
The example best fits to the present case of Nguyen and give reasons why he should not be
taxed as tax resident.
CONCLUSION
From the above study it can be concluded that Mr. Nguyen should not amend his income
tax returns for the year 2017 and 2018 for filing it as non-resident. The statement is supported as
per the rules which are given in tax laws of Australia and the famous case law of Harding vs
Commissioner of taxation. It was given that text of law cannot be substituted and its application
to facts should be as per its meaning. Individuals are taxed on their residential status and in this
case Nguyen is not considered as tax resident as the length of stay more than considered for
residing. The departure was also made by Nguyen with an intention of not returning to Australia.
Just having house property in Australia is not considered enough for deciding the residential
status. Therefore Mr Nguyen should not amend the returns as his residential status has findings
of his residence abroad.
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REFERENCES
Books and Journals
Christians, A., 2017. Buying in: Residence and Citizenship by Investment. . Louis ULJ. 62. p.51.
Freebairn, J., 2018. Federalism and Tax reform. Australian Economic Review. 51(2). pp.262-268.
Hulse, K. and Yates, J., 2017. A private rental sector paradox: unpacking the effects of urban
restructuring on housing market dynamics. Housing studies. 32(3). pp.253-270.
Mangioni, V., 2015. Land Tax in Australia: Fiscal reform of sub-national government.
Routledge.
Ong, R., Wood, G. and Colic-Peisker, V., 2015. Housing older Australians: Loss of
homeownership and pathways into housing assistance. Urban Studies. 52(16). pp.2979-
3000.
Online
International tax for individuals. 2019. [Online]. Available through :
<https://www.ato.gov.au/Individuals/international-tax-for-individuals/work-out-your-tax-
residency/>.
Foreign income of Australian residents working overseas. 2019.[Online]. Available through :
<https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Foreign-income-
of-Australian-residents/Foreign-income-of-Australian-residents-working-overseas/>.
Harding vs Commissioner of Taxation. 2019[Online]. Available
through :<https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/
2019/2019fcafc0029>
Resides Test. 2019.[Online]. Available through
:<https://www.ato.gov.au/individuals/international-tax-for-individuals/in-detail/residency/
residency---the-resides-test/>
Residential Status. 2019. [Online]. Available through
:<https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/
2019/2019fcafc0029>.
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