Taxation Law: Residential Status and Dividend Taxability

This document discusses the residential status of a person in Australia and the taxability of dividends paid to residents and non-residents. It also covers the provisions related to taxation of income based on residential status.

Taxation law
Table of Contents
Case 1...............................................................................................................................................3
Issues............................................................................................................................................3
Taxation provisions.....................................................................................................................3

Residential status.....................................................................................................................3
Application..................................................................................................................................6
Conclusion...................................................................................................................................7
Case 2...............................................................................................................................................8
Issue.............................................................................................................................................8
Taxation provisions.....................................................................................................................8
Application..................................................................................................................................9
Conclusion...................................................................................................................................9
References......................................................................................................................................11

CASE 1
Issues
The assessment of income is based on the residential status of the person. The income tax
assessment act 1997 specifies the several provisions related with the changeability of the income
tax in case of a resident or non-resident person of Australia (Wilkins, 2015). The present study
revolves around determining the residential status of the person named as Jack. Jack has the visa
from his first visit Australia in 2007 until the end of 2018 income year. Jack is working as a
marine engineer on a seagoing barge owned by an Australian company; subsequently, the barge
was leased to a Malaysian company for use in carrying out work in China. Jack accepted the
employment and left Australia on 8 July 2017. However, his son and wife remain in Australia.
Further, he terminated the contract return to Australia after giving none month services in China.
In China, the accommodation provided by the company was in a temporary nature. In Australia,
he owned the residential investment unit.
Taxation provisions
It is possible for the person that he/she may consider as the resident of the two countries at the
same time. It generally happens in a situation where the person is working in another country for
more than 183 days and whose permanent residence in their home state (Burkhauser, Hahn, and
Wilkins, 2015).
Residential status
The income tax is charged on the basis of the residential status of the person. The Income Tax
Assessment Act 1997 defines the norms and regulations for ascertaining the residential status of
the person. As per the Income Tax Assessment Act 1936, subsection 6(1), a person is regarded as
the resident of Australia, if he/she lives in Australia in the ordinary sense (Chardon,
Freudenberg, and Brimble, 2016). As per the case law R v Hammond (1852), place of residence
is the place where the person lives with his family. The taxation ruling 98/17 of the income tax
states the residential status of the person who coming to Australia such as tourist, migrants, and
students studying in Australia, pre-arranged employment contract and many others and
prescribed the conditions in which the person is regarded as the resident of Australia

(Richardson,Taylor, and Lanis, 2015). The residential status is determined by considering the
overall situation of the individual, which includes the following aspects –
 The reason for living in Australia by the person.
 The extent to the commercial transaction, business and services established in Australia.
 The possession held by the individual in Australia (Kudrna, Tran, and Woodland, 2015).
 The extent to which individual is connected with the social activities in Australia.
Moreover the normal meaning of the word ‘resides’ is defined under subsection 6(1) of the
income tax assessment act 1936. If the person does not satisfy the condition prescribed under the
common law test of residency, then also he/she may consider the resident of the Australia if
he/she satisfies any conditions given under the statutory test of residency, which is defined under
subsection 6(1) if the Income tax Assessment Act 1936 (Boyd, 2018).
(a)Residency according to ordinary concept
Whether the individual is regarded as the resident or non-resident, is based on several factors. It
is the question of fact, which includes the following aspects –
 The effects of the individual are preserved in Australia or in the country of origin.
 The place of permanent residence is in the country of origin and is accessible by him /her
as required (Matthew, 2018).
 Whether the individual carried out any activity in the country of origin.
 If the person is not living in Australia because of the commercial and business purpose,
then it is not the sufficient condition that he/she not considered as the resident.
 The extent to which the bank account transactions or any possession held by the
individual in Australia.
 Whether any commercial or business is established in Australia by the migrants (Enticott,
& et al. 2016).
All the above aspect should be taken into account for determining the residency status of the
person.
(b)The domicile test

If the person possesses the permanent residence in Australia, then he/she considered as the
resident of Australia, except if the commissioner is satisfied that the person owns the permanent
house on any other country. According to the Domicile Act 1982, the person gets the residency
by the choice if the individual build the house for an indefinite period in Australia (Henderson V
Henderson 1965).
(c)The 183days test
A person is considered as the resident of Australia if he/she resides in Australia for more than
183 days in a tax year either for a continuous period or in parts.
(d)The superannuation test
The superannuation test is regarded as the alternative method of an ordinary test of residency.
This method is generally applicable to the person who works outside Australia for the
government of Australia. If the person because of the superannuation acts 1976 working outside
Australia then also he/she comes within the category of the resident of Australia. Further, the
spouse and his children below the age of 16 years are also regarded as the resident of Australia.
Apart from the above provision, the government of Australia also entered into the double
taxation avoidance agreement with many countries, which leads to the avoidance of the tax
twice. In other words, it can be said that double taxation avoidance agreement leads to the
avoidance of the double tax by the taxpayer on their income generated from the residency
country as well as from the source country.
Application
The residential status of Jack for the year 2017-18
In the present case, it is given that Jack holds the visa of Australia from 2007 to 2018. The
manner in which Jack arranges the social and economic activities of life is an important factor in
ascertaining the residential status. In the residency test, the conditions are determined by having
regard to all situation and relevant facts. Further, the intention and purpose of presence, social or
living arrangement, possession and location of the assets and connection of the business and
family are the factors which are considered for the residential status. In the given study, since the
Jack hold the visa of Australia for the year 2017-18 also. The family of the Jack live in

Australia, along with this he also holds the assets in Australia which the residential unit. By
considering the above factors, it has been concluded that Jack is considered as the resident of
Australia for the year 2017-18. The issue is that the jack worked in China did not make any
impact on the residential status; he is regarded as the resident of Australia.
Sources of income of jack while working in China
As per the rule describes in the income tax assessment act, the resident of Australia are generally
taxed on their whole income whether it is generated in Australia or outside Australia. However,
in the case of the foreign resident, the income tax is charged only on the Australian source of
income which is derived and received in Australia. In the given study, the Jack is considered as
the resident of Australia. Therefore tax is charged on the all income whether it is earned in
Australia or outside Australia. Further, it is given that Jack received the salary in the bank
account of the Australia on which the tax is already deduced as per the norms of Malaysia. Since
the government of Australia entered with the double taxation avoidance agreement with the
many countries, therefore the person is not required to pay the tax on the same income twice.
Thus, the tax which is already deducted, the jack can avail the credit of that tax at the time of
computing the income tax levy in Australia.
Conclusion
On the basis of the above analysis, it has been concluded that Jack is considered as the resident
of the Australia and income earned from the Ocean development Ltd, is charged in Australia and
he can avail the credit of the tax already deducted in Malaysia because of the double taxation
avoidance agreement.
CASE 2
Issue
Different provisions are defined for the taxability of the dividend paid to the resident or the non-
resident person of Australia (Ainsworth & et al. 2016). In the given study the person named as
Timothy tower transferred to the Singapore office of Global AIH Ltd, for five years. His wife
also went there. She received the $ 5000 as rental income from the house situated in Sydney and

$ 2500 in fully franked dividend from Global AIH Ltd. She incurred $5650 as interest payment
for the funds borrowed for purchasing the shares of Global AIH Ltd.
Taxation provisions
The income tax is charged as per the resident status of the person. The residential status is based
on certain rules, which are already described in the earlier problem. If the person is resident of
Australia, then the income tax is charged on the Australian sourced income as well as income
generated outside of Australia (Ainsworth & et al. 2018). In the case of FCT v Mitchum(1965),
the income generated by the Mitchum is not considered as the Australian sourced income,
therefore, it is not taxable for the non-resident. The non-resident of Australia, also receives a
dividend from the Australian resident company. However the tax treatment is distinct from the
resident shareholders (Ainsworth & et al. 2016). If the person is non-resident of Australia, the
franked amount of dividend paid by the Australian resident company is not subject to
withholding tax and Australian tax. Moreover, the withholding tax is a levy on the unfranked
amount of dividend. Further, the person cannot claim any franking tax offset for the franked
dividend (Cannavan, and Gray, 2017). Along with this, he/she cannot entitle any franking credit
related to franked dividend to decrease the amount of tax chargeable on another source of
Australian income (McClure, & et al. 2018). Further, in the Australian tax return, the person
should not include the amount of any franking credit or franked dividend.
In general section 51 of the act says that deduction is allowed if the outgoings are incurred for
the gaining and producing the assessable income and the same judgment was given in the legal
case of Evans V FCT (1986). However in case of payment of franked dividend to the non-
resident of Australia, any expenses incurred for generating the dividend which is not assessable
to Australia, cannot be claimed by the person (Mayo, 2018).
Application
In the given case Eliza tower is considered as the non-resident of Australia as she went to
Singapore on 10 July 2017 for the five years. The income received from leasing the house in
Sydney amounted $ 5000 is regarded the Australian sourced income. Therefore it is taxable in
Australia. Further, she also received the $2500 in fully franked dividend from the Australian
residence company. As per the above provisions of the dividend, $2500 is not subject to
Australian tax or any withholding tax (Nguyen, 2016). Moreover, she also incurred the expenses

of $ 5650 as interest in borrowing taken from the bank and this fund is used for buying the shares
of the company. However, she is not entitled to claim any expenses incurred for getting the
dividend which is not assessable to Australia.
Conclusion
On the basis of the above analysis it has been observed that for the non-resident of Australia, the
Australian sourced income is taxable (Stewart, 2017). Further, the franking dividend received by
the non-resident is not subject to Australian income and withholding tax (McLaren, and
Cormick, 2018).

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