Taxation Law: Residency and Tax Liability

TAXATION LAW
STUDENT ID:
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Case Study One
a) The issue of residency has been dealt with as per ss. 6-1 ITAA 1936. With regards to the
various tests that can be used to determine tax residency for individual taxpayers, the relevant
tax ruling is TR 98/17. As per this ruling, there are four tests that may be applicable which
are briefly described below (Woellner, 2015).
 Domicile Test – In order to pass this test, it is essential that the underlying taxpayer should be
a domicile holder as per Domicile Act 1981. Additionally, it is also imperative that the
permanent abode of the concerned taxpayer during the year under consideration must lie in
Australian territory only (Krever, 2016).
 Commonwealth Superannuation Test –This test is a specific test which is valid only for
Federal government employees who have been serving abroad. The criterion to determine tax
residency is to highlight if the underlying employee makes contribution to specified
superannuation schemes or not.
 183 day test – This is used to test if the underlying foreign resident is a tax resident of
Australia or not. The primary condition that ought to be fulfilled for passing this test is that
the underlying taxpayer should have been physically present during the concerned tax year
in Australia for a minimum period of 183 days. Also, it is imperative that the Tax
Commissioner should have not suspicion in regards to intention on the part of the taxpayer to
settle in Australia over the long term.
 Ordinary ‘residency’ test- Owing to the lack of clarity with regards to meaning of “reside” in
the Australian statute, the key parameters for this test have been outlined from the various
legal cases that act as precedents. These factors as summarized in TR 98/17 are indicated
below.
1) Purpose of visit to Australia – Typically Australian tax residency could potentially arise in
cases where the reason to visit is significant such as employment or study. In this regards, it
is noteworthy that visit to Australia for a short duration (such as 1 or 2 months) for
employment would not result in Australian tax residency as indicated in FC of T v. Pechey 75
ATC 4083.
2) Extent of personal and professional ties – The existence of strong personal and professional
ties with Australia in comparison to country of origin would make a valid case for Australian
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tax residency. The relevant case indicating the same is Peel v. The Commissioners of Inland
Revenue (1927) 13 TC 443 (Barkoczy, 2017).
3) Location of Assets – If the underlying taxpayer has significant assets (especially immovable)
located in Australia, it would potentially strength the case for Australian tax residency as the
taxpayer might stay for a long time (Reuters, 2017).
4) Living arrangement while in Australia – If the taxpayer tends to socially have a life in
Australia which is comparable to that in Australia, then the chances of Australian tax
residency would be enhanced (Woellner, 2015).
In wake of the above tests, the tax residency status of Sue needs to be determined who is a UK
resident. Clearly, the domicile test would be irrelevant for her as she does not hold Australian
domicile. Also, since she is not employed by the Federal government, hence the Commonwealth
superannuation test would not apply. The applicability of the other two tests for Sue based on the
given information is carried below.
1) 183 day test – It is evident that Sue arrived in Australia on August 1, 2018 and left Australia
on December 31, 2018. The total number of days of stay in Australia is less than 183 days
and hence she fails to pass this test.
2) Ordinary “Resides” Test – It is evident that Sue has come for employment which is a full
time position for a period of 4 months. Also, she has migrated to Australia with all her family
and hence has significant ties with Australia both professionally and personally. Based on the
above factors, she would be considered as Australian tax resident despite not having any
fixed assets in Australia.
For an Australian tax resident as per ss. 6-5(2)ITAA 1997, all sources of income would be taxed
irrespective of their geographical location. Hence, income for Sue would include the following
(Wilmot, 2016).
 Interest on bank account in London – Ordinary Income (s. 6-5 ITAA 1997)
 Salary and wages earned in London– Ordinary Income (s. 6-5 ITAA 1997)
 Salary and wages earned from BHP while in Australia– Ordinary Income (s. 6-5 ITAA
1997)
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