Taxation Law: Determining Residential Status and Main Residence Exemption

This article discusses the determination of residential status for taxation purposes and the main residence exemption in taxation law. It covers the tests for residency, the source of income, and the conditions for main residence exemption. The case of FCT v Rowe (1997) and FCT v Stone (2005) are also analyzed.

Running head: TAXATION LAW
Taxation Law
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Table of Contents
Part A:........................................................................................................................................2
Answer to requirement 1:...........................................................................................................2
Issues:.....................................................................................................................................2
Rule........................................................................................................................................2
Applications:..........................................................................................................................5
Conclusion:............................................................................................................................5
Answer to requirement2:............................................................................................................6
Part B:.........................................................................................................................................7
FCT v Rowe (1997) 35 ATR 432; 97 ATC 4317.......................................................................7
Issues:.....................................................................................................................................7
Facts:......................................................................................................................................7
FCT v Stone(2005) 59 ATR 50; 2005 ATC 4234......................................................................8
Issues:.....................................................................................................................................8
Facts:......................................................................................................................................8
Answer to B:..............................................................................................................................8
References:...............................................................................................................................10

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Part A:
Answer to requirement 1:
Issues:
The issues here is based on determining the residential status of the taxpayer inside
the denotation of “section 6 (1) of the ITAA 1936”. The issue also contains the assessment of
income from the source nation for taxation purpose.
Rule
The purpose of the “Taxation Ruling of IT 2650” is to offer rules in defining whether
the taxpayer that leaves Australia to live in foreign for instance on impermanent abroad work
jobs ceases to be an Australian resident for the purpose of taxation during their stay in
overseas nation.
The statutory meaning of occupant and inhabitant of Australia is defined under the
“subsection 6 (1) of the ITAA 1936”. According to the definition stated under “section 6 (1)
of the ITAA 1936” a person that resides in Australia and contains those person that has their
residence in Australia except it is understood by the taxation official that the taxpayer has the
permanent place of abode out of Australia (Barkoczy, 2014). The definition also includes
person that has been Australian for greater than six months of the year except the taxation
commissioner is the taxpayer has the permanent place of abode out of Australia and does not
have the intention of residing in Australia.
The above stated definition also provides four relevant tests in ascertaining whether the
taxpayer is regarded as the Australian resident;
 Residence in terms of the ordinary concepts
 The residence and perpetual place of residence test

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 The 183 days test
 The superannuation test
There are certain factors that must be ascertained while determining the residence status
of an individual. This includes;
 The intentional and the real length of time an individual resides in the foreign nation.
 The purpose of the taxpayer to entire return to Australia at certain point of time or
traveling in another country
 The duration of a person’s attendance in the overseas nation or the continuity of stay
in the overseas nation (Grange et al., 2014).
Resides Test:
The ordinary sense of the term reside is referred as to live permanently for a
considerable period of time (Jover-Ledesma, 2014). This implies that to have a settled or
usual abode where a person lives or at the particular place. If a person lives in Australia then
no other test is needed for considerations.
Domicile Test:
Domicile is observed as the legal concept which should be determined based on the
“Domicile Act 1982” and the common law rules that is developed by the court. The primary
common law rule states that a person obtains at birth the domicile of his or her origin (Kenny
et al., 2018). The court in “Henderson v Henderson (1965)” held that an individual usually
preserves the dwelling of their origin until one decides to acquire the domicile of their choice
in another country or acquires the domicile by the act of law (Sadiq et al., 2018). As held in
the leading case of “FCT v Applegate (1979)” the high court in its decision held that the
perpetual does not signifies everlasting or incessantly and the same is measured objectively
every year.

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While determining the residency test under domicile test the period and
continuousness of a taxpayer’s existence in the overseas nation must be considered. Further
consideration includes the permanency of association that a taxpayer has with a particular
place in Australia.
183 days test:
According to the 183 days test if an individual has actually been in Australia,
regularly or sporadically all through one half or six months of the income year will be
considered as the Australian resident (Taylor et al., 2018). The exception to this rule is that
unless the taxation commissioner is content that his usual place of abode is out of Australia
and he does not intends to take up the residence in Australia.
Superannuation test:
The superannuation test applies to the eligible employees of commonwealth public
servants and the family members are treated as the Australian residents.
Source of Income:
Employment income such as salaries or wages must be determined in terms of the
source where the services or duties were performed. The court of law in “FCT v French
(1957)” the high court decided that imbursement for services completed in New Zealand, as
such was the source of payment was New Zealand (Woellner et al., 2018).
According to the ATO there are certain types of foreign sourced income are exempted
from the domestic tax system. Under the section “23AG of the ITAA 1936” overseas
employment income obtained by the services provided by the Australian residents overseas
are exempted from the domestic tax.

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Applications:
As evident from the current case of James it is noticed that he is a ship officer to an
overseas company named Sails International Inc. that is incorporated in Bermuda. James
formerly owned a family home in Australia before his separated wife and children shifted to
Singapore. Under the reside test even though James has a residential home in Sydney
Australia, this alone cannot be regarded enough in determining residential status for taxation
purpose.
With respect to the Domicile Test under the “Domicile Act 1982” James will be
treated as the Australian resident even though James is residing outside of Australia in a ship.
Citing the event of “Henderson v Henderson (1965)” James residence is in Australia
and as a resident he has lived in Australia. James will retain the domicile here even though he
was absent abroad, unless he choose to forever travel in another nation. With respect to the
“FCT v Applegate (1979)” James permanent place of abode remains in Australia as he has
not conclusively demonstrated that his domicile of choice is out of Australia.
Under the 183 days James was only present in Australia for 80 days for whole of the
income year however, it is satisfied that his usual place of abode is in Australia and there is
no such intention of taking up residence outside Australia. The superannuation test does not
applies to James as he is not the commonwealth public servant.
Citing the event of “FCT v French (1957)” the source of employment income for
James was in Hong Kong as the terms of employment contract was signed in Hong Kong
being the source nation. Under the “section 23AG of the ITAA 1936” the foreign sourced
income of James will be excluded from domestic tax.

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Conclusion:
On a conclusive note James will be treated as the Australian resident as his domicile
is in Australia and his perpetual place of residence remains in Australia.
Answer to requirement2:
As a general rule a taxpayers main residence is the home which is owned by them and
typically in which they live (Ato.gov.au, 2018). A capital gains or loss originating from the
dwelling is disregarded if the taxpayer is an individual. A taxpayer is provided with main
residence exemption if the dwelling was the taxpayer’s main residence all through the period
of ownership and the conditions of “subdivision 118-B” are met. A taxpayer is allowed full
main residential exemption if the property has not been used to produce assessable income
such as renting out or carrying on any business (CCH iKnow, 2019). However, a partial main
residence exemption is provided to the taxpayer under “subdivision 118-B” if;
 The dwelling was the main house of the taxpayer for only a part of the period of
ownership period
 The dwelling was used by the taxpayer for generating income during the ownership
period.
As evident in the current situation of James, he will be allowed to partial main
residence exemption under “subdivision 118-B of the ITAA 1997” because the property was
rented out to his cousins and family for producing income. The house was James main
residence for only a part of the period of ownership.

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Part B:
FCT v Rowe (1997) 35 ATR 432; 97 ATC 4317
Issues:
The following case of “FCT v Rowe (1997)” is associated with the issues of whether
the legal expenditure that is incurred by the taxpayer to defend the disciplinary actions were
deductible. In respect to the availability of the deduction the federal court of law in the case
of Rowe referred to the case of “Inglis v FCT” where the cost incurred in proceedings
bought forward by the public servants against the employer for protecting the work
arrangements from the application of restrictions were allowed as deductible expenditure
(Bankman et al., 2018). It must be noted that in the case of Inglis the taxpayer employment
position was under the risk. While in the case of Rowe, the taxpayer was employed by the
living shire council as the Engineer and was suspended from the duty (Murphy & Higgins,
2016). The taxpayer was required by the council to explain the reason why Mr Rowe should
not be dismissed from the based on the numerous complains that were bought forward against
him. To make matters simple, there was the clear and existent danger of losing out the
position of employment.
Facts:
The federal court of law in the case of Rowe identified in numerous aspects that the
expenditure that was occurred by the Rowe cannot be qualified as capital in nature. The
federal court of law nevertheless made reference to the statement made in “Hallstorms Pty
Ltd v FCT” to support the argument that though expenses may possess the flavour of capital
however this cannot be considered determinative of whether the expenditure would be
allowed for deductions (Schmalbeck et al., 2015). The case of Rowe brings forward the fact

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of claim that to deduct the legal expenditure and the legal expenditure which is assumed to
take the quality of outgoing of capital in nature or in other words an outgoing of revenue
account based on the cause or purpose of occurring such expenses.
FCT v Stone(2005) 59 ATR 50; 2005 ATC 4234
Issues:
The taxpayer here Mrs Stone was regarded as the policewomen and also the javelin
thrower that derived salary of $39000 and also made around $180,000 in the form of prize
money and endorsements (Simmons et al., 2017). The taxpayer here was found to be carrying
on the business of professional athlete and the money was regarded as the income.
Facts:
During the year ended June 1999, Mrs Stone reported the taxable income for being a
police officer. The taxpayer also included in her tax return the receipts that totalled $136,448
that were made from javelin throwing (Seto, 2015). These receipts was not reported as the
taxable income. The sporting receipts of the taxpayer also included the prize money, grants
from the AOC, QAS, sponsorship fees and appearance fees. The taxation commissioner
treated all the receipts as the taxable income and the objection of Mrs Stone was disallowed.
Nevertheless, both the parties agreed that if the sporting receipts would be treated as income
then Mrs Stone would be allowed for deductions of $19,739. The court held that the taxpayer
carried on the business of sportsperson. Because the sporting activities gave rise to cash
receipts from the business were treated as ordinary income under “section 6-5 of the ITAA
1997”.
Answer to B:
Accordingly in the case of “FCT v Stone (2005)” the prize money and the
government grants that was received by taxpayer was treated as income based on the ordinary

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concepts (Mcdermott, 2018). Even though the profit making purpose was not treated as the
primary purpose, however the taxpayer here was aware that sporting success would result in
financial reward and acceptance of sponsorship by Mrs Stone reflected she turned her talent
to make money. While in the case of “FCT v Rowe (1997)” the receipt of grant was regarded
as too remote in respect to the employment of the taxpayer to be held as assessable income
and was appropriately classified as compensation for the loss of name and reputation of the
taxpayer.
The extract provides confirmations that even though the expenditure contained the
flavour of capital this would not contradict with the related expenditure given the purpose of
occurring the expenditure was to protect the ability of the taxpayer to continue its income
earning activity (Braithwaite & Reinhart, 2019). The purpose of expenses in Rowe’s case was
to maintain the present income earning position.

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References:
Ato.gov.au Your main residence. (2019). Retrieved from
https://www.ato.gov.au/General/Capital-gains-tax/Your-home-and-other-real-estate/
Your-main-residence/
Bankman, J., Shaviro, D. N., Stark, K. J., & Kleinbard, E. D. (2018). Federal Income
Taxation. Aspen Casebook.
Barkoczy, S. (2014). Foundations of taxation law 2014.
Braithwaite, V., & Reinhart, M. (2019). The Taxpayers' Charter: Does the Australian Tax
Office comply and who benefits?.
CCH iKnow | Australian Tax & Accounting. (2019). Retrieved from
https://iknow.cch.com.au/topic/tlp104/overview/main-residence
Grange, J., Jover-Ledesma, G., & Maydew, G. (2014). Principles of business taxation.
Jover-Ledesma, G. (2014). Principles of business taxation (2015).: Cch Incorporated.
Kenny, P., Blissenden, M., & Villios, S. (2018) Australian Tax 2018.
Mcdermott, Beth --- "Commissioner of Taxation v Stone (2005) 215 ALR 61: It's
Implications for the Role of Intention in Assessing Business Receipts, and the
Treatment of Gains Made by Athletes" [2006] SydLawRw 18; (2006) 28(2) Sydney
Law Review 373. (2019). Retrieved from
http://classic.austlii.edu.au/au/journals/SydLawRw/2006/18.html
Murphy, K. E., & Higgins, M. (2016). Concepts in Federal Taxation 2017. Cengage
Learning.

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Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., & Obst, W. et al. (2018)
Principles of taxation law 2018.
Schmalbeck, R., Zelenak, L., & Lawsky, S. B. (2015). Federal Income Taxation. Wolters
Kluwer Law & Business.
Seto, T. (2015). Federal Income Taxation: Cases, Problems, and Materials. West Academic
Publishing.
Simmons, D. L., McMahon, M. J., Borden, B. T., & Ventry, D. J. (2017). Federal Income
Taxation. Foundation Press.
Taylor, C., Walpole, M., Burton, M., Ciro, T., & Murray, I. (2018). Understanding taxation
law 2018.
Woellner, R., Barkoczy, S., & Murphy, S. (2018). Australian Taxation Law 2018 ebook 28e.
Melbourne: OUPANZ.