Tax Law: Residency Tests and Tax Implications for Individuals

This document discusses the four residency tests for tax purposes in Australia and their application to individuals. It also explains the tax implications of foreign income and rental income for Australian tax residents and foreign tax residents. The document cites relevant tax rulings and cases to support the analysis.

TAX LAW
STUDENT ID:
[Pick the date]

Question 1
a) The four tests of residency that are applied for tax residency of individuals in accordance
with ss.6-1 ITAA 1936 are highlighted as follows (Barkoczy, 2017).
 Domicile test – For Australian domicile holders
 183 day test – Foreign domicile holders visiting Australia
 Ordinary “resides” test - Foreign domicile holders visiting Australia
 Superannuation test – For Federal government employees stationed abroad
The tax payer Jack despite being a Germany passport holder can be considered an Australian
domicile holder considering that he has spent more than 10 years in Australia and lives with
his family and has significant assets. As a result, the only test from the above list that is
relevant to Jack is domicile test (Deutsch, Freizer, Fullerton, Hanley, & Snape, 2015).
Besides being an Australian domicile holder, as per TR 98/17, domicile test also requires that
the permanent abode must be in Australia. It is imperative to note that even while the
taxpayer can be outside Australia, it is possible that the permanent abode is in Australia only
(Coleman, 2016). The various factors that the Tax Commissioner takes into consideration to
determine the place of permanent abode are highlighted in IT 1650 and summarised as
follows (Krever, 2017).
 Extent of deviation between the intended foreign stay and actual stay along with
underlying reason.
 Any action of setting any home or buying asset in foreign place of work.
 The extent of duration of continuous stay in foreign land.
 The amount of association with Australia during the time the taxpayer is living
abroad.
 The presence or absence of intention to return to Australia on part of the taxpayer.
Applying the above factors, it would be correct to conclude that permanent abode of Jack is
in Australia only when he is working in China. The various explanations for this conclusion
are as follows.
 He left his wife and children in Australia only and therefore has personal connection
with Australia.

 In China, the living arrangement was makeshift and food was provided by the
employer.
 His salary was credited in Australian bank account and he also maintained his club
membership besides retaining significant amount of Australian assets that highlight
professional and social connection with Australia.
 No deviation is observed between the actual and intended China stay as it lasted for
exactly 9 months.
 The period of stay was not substantial as indicated in the F.C. of T. v. Jenkins 82 ATC
4098.
As a result, the domicile test is passed and Jack would be an Australian tax resident for
2017/2018 tax year.
b) Since Jack is an Australian tax resident, hence as per ss. 6-5(2) ITAA 1997, income from
all sources (i.e. domestic and foreign) would be taxable. It is apparent that during the period
when Jack was in China, he was employed with OD, a Malaysian company and hence the
underlying source of income would be categorised as foreign. However, despite the income
source being foreign, the same would be taxed as ordinary income (s. 6-5 ITAA 1997 in
Australia (Reuters, 2017).
Question 2
In order to highlight the tax implications of the given transactions, the first step is to
determine the tax residency of Timothy Tower and his wife Eliza for the tax year 2017/2018.
The tax residency of individual taxpayer has been discussed in ss. 6(1) ITAA 1936. This
highlights the various tests that may be applied for determining the tax residency. These have
been detailed in the tax ruling TR 98/17 (Sadiq et. al., 2015). Based on the given facts, it may
be assumed that Eliza is Australian domicile holder and has been shifted to Singapore in
order to discharge her personal obligation as her husband has been relocated to Singapore.
Considering the various tests available, only one test is applicable to Eliza namely the
domicile test.
As per the domicile test, there are two key requirements which the underlying taxpayer ought
to satisfy in order to pass the test. One of these conditions is that the taxpayer should have an
Australian domicile. The other condition is that even while the taxpayer may be outside

Australia for discharge of professional or personal obligations, but the permanent abode
should still be in Australia only (Barkoczy, 2017). The relevant case that ought to be
discussed here is F.C. of T. v. Applegate (1979) ATR 899. In this particular case, the taxpayer
having Australian domicile was sent abroad by Australian company to set up foreign
operations for a period of three years. There was intention both on the part of the company
and also the taxpayer that once the professional commitment is over, the taxpayer would
return to Australia (Krever, 2017). However, the court opined that if there is absence from
Australia for a substantial period, then even if the taxpayer wishes to return to Australia, it
would be considered that there is shifting of permanent abode from Australia to the foreign
location. This substantial period has been defined as atleast two years (Reuters, 2017).
Considering the F.C. of T. v. Applegate case decision, it would be appropriate to conclude
that there is a shift in permanent abode to Singapore for Eliza since the couple has shifted for
a substantial period of five years. Owing to permanent abode being shifted out of Australia,
Eliza would be categorised as foreign tax residents. The tax residency is pivotal as in
accordance with ss. 6-5(3) ITAA 1997, the assessable income for foreign residents would
include the income derived from only Australian sources. This is in sharp contrast with
Australian tax residents for which income from both domestic and foreign source would be
taxed (Sadiq et. al., 2015).
With regards to Eliza, income is received in the form of rental income from leased Australian
residence to the tune of $ 5,000 and this would be considered as taxable income as the
underlying source of income is Australia. In relation to the dividend income, while the
proceeds of $2,500 fully franked dividends would be considered as ordinary income but there
is difference in treatment of dividend income for residents and non-residents (Coleman,
2016). With regards to Eliza, she will not be required to add the franking credit associated
with the dividend income in the assessable income in Australia and also no tax rebate on the
franking credit may be availed by Eliza.
Hence, assessable income for Eliza = 5,000+2,500 = $7,500

References
Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University
Press.
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional)
Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., & Snape, T. (2015) Australian tax
handbook. 8th ed. Pymont: Thomson Reuters.
Krever, R. (2017) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON
LAWBOOK Company.
Reuters, T. (2017) Australian Tax Legislation (2017). 4th ed. Sydney. THOMSON
REUTERS.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., &Ting, A.
(2015) Principles of Taxation Law 2015. 7th ed. Pymont: Thomson Reuters.