Western Sydney University - LAWS3070: Taxation Law Analysis

This report analyzes a taxation law case involving Peter, who transitioned from a temporary to a permanent resident in Australia. It examines the tax implications of his foreign rental income and income from mobile phone repair activities. The report references relevant taxation rulings like TR 98/17 and legislation, including ITAA 1936, to determine Peter's tax obligations. It differentiates between business and hobby income, applying factors from tax ruling 97/11 and case law like Evans v. FC of T to assess whether Peter's mobile repair income should be declared as business income. The report concludes by calculating Peter's ordinary income, considering his rental income, employment income, and income from mobile phone repairs and reconditioned phone sales. This analysis provides a comprehensive understanding of residency, foreign income, and business income taxation in Australia.

TAXATION LAW
LAWS3070 – EXAM

1.
With reference to the taxation ruling TR 98/17 (residency status of individuals entering
Australia), individuals living on temporary visas are counted as temporary residents in Australia.
In the given case, Peter arrived in Australia on 1 March 2016 and was living in Australia on
temporary visa till getting enrolled for a four year engineering degree course at Western Sydney
University. Further, he was granted with the student visa which is another form of temporary
visa and in the beginning of 2022, he finally granted with permanent residency status in
Australia.
Therefore, permanent residency of Peter leads him to become an Australian resident from the
beginning of 2022. In Australia, temporary residents for the purpose of income tax usually do not
pay tax on the income they earn from another country. This is applicable in the given case of
Peter who was residing in Australia on the basis of temporary visa. The treatment of foreign
income earned in the case of temporary resident is such where foreign income is not taxed in
Australia except the income that has been derived as a result of employment or services
performed in overseas land while residing in Australian as a temporary resident.
Through the above discussion, it has been identified that TR 98/17 states that individual like
Peter entering to Australia on a student visa would be deemed and treated as temporary
Australian resident and accordingly, his treatment for the tax purpose would be as follows:
Issue of the given case
Peter is a citizen of another country until 2021 that is, Hong Kong.
Peter arrived Australia in 2016 and living as a temporary resident there till 2021.
As per the case given, Peter has not lodge any tax return in foreign nation that is, Hong Kong
while residing in Australia. Also, the income derived from rental property in Hong Kong was
never report in his Australian tax return.
Peter was receiving AU$40000 per annum in the form of rent from investment property owned
in Hong Kong. He has assigned his father for collecting rent and making payment for expenses

related to repairs & maintenance and then deposit the net amount in his bank account in
Australia.
Relevant laws, legislation and taxation rulings
As found in the case of Miller VS FACT, that foreign residents are not required to pay taxes on
the income earned other than employment & services performed in foreign land. Also, under the
section 6 of ITAA 1936, individuals living in Australia on temporary visa are not treated as
Australian resident and accordingly their foreign income derived through investment property in
another country is not taxable in Australia. On getting permanent residency in Australia, the tax
ruling and legislations application Australian permanent residents become applicable and
treatment for the tax purpose is done according. Temporary residents are taxed on their
Australian sourced income only at the marginal rates applicable on permanent residents and the
biggest issue they face is they do not get tax free threshold and accordingly, they pay
comparatively higher taxes on initial basis. The decision pertaining to the residency is taken on
the basis of several factors such as duration & frequency of visits to Australia, type of citizenship
of visa hold, physical presence, purpose of visit to Australia and maintenance of place of abode,
etc. as identified through the case law of Miller VS FACT. As per the ITAA 1936 section 6, the
temporary residents are liable to pay tax in Australia on the income derived in the following two
ways:
 Income earned while living in Australia from foreign nation through performing
employment and services.
 Income earned through Australian source while living in Australia on temporary basis.
On the other hand, the permanent residents are required to lodge tax returns in Australia of all the
income received from any corner of the world including Australia. Anyone who is an Australian
resident or have become Australian resident during the year is required to pay tax on both
Australian sourced as well as foreign sourced income derived from any means.
Application
In the given case of Peter arriving in Australia in 2016 and residing on temporary visa till the end
of 2021 would be definitely deemed as an temporary resident of Australia and accordingly, he

would not require to lodge the property income derived in the form of rent from Hong Kong.
This condition would be consistently application right from his arrival till he get permanent
residential status in Australia. Accordingly, there is no requirement to lodge tax returns for the
investment income derived from foreign nation by Peter as the returns are required to be lodged
only in the event of employment & services performed in foreign nation. So, Peter has rightly not
lodge his rental income from Hong Kong property while being a temporary resident in Australia
till 2021.
However, Peter has granted with permanent residency in the beginning of 2022 which
leads to the application of terms & conditions that are meant for permanent Australian residents
for the tax purposes where it is necessary to declare the foreign sourced income derived from any
means. Therefore, the income to the extent that is relevant for the period of the previous year
during which he has hold the permanent residency status in Australia would must be lodged in
the Australian tax returns for the year ending 30th June 2022 (Foreign income exemption for
temporary residents. 2022). It is given that Peter was earning AU$40000 per annum or
AU$10000 per quarter and if we consider that Peter got permanent residency on 1st January
2022, then the rental income to the extent of AU$ 20000 for the two quarter of 2022 must be
declared in the Australian tax return for the tax year ending 30th June 2022 (Foreign income
exemption for temporary residents. 2022).
2.
Issue identified from the case
Peter has liking for fixing mobile phones and from 2020 he began repairing mobiles of his fellow
students & friends only during his spare time and charged for the cost of parts only. However,
from 2021, due to getting more requests he has fixed the charges for mobile phone repairing as
$25 per hour worked leading to earning $25000 from this mobile repair activity for the current
tax year ending 30th June 2022. However, he has not declared this income derived during the year
as a business income by considering it as their hobby.
Relevant case law, legislation and tax rulings

As per the Australian tax office, there is a thin line making a different between the business and
hobby which involves the intention & regularity with which the activity has been performed.
Businesses are run with the main motive underlining it is making profit which is not deemed to
be the primary reason in case of hobby. Usually hobbies are taken up in spare time in terms of
recreational pastime and may result in the generation of minimal income which does not led to
the payment of income tax. As per the tax ruling 97/11, several factors are taken into account to
determine whether a particular activity is regarded as a business or hobby, such as the following:
Some of the factors that determine whether one is in a business or not:
The decision made to start a business and doing anything to operate in a manner of business such
as:
Registration of the name of the business
Obtaining the ABN number
The intention of making profit or believing that profit will be made from the activity- even if it is
unlikely in the short term.
Repetition of the similar types of activities.
Consistency of the size and scale of his activity with other businesses in the industry.
Planning, organizing and carrying out the activities in a manner of business. This can include:
Keeping the record of transactions and maintaining books of accounts
Having a separate bank account for the business
Business operations are carried out from business premises
Possessing the required licenses or qualifications
Having the business name registered
There are chances where the activity is started with the purpose of hobby and later the intention
may get changed and the circumstances arising from the change in such intention indicates the

person may be carrying on a business as identified in the case of Evans v. FC of T 89 ATC 4540;
(1989) 20 ATR 922. Therefore, when the activities are performed on the regular basis and there
is a fixed charged for the product or services provided as a result of the performance of the
activity indicating the profit making motive of the individual, then the income derived must be
declared as the business income while filing Australian tax return.
Application
In case of Peter, whatever activities have been performed during the year 2020 would be
regarded as a hobby because the repair activity was performed in spare time only without the
underlying motive being of earning profit as he was charging just for the parts. However, from
2021, Peter has fixed the repairing charges on an hourly basis indicating his profit making
intention as well as the regularity of performing the activity and accordingly, the income derived
through repair activity during the tax year ending 30th June 2022 amounted to $25000 must be
declared by him in his Australian tax return by treating it as a business income.
3.
As per the Australian Tax Office, the ordinary income means income that is considered by every
as an income on the basis of ordinary concepts.
Through the given of Peter, it has been identified that he has become the permanent resident
from the beginning of the 2022 and accordingly, the following income would be treated as his
ordinary income by referring to the section 6.5 of the Income Tax Assessment Act 1997, where it
has been defined that all income accounts for ordinary income whether derived directly or
indirectly from all the sources during a financial year whether within or outside Australia
(Assessable income (in taxation). 2022).
Rental income of the entire tax year from the Hong Kong investment property = it is foreign
sourced income of the resident (Peter), hence would not be included in ordinary income.
Employment in a café at Parramatta = $1000 per month and Peter remains employed for three
months of the current tax year, hence the ordinary income here = $3000
Income from repairing mobile phones = $25000

Income earned from selling reconditioned phones = $12000
Total ordinary income derived during the current tax year = $3000 + $25000 + $12000 =
$40000.

REFERENCES
Foreign income exemption for temporary residents. 2022. [Online]. Available through <
https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Income/Foreign-income-
exemption-for-temporary-residents/>
Foreign income exemption for temporary residents. 2022. [Online]. Available through <
https://www.ato.gov.au/General/COVID-19/Support-for-individuals-and-employees/Residency-
and-source-of-income/#Temporarilyoverseas>
Assessable income (in taxation). 2022. [Online]. Available through <
https://sklawyers.com.au/dictionary/assessable-income-taxation/>
Australia: When does your hobby become your business?.2022. [Online]. Available through <
https://www.mondaq.com/australia/income-tax/1161640/when-does-your-hobby-become-your-
business>