Australian Taxation Law: Case Study on Residency and Income Sourcing

This case study analyzes the tax residency of ABC Ltd., a Hong Kong-incorporated palm oil company, and Peter, an Australian accountant managing its Brunei plantation, along with his wife. It applies Section 6(1) of ITAA36 and TR 98/17 to determine residency based on factors like incorporation, central management control, physical presence, domicile, and superannuation tests. The study examines ABC Ltd.'s management location in Sydney versus Brunei and Peter's intent to reside in Brunei, considering factors like family relocation and property rental. It also addresses Peter's wife's residency status and whether Peter's accounting business qualifies as a Small Business Entity (SBE). The conclusion recommends ABC Ltd. be considered an Australian resident for tax purposes in 2015 due to management control in Sydney, but a foreign resident for 2016-2017. Peter is deemed a non-resident for 2015-2017, taxable only on Australian-sourced income, and eligible for cash-based accounting as an SBE.

Running head: TAXATION
Taxation
Name of the Student:
Name of the university:
Authors note:

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Table of Contents
Issues:.........................................................................................................................................2
Laws applicable:.........................................................................................................................3
Application of the laws:.............................................................................................................6
Conclusion and recommendation:..............................................................................................8
Reference..................................................................................................................................11

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Issues:
1) ABC LTD.:
The company in the given scenario is incorporated outside Australia and majority of
its shareholders reside outside Australia. However, all the members of the board of
directors reside within Australia and the central management and control of the
company is exercised from Australia.
In the year 2016 the operations of the business in Brunei grew to such an extent that
the Board of Directors decided that the decision taken in monthly meetings held in
Sydney would be tentative and one of the Directors would have to visit Brunei to
communicate and manage the business together with the plantation manager of the
company in Brunei. The other decisions would continue to be taken by other members
of the Board of Directors from Sydney.
2) Peter (plantation manager):
In this scenario peter is a plantation manager of ABC LTD. he shifted to Brunei in the
year 2015 under a contract for two years. While under employment he took his wife
and daughter along with him and also leased a big house which came as package with
the employment. He along with his wife also joined the local golf and bridge club.
Their daughter was admitted to a boarding school. While in employment, he rented
out his house in Melbourne for two years (Gitman et al. 2015). The rent from the
house was paid into his Australian bank account which was accessed by him using his
Australian credit cards. Peter also received dividends from a Singapore company as a
consequence of his investment in the shares of the company.
On returning to Australia Peter started his accounting services as a sole proprietor. He
billed a customer by $8000 on 28th June 2017 but cash was not received in respect of
the transaction.

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3) Peter’s wife:
Peter’s wife accompanied him to Brunei and while in Brunei she took up a part time
job as an English teacher. She also joined the local Bridge and Golf club.
After returning to Australia she assisted her husband in his profession as a
receptionist.
Laws applicable:
1) In order to determine the tax residence of a company the following criteria’s are
looked upon by the statute under section 6(1) of ITAA36
a) Place of incorporation-
A company incorporated in Australia is automatically resident of Australia
irrespective of any other factors.
b) Meaning of the central management and control-
Two limb tests is conducted to
c) Who exercises central management and control?
d) Where is the central management and control exercised?
The relevant case study to this includes Baywater Investments Limited & ORS vs.
Commissioner of Taxation; HUA WANG Bank BERHAD vs. Commissioner of
taxation.
2) In order to determine the residency of an individual for taxation purpose the statute
looks for the following criteria’s under TR 98/17
a) Ordinary test of residence-
An individual is considered to be resident if it is taken that the person is in
Australia to reside. There is no single test in respect of determining whether the
person is in Australia to reside or not several factors have to be considered (Saad
2014).

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b) 183 day test-
If the person spends more than half the income year in Australia, whether
continuously or with breaks he will be considered to have a constructive residence
in Australia (Cardew 2017).
c) Domicile test-
A person is resident of Australia if his domicile is in Australia. Unless it is proved that
his permanent abode is outside Australia and he has no intention of taking up residence in
Australia (Al-Mamun et al. 2014).
The domicile of an individual is determined by the Domicile act 1982:
- Domicile at origin of birth
- Choice of Domicile i.e. where the tax payer wants to make their home
indefinitely.
The act is generally applied to the individual moving overseas, but not
changing their domicile.
Federal Commissioner of Taxation vs. Applegate
In determining whether the tax payer is having permanent abode outside Australia or not the
commissioner has many factors to consider in Ruling IT 2650.
1) The intended and extent of overseas stay
2) The primary intention of staying in the overseas country, whether permanent or
temporary.
3) The location of the established home of the individual
4) The durability of the Australian associates (for e.g. place of education of the
taxpayer’s children.)

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d) Superannuation test-
This test states the government employees of Australia posted overseas are
residents of Australia.
In case an individual is considered a foreign resident then only such ordinary and
statutory income will be taxed which is sourced from Australia (Drew and Dollery 2015).
Sources of income:
1) Business income (sale of goods)-
a) Generally the place where trading activities of the company take place
b) Income arising out of a contract
2) Rental income-
Where the property is situated
3) Income from sale of property other than the trading stock-
Generally the place where the property is situated.
4) Services-
Generally where the provision of the service takes place
FCT vs. French (1957).
5) Interest-
The place where the contract was entered into and the place where the money was
landed out.
6) Dividends-
The place from where the company derived its profit.

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Nominees ltd vs. FCT (1973).
7) Royalties-
The place where the intellectual property is located from which the income is arising.
Derivation of income: SBE taxpayers and large firms:
The business eligible for becoming the small business entity can adopt both cash and accrual
basis. However the government encourages cash basis as it is easier to calculate GST in case
of cash transactions (Symes 2016).
As per the provisions a SBE has a turnover of not more than $10 million.
In case of large firms, the accrual method is appropriate including large professional firms.
Application of the laws:
1) ABC Ltd.
In case of the company, it is seen that the company is not incorporated in
Australia. In addition to this the operations of the company is carried out in Brunei
that is outside Australia (James et al. 2015). Hence, the company fails the first test.
But, it has to be considered that during the year 2015 the management took decisions
governing its operations from Sydney as it is mentioned that all the Board meetings of
the members of the Board of Directors are conducted on a monthly basis in Sydney.
In this case it has to be effectively justified whether the central management and
control of the company was undertaken by the Board of Directors from Sydney i.e.
Australia (McCluskey and Franzsen 2017). After factoring in the implications or the
effects of the decisions taken, it can be prudently said that the company’s central
management and control resided within Australia during the period of 2015.

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For the period of 2016 one of the members of the Board had to move to Brunei in
order to cooperate the functions of the business along with their plantation manager. It
has been specifically said that the decisions taken by the rest of the board members
was to be considered as tentative (McIntosh et al. 2015). It has to be collectively
analysed with the fact that the operations scale in Brunei had reached such heights
that the management was forced to establish personal contact for conduct of the
business. This suggests that for the period of 2016 and onwards the place of central
management and control was outside Australia (Pawson 2017).
2) Peter:
In case of Peter the residency test have to be taken prudently. In the ordinary
tests several factors have to be considered. The factors that go in favour of Peter
include he has taken his wife and unmarried younger daughter with himself. He rented
out his residence in Australia and took a big house on lease in Brunei. While in
Brunei the couple mingled with the society quite well which is reflected by the fact
that they became members of the local Bridge and golf club. All these factors indicate
that Peter was aiming to reside in Brunei (Richardson et al. 2015). The factors that go
against his residence in Brunei include the fact that he maintained his house in
Australia and had just rented it out. He did not clearly mention about the extending hi
employment period prior to expiry of his term of two years and he did come back to
Australia after two years (Chomik et al. 2015).
In case of the 183 days test, he did not stay in Australia for more than 183 days for the
period of two years that is 2015 to 2017.
The superannuation test is not applicable in the case of Peter as he is not a
government employee.

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After coming back to Australia, the business started by Peter has not crossed the
turnover of $10 million in the year 2017 (O'faircheallaigh 2017).
Peter’s wife:
In case of Peter’s wife, she left Australia along with her husband. There are many
factors indicating that for the period of two years she decided to reside outside
Australia (Forsyth et al. 2014). For instance she took up part time job as an English
teacher and also became member of the local club of Bridge and Golf. She was not in
the country for more than 183 days for the period of two years that is from 2015 to
2017. The tests of superannuation do not belong to her either (van den Nouwelant et
al. 2015).
Conclusion and recommendation:
1) ABC Ltd.:
For the period of 2015 the company was managing its business operations
including supervision and control over the operations from Sydney. Hence, the
company will be considered as resident due to fact that it has satisfied any of the three
conditions of residence in case of a company. The reason is that the statute lays down
that irrespective of the location of the location of the business and its corresponding
operations, in case the central management and control is exercised within the country
then it will be deemed that the company is a resident of Australia for tax purposes for
that period for which the control and management was exercised from Australia.
For the period of 2016 and 2017 the management was shifted to Brunei. This can be
concluded because of the fact that it is mentioned that one of the board members have
to move to Brunei for the purpose of managing the upscale in the business along with
the assistance of the plant manager. This suggests that during this period of two years

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the place of central management and control of the company was outside of Australia.
Hence for these two years the company will be a foreign resident. Consequently for
the period of 2015 the company will be liable to pay taxes for its come from all the
sources and for the year 2016 and 2017 it will have to pay taxes in respect of only that
income which have sourced from Australia.
2) Peter:
For the period of two years that is 2015 to 2017 he will not be considered as a
resident of Australia as he intended to reside in Brunei for those two years as he has
not been able to satisfy even one of the four tests of residence. Hence, his income
which was sourced from Australia will only be taxed and not any other income. This
will include rent from his house on Melbourne, dividends from his investments in the
Singapore Company. The income is to be considered as sourced from Australia
because the rent has accrued from a property situated in Australia and the company
has its income source in Australia.
Peter should follow cash method of derivation of income for his business as his
business is entitled for Small Business Entity due to the fact that it has not crossed the
turnover of $10 million in the year 2017.
3) Peter’s wife:
For the period of 2015 to 2017 she will not be considered as the resident of Australia
for the purpose of taxation as she has not been able to fulfil any of the three criteria’s
of test of residency. Hence her income as a part time teacher in Brunei will not be
taxed.

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The income from the business of Peter will be clubbed with his income unless
and until his wife for dissemination of her specialised skill and knowledge has
received some consideration in the Peter’s business.

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