Analysis of Australian Taxation: Residency, Income, and Capital Gains

This report provides a comprehensive analysis of the Australian taxation system, focusing on key aspects such as tax residency, assessable income, and capital gains tax. It begins with an introduction to the Income Tax Assessment Act 1997, highlighting the significance of tax residency in determining an individual's tax obligations. The report delves into the concept of tax residency, outlining the rules and statutory tests used to determine an individual's residency status, including the domicile test, the 183-day test, and the superannuation test. It also examines the implications of temporary residency and the potential for dual tax residency. The report then explores the meaning of assessable income, differentiating between ordinary and statutory income, and discussing how residency status affects the calculation of assessable income. Furthermore, the report clarifies the distinction between capital receipts and revenue receipts, which is crucial for determining the taxability of income. Finally, the report explains the concept of capital gains tax, including the conditions and exemptions, and the calculation of capital gains and losses. The report uses the case of Edward to illustrate the application of tax residency rules and concludes with a summary of the key findings and concepts discussed.

Assessment item 2

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Question 1........................................................................................................................................3
Tax residency concept of the Australian Taxation system..........................................................3
Question 2........................................................................................................................................6
Meaning of the assessable income...............................................................................................6
Capital receipt and revenue receipt..............................................................................................7
Capital gain tax............................................................................................................................7
Conclusion.......................................................................................................................................9
References......................................................................................................................................10

INTRODUCTION
The Taxation system of Australia is governed by the Income Tax Assessment Act 1997, which
prescribes all the rules, regulations for assessing the income of the individual. Tax residency is
an important aspect with respect to the assessment of the income tax of the individual (Lombard,
2017). The determination of the tax residency status depends on the circumstances of the
individual. The present study focuses on the tax residency concept of the Australian Taxation
system. Further, the income tax is levied only on the consistent and regular income generated
from the business activity of the individual. Therefore, the determination of the assessable
income of the individual should be as per the provisions provided by the Income Tax Assessment
Act 1997 (Saez, 2017).The taxation system of Australia describes the conditions of ascertaining
the tax residency status of the individual, only after fulfilling those conditions individual will be
considered as a tax resident of Australia (Choudhary, Koester, and Shevlin, 2016). Moreover, the
separate rules are prescribed in the Act with respect to the capital gain tax of the individual.
QUESTION 1
Tax residency concept of the Australian Taxation system
The determination of the Australian Tax residency is based on the fact and the circumstances of
the individual while applying the certain laws and statutory tests. According to (subsection 6(1)
of the Income Tax Assessment Act 1936 describes that, in general aspect, an individual is
considered as a residence of Australia if the individual “resides” in Australia. Here the word
resides is decided by considering the overall situation of the individual which includes the
intention and the purpose of the residence of the individual in Australia. It is further, supported
by the level of connection with the family of the individual or business and employment within
Australia and the maintenance and location of the assets of the individual and the social and
living arrangement of the individual (Clark, and Maas, 2016).
By considering the case law of Harding v Commissioner of Taxation [2018] FCA 837, if the
individual does not satisfy the above test of residency, then the individual will be considered as
an Australian Tax resident only if the individual satisfies the statutory residence test. The

statutory residence test is described in the subsection 6(1) of the Income Tax Assessment Act
1936, which are as follows-
1. The domicile Test- An individual will be considered as a resident of Australia under the
domicile test if they have a domicile in Australia except the commissioner is satisfied that
the permanent place of residence of them is outside Australia. Generally, the domicile
means the country in which the individual is born unless the individual migrates to
another country (Boyd, 2018). According to the Domicile Act 1982, if the person plans to
build the house in Australia, definitely then that person obtains the domicile by choice.
2. The 183 days test- An individual will be considered as a resident of Australia under the
183 days test if the person is present in Australia for more than 183 days, in a particular
tax year. The presence of the 183 days may be continuous or irregular; it does not make
the effect on the residency. However if the commissioner is satisfied that the usual place
of that person is outside Australia and the intention of that person is not to take up
residence, then the individual will not be considered as a resident even if the condition of
183 days test is satisfied (Sharkey, 2015).
3. The superannuation test- this is referred to as a substitute for the ordinary test of
residence. An individual will be considered as a resident of Australia under the
superannuation test, when ordinarily they do not live in Australia, however if the
individual is eligible employee for the purpose of the superannuation Act 1976, or the
assessee is spouse or the child below the 16 years of age of such individual, then the
individual is deemed resident under this test (Burgess, 2018).
Further, an individual may be considered as a temporary resident of Australia, if the individual
holds a temporary visa granted provided by the provisions of Migration Act 1958 or if the person
is not a resident Australian resident under the social security Act 1991 or if the spouse of the
person is not a resident provided by the provisions of social security Act 1991.
Further, it is also possible for the individual that simultaneously tax resident of the two countries,
for instance, individual got the assignment from the other country and received income from that
country but individual satisfies any one condition of the tax residency rule which is described
above therefore individual is a resident of Australia. In this example, the individual is
simultaneously the tax resident of Australia and the other country also. In this situation through

the double tax agreement taxing rights of the countries can be ascertained (Cui, 2016). The
government of Australia has entered into an agreement with the many countries by which the
individual has not to pay the tax in both the countries. However, if the individual is the
permanent residence of Australia then all the income whether it is generated in Australia and
outside Australia, the tax will be charged in the Australia (Long, Campbell, and Kelshaw, 2016).
In the present study Edward was living with the parents in Australia, but for the purpose of the
job, Edward went to Singapore for two years, and after completion of the two years, and
afterwards he went to Europe for one year, and after that, he returned to Australia. In other
words, Edward comes to Australia after a period of three years. But after return to home, Edward
moved out of the parent’s house and lived in the rented apartment. For determining the tax
resident status of the Edward during the absence from Australia, the above-described rules have
to be applied.
According to the ordinary residence test, Edward will not be considered a resident of Australia
since in general aspect Edward does not reside in Australia
Since Edward does not satisfy the ordinary residence test, therefore Edward will be considered as
a resident of Australia only on the fulfilling of one or more conditions which are prescribed
under the statutory residence test.
Under the domicile test, Edward will be considered a resident of Australia only if he did not
migrate to any other country. Since in this study Edward migrated to Singapore for the
employment, therefore the domicile test does not get satisfied by the Edward, and he will not be
considered as a resident during the absence from Australia.
Further, the 183 days test is not applicable for the Edward for determining the tax residency
status, because the study asks about the tax residency status during the absence from Australia,
therefore under this test also Edward will not be regarded as a tax resident of Australia.
Apart from the above, Edward will be considered as a residence under the Superannuation test
only if Edward is an eligible employee under the superannuation Act 1976. Since this condition
did not satisfy, as the Edward was not the eligible employee under the superannuation act,

therefore Edward will not be considered as a residence of Australia during the absence period
from Australia.
From the above evaluation, it has been seen that Edward does not satisfy any condition which is
prescribed under the statutory residence test. Therefore,Edward is not a tax resident of Australia
during his absence, and the foreign income of the Edward will not be taxed in Australia.
QUESTION 2
Meaning of the assessable income
According to the section VI of the Income Tax Assessment Act 1997, assessable income refers to
the income generated from the ordinary income and the amount which is defined as the income
under the income tax law. Further ordinary income consists of the income generated from the
ordinary source such as by income from rendering personal services, income from property and
income earned by the trading activities. Assessable income does not include the exempt income
(Edmonds, Holle, and Hartanti, 2015). The determination of the inclusion of ordinary income at
the time of calculation of the assessable income can be affected by the source of the income,
resident status of the individual and the how income is derived (Burns, 2017).
Section 6-5(2) of the Act 1997, stated that if the person is resident of Australia, then assessable
income includes the ordinary income generated from directly or indirectly form all the sources
within Australia or the outside of Australia, during the income year.
Section 6-5(3) of the Act 1997, stated that if the person is a foreign resident, then the assessable
income includes the ordinary income generated from directly or indirectly from the sources
within Australia
Section 6-10(4) of the Income Tax Assessment Act 1997, stated that if the person is resident of
Australia, then assessable income includes the statutory income generated from directly or
indirectly form all the sources within Australia or the outside of Australia, during the income
year.

Section 6-10(5) of the Income Tax Assessment Act 1997, stated that if the person is a foreign
resident, then the assessable income includes the statutory income generated from directly or
indirectly from the sources within Australia
Capital receipt and revenue receipt
Since the income tax is charged on the income of the individual, therefore it is essential to
determine the nature of the income. On the capital receipt, only to the extent of the gain is
taxable and only at the time of disposal. Revenue receipt is the receipts which are generated from
the ordinary business activities of the individual (Chardon, Freudenberg, and Brimble, 2016).
Income tax is calculated on the profit of the person which is derived by the deducting revenue
expenses from the revenue receipt. Further, as per the case of Federal Court of Australia (Heerey
J) in Paykel v. FC of T 94 ATC 4176 if the transaction was made with the intention to earning
the profit, then also it is included in the assessable income from the individual even though the
transaction is not the ordinary course of business of the individual (Evans, Minas, and Lim,
2015).
Capital gain tax
As per the Australian taxation system, the concept of capital gain tax applies to the gain and loss
occurred as an outcome of the capital gain tax event happening to a capital gain tax assets.
However, it is subject to certain exemptions and condition (Jones, 2017). Generally capital gain
or loss is the difference between the sales consideration and the acquisition cost. All the
incidental expenses related to the sales and purchase took into account at the time of capital gain
tax calculation. Capital gain tax is applicable at the time of disposal of the asset subject to the
specific exemption (Huizinga, Voget, and Wagner, 2018).
Capital asset is sold by assessee after keeping the twelve months from the date of acquisition of
asset then assessed has to pay only 50% of the capital gain tax, on the other hand, if the asset is
sold by the assessee within the twelve months from the date of acquisition then assessed has to
pay full amount of capital gain tax.
Section 104-5 of the Income Tax Assessment Act 1997 defines the capital gain tax law and
specifies the capital gain tax event, treatment of gain or loss arising out of the event, adjustment
of the cost base, and determination of the date to apply for the transaction.

The most common event is capital gain on disposal of assets; it arises if the proceeds from the
sale consideration are more than the cost base. However, sale consideration is less than the cost
of acquisition of asset than it results in a capital loss. Further, the date for the determination of
the capital gain/loss is the date on which the contract for the sale has been made between the
parties, even if the payment of sale consideration is realized later (Faccio, and Xu, 2015).
Generally, the cost base is the amount paid at the time of acquisition of an asset which includes
all the incidental cost related to the purchase of the asset such as the commission of the agent. In
the Income Tax Assessment Act 1997, three forms of the cost base of the asset has been stated
which are-
1. Reduced cost base- in this method certain cost excluded and certain extra reduction
applied
2. Cost base- in this method money paid for the transaction including the ancillary cost plus
later capital cost of the addition
3. Index cost base- it is applicable only when the asset was acquired before 21 September
1999. The cost base in indexed by the changes in consumer price index.
For calculating the capital gain tax, there are two methods are prescribed under the act
which is given below-
1. Reduced cost base- in this method, if the assessee has as a capital gain, then assessed
is required to check whether there is a capital loss by applying the reduced cost base
method. In this method indexation not applied to the element of the cost base. All the
elements of the cost base is included except the balancing adjustment amount (Tran‐
Nam, and Evans, 2014).
2. Indexed cost base method- in this method capital gain tax is calculated on the
difference between the sale proceeds and the indexed cost base.
In the present study, John purchased land 30 years ago for $ 300000 and sold the land
for $ 5 million. The receipt from the sale of land is not the revenue receipt as the
receipt is not generated from the ordinary activities of the business (Saad, 2014).
Further at the time of acquisition of the land the intention of the John was not to earn
the profit from the sale of land. John purchased land because of the operation of the
factory. Therefore it is the capital receipt for the John, and the calculation of the

capital gain tax is based on the provisions of the Income Tax Assessment Act 1997,
which are described above.
Since the asset is held for more than twelve years by the John from the date of
acquisition, therefore, he has to pay only 50% capital gain tax.
CONCLUSION
On the basis of the above study it has been concluded that the residency status of the person is
determined by applying the ordinary residency rule and if this condition is not satisfied then
apply the statutory rules of the residence which are domicile test, the 183 days test and the
superannuation test. Further, in the case of the dual residency, provisions of the double tax
agreement will be applied, as the person is required to pay tax only one time and in one country.
Apart from this tax is levy only on the income of the individual which is generated by the
ordinary activities of the income or which is specified to the Act. On the capital receipt, the
capital gain tax is a levy, on which the separate provisions are prescribed under the act.

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