Taxation Law Assignment on Residential Status and Partnership Income

This assignment solution delves into Australian taxation law, specifically focusing on determining an individual's residential status for tax purposes and calculating the net income of a partnership. Part A analyzes the residential status of an individual, Jack, for the year ending June 30, 2018, consi...Read More

Taxation law

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
Advising Jack about his residential status in Australia for tax purpose for the year ended 30
June 2018.....................................................................................................................................1
PART B............................................................................................................................................3
Calculation of net income of the partnership...............................................................................3
CONCLUSIONS..............................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Taxation law can be defined as rules provided by government in order to monitor and
control the assessment of tax amount to be paid on the amount earned, expend, property held,
transactions made, license granted, etc. by an individual or a business corporation or by any other
person of Australia. The present study shows various rules relating to the residential status of an
individual for taxation purpose. Further it also shows a calculation of taxable amount to be paid
by a partnership firm.
PART A
Advising Jack about his residential status in Australia for tax purpose for the year ended 30 June
2018
For the purpose of determining the amount of tax to be paid by an individual or
corporation or any other person, to the Australian Government, checking the residential status of
the person is the most important and basic element.
IT 2650 of Income tax Assessment Act 1997, all those person who passes the criteria
decided by the income tax authority of the country, would be termed as the Australian resident
and would be taxed as per the taxation laws of country (Mangioni, 2015). The Government of
Australia has provided some tests such resides test, domicile tests, 183 day test and
commonwealth superannuation test, that is needed to be fulfilled by an individual for the purpose
of declaring himself as an Australian resident for Taxation purpose. These tests can be analysed
as under:
Resides test
The term “Resides” is used by the income tax authority of Australia for deciding the
resident of a person for income tax purpose. As per the resides test, a person can enter into
Australia for any of the following purposes:
 for migrating purpose,
 or teaching or studying purpose
 for tourism purpose,
 for the purpose of pre-arranged employment contract (McGee, Devos and Benk, 2016)
Further, for the purpose of testing the residential status, various factors are also
considered such as:
 intention of presence in the Australia
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 ties with family and business
 location of all assets held by individual in Australia
 All the arrangement relating to social living of person, etc.
If these factors seems similar as the ordinary resident Australia, the individual would be
considered as the resident.
If a person fulfills requirements of resides test, he would be considered as Australian
resident (Technical Update: Reform of the Income Tax Residency Rules for Individuals, 2018).
Although, in case, of failure of satisfying the test, individual can be consider as resident if he
fulfills any one of the statutory test.
Statutory test
As per the clauses of statutory test, if an individual fails to pass the resides test,
individual needs to fulfill any one of statutory test for fulfilling the resident status of individual.
Statutory tests are as follows:
Domicile test
As per this test, if the person is domicile of Australia i.e. if has taken birth in Australia or
whose parent permanently lives in Australia, but recently living outside of Australia are said to
be resident of Australia (Cobiac, Tam, Veerman and Blakely, 2017).. Although, if these person
have decided to live outside Australia permanently, they will fail to pass the domicile test of
resident.
183 day test
As per this test, if any person usually places outside the Australia, but in any specific year
has lived for 183 days or more, would be treated as resident of Australia for the year.
Superannuation test
This test says that if an individual is a member of some specific Government service
departments, the individual will be treated as a Australian resident for the taxation purpose.
Summary of residence tests:
All these tests for the purpose of checking the residential status in the Australia can be
summarise as under:
A person is said to be an Australian resident if:
 The individual has born in Australia and still living in the country since birth.
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 Individual satisfies to be domicile in the Australia until and unless commissioner of
country satisfies that the person have a permanent resident in abroad (Graetz and Warren,
2016).
 The individual is working in any government service department and covers under
superannuation act 1976.
 the individual has lived at least 183 days in the country.
If any of the above condition is being satisfied by the individual, the person will be
treated as residence of Australia for the taxation purpose.
In the present case scenario, during the period from 1 July 2017 to 30 June 2018, the
Johnson remained in the Bahrain, further, he also took a permanent apartment there. In this
regard, it fails to satisfy all the residence test of Australia. Therefore, Mr. Johnson will be treated
as a Non resident for the tax purpose for year ending on 30 June 2018.
PART B
Calculation of net income of the partnership
Income statement of Barista School for the year ending 30 June 2018
Particular Amount
Fee received 350000
Interest on drawing – jared 500
Interest on drawing – judy 750
Total revenue (a) 351250
Rent paid for training venue 35500
Cost of ingredient 6600
Salary paid to teacher 125000
Superannuation contributions for part-time teachers 11876
Bank loan repayments 2800
Interest on bank loan 1500
Total expense (b) 183276
Net profit (C =a-b) 167974
Tax to be paid (27.5% of net profit) (D) 46192.85
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Net profit after tax (C-D) 121781.15
DISTRIBUTION STATEMENT
Particular Amount Particular Amount
Interest on capital Net profit 121781.15
Jared 1000
Judy 1000
Interest on
drawings
Salary to partners Jared 6000
Jared 35000 Judy 12000
Judy 60000
Share in profit
Jared (42781.15*1/2) 21390
Judy (42781.15*1/2) 21390
139780 139781.15
Interpretation
From the above statement, it can be interpret that the Barista has generated a net income
of $167974. further, as per the taxation rules of Australia, the School would need to pay a tax @
27.5% on its net profit. From the distribution statement of the firm, it can be interpret that after
all the adjustments, the net profit would be distributed in Jared and Judy equally of $ 21390.
CONCLUSIONS
From the analysis of the above study it can be analysed that for the purpose of charging
income tax on individual, its residential status is needed to be determined. The residential status
can be determined on the basis of number of days spend in the country and purpose of living, etc.
further, the study has also concluded that a partnership is being taxed @ 27.5% on its net income
generated by it.
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REFERENCES
Books and Journals
Mangioni, V., 2015. Land Tax in Australia: Fiscal reform of sub-national government.
Routledge.
McGee, R., Devos, K. and Benk, S., 2016. Attitudes towards tax evasion in Turkey and
Australia: A comparative study. Social Sciences. 5(1). pp.10.
Cobiac, L. J., Tam, K., Veerman, L. and Blakely, T., 2017. Taxes and subsidies for improving
diet and population health in Australia: a cost-effectiveness modelling study. PLoS
medicine. 14(2). p.e1002232.
Graetz, M. J. and Warren, A. C., 2016. Integration of corporate and shareholder taxes. National
Tax Journal, Forthcoming, pp.16-36.
Online
Technical Update: Reform of the Income Tax Residency Rules for Individuals. 2018.[Online]
Available through :
<https://www.bdo.com.au/en-au/insights/tax/technical-updates/reform-of-the-income-tax-
residency-rules-for-individuals>
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