Federation University: BULAW 5916 Tax Law & Practice Assignment

This assignment delves into the complexities of Australian tax law, specifically examining the residential status of James, the source of his income from Sails International, and his entitlement to the main residence exemption. The analysis employs various tests, including the domicile test and the 183-day test, to determine James's residency. It also explores the implications of foreign source income and the applicability of the capital gains tax (CGT) provisions, particularly the main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997. The assignment concludes that James is considered an Australian resident under the domicile test, his income from Sails International is considered foreign source income, and he is not entitled to the CGT exemption due to renting his main residence. The document also provides a broader overview of assessable income, government grants, and relevant case law such as Commissioner of Taxation v Stone [2005] and FCT v Rowe [1997] to provide a holistic understanding of the subject matter.

The Faculty of Business
BULAW 5916Taxation Law & Practice
Assignment: Semester: Summer 18/19

TABLE OF CONTENTS
Part A.........................................................................................................................................3
Issues......................................................................................................................................3
Taxation provisions................................................................................................................3
Residential status................................................................................................................3
Main residence exemption in subsidy 118-B.....................................................................5
Application.............................................................................................................................6
The residential status of James in Australia and source of his salary from Sails
International.......................................................................................................................6
Entitlement of James to the main residence exemption in subdivision 118-B..................7
Conclusion..............................................................................................................................7
Part B..........................................................................................................................................8
References................................................................................................................................10

PART A
Issues
The issue is whether the James is considered as the resident of Australia. Along with
residential status, what is the source of receiving the salary from the Sail International Inc. is
also ascertained.
Taxation provisions
Residential status
Chargeability of the income tax is greatly impacted by the resident status of the person. The
taxation system of Australia governed according to the norms and rules prescribed under the
income tax assessment act 1997. Residents are well permitted to the tax-free entrance as well
as they have to pay a Medicare tax. In the case of the non-resident, income tax will be
charged only on the sourced income derived in Australia. In the case of FCT v Mitchum
[1965], the income derived by the Mitchum is not regarded as the Australian sourced income
and therefore it is not taxable for the non-resident. In addition, people are not allowed to tax-
free access (Kopczuk and WMunroe 2015).
A person is considered as an Australian tax resident in case if he/she “resides” in Australia as
per the ordinary sense of that word (subsection 6(1) of the Income Tax Assessment Act 1936
(ITAA 1936)) (Soltana, Sabetzadeh and Briand, 2016).
Following are the tests to determine residency of individual:
(a) Residency according to ordinary concepts
This test presents whether an individual resides in Australia is a question of fact that is based
on the circumstances of every case, however following are the influential factors-
 In case an individual comes back to the country of origin than the occurrence,
promptness and period of such trips and their reason can be important factors
(Woellner, 2016). And if the individual is not present in Australia just because of its
business than in that situation, it might not be sufficient in itself to hold a claim that
the individual is not a resident (Jenner, 2015).

 The degree of commerce and family binds which the individual has in Australia and
in the country of origin whether the people go together with their family to Australia
and go back on trips to the country of origin.
 Whether an individual working in the country of origin (Edmonds, Holle and
Hartanti, 2015).
 Is the place of domicile is till that place preserved in the country of origin or is
obtainable for the individuals use as there?
 Whether the individual effects are reserved in Australia or in the country of origin?
 The degree to which any possessions and bank accounts are obtained or uphold in
Australia or in the country of origin.
 Migrant has started or established a business in Australia (Steen and Peel, 2015).
All the above factors are considered for determining the residential status of the individual.
(b) The domicile test
A person is a resident of Australia as per the domicile test, in case he or she has a residence in
Australia except the Commissioner is pleased that the individuals enduring place of residence
are outside Australia. As per the Domicile Act 1982, an individual obtains a residence of
choice in Australia if the purpose of the individual is to build his or her home for an indefinite
period in Australia (Zelinsky, 2016). Discussion of the domicile test is done in Taxation
Ruling IT 2650. Domicile usually means the state where a person is born in if not then they
travel to another state however then you accept a “domicile of choice” (Jenner, 2015).
(c) The 183 days test
A recurring émigré or new emigrant having observed to the conditions of their migrant visa,
those were there in Australia for more than 183 days (endlessly or sporadically) in a tax year
is, on the whole, a resident of Australia beneath the 183 days test. This is if not the
Commissioner is pleased that his common place of residence is outside Australia and that he
does not propose to adopt residence (Clarke, 2018).
(d) The Superannuation Test
It is known as “statutory” test and a substitute to the ordinary tests of residence however it
can be said that persons might be “residents” according to this test at the time they do not in
any way reside in Australia in the normal way (Butler and Fettes, 2016).

Main residence exemption in subsidy 118-B
The capital gains tax (CGT) provisions in the Income Tax Assessment Act 1997 (ITAA
1997) is not relevant for the selling of the main residence where convinced circumstances are
fulfilled. Normally, it signifies that where a person sells the main residence, no CGT is
charged, except the residence has been used for the purpose of producing profits. Moreover,
the requirements that are linked with such exemption can be originated at Subdivision 118-B
ITAA 1997(O’Connell, 2017).
According to the Australian federal tax, an important benefit of a person’s owing their own
possess home is the release to Income tax below the Main Residence exemption below
Subdivision 118-B of Income Tax Assessment Act 1997 (Duncan, Hodgson, Minas, Ong and
Seymour, 2018).
This exemption may not apply in full if:
The residence was the taxpayer’s major dwelling for only part of the possession phase, and
moreover, it does not pass to the taxpayer from a deceased land or
The dwelling was used for producing income throughout the possession phase and, in case
interest was incurred on money that is borrowed to get hold of the residence that probably
will be deductible.
Application
The residential status of James in Australia and source of his salary from Sails International
By considering the various aspect of the given study, it has been evaluated that James has a
permanent resident house in Sydney. It is because, as per the case of FC of T v Applegate 79
ATC 4307, liability to tax arises annually and residency is also required to be assessed
annually. Further, Under the domicile test, a person is considered as the resident of the
country (Australia), if he/she possesses the residence in Australia, except only if the
commissioner contends that the permanent place of residence of the person is not within
Australia. As the domicile test, it is applicable to James because he has a permanent home in
Sydney, he is a tax resident of Australia.

The foundation of his salary from sails international will be Income from Foreign Sources for
overseas service (Deutsch, friezer, fullerton, hanley and snape, 2017).
Due to the double taxation avoidance agreement, if the person already paid the tax on the
income in one country, then he/she can avail the credit of such tax at the time of payment of
tax in another country. In this provisions of federal commissioner of taxation v. french, high
court of Australia will be applicable. This case states that income earned and taxed outside
Australia by a resident will be exempt in Australia.
Entitlement of James to the main residence exemption in subdivision 118-B
Income tax assessment act 1997 provides the exemption from the capital gain tax on the sale
of the main residence only if the certain terms and conditions are fulfilled. As James is using
its dwelling for rent out purposes to his cousin, he is not entitled to exemption from Capital
Gains Tax under subdivides 118-B if he sells his major residence in Sydney. According to
the law if they are using their main residence for producing the income then they can not
avail the advantage of subdiv 118-B at the time of selling the house, therefore no CGT
exemption available to James (Barkoczy, 2018).
Conclusion
On the basis of the above study, it has been concluded that James is considered as the resident
of Australia as per the provisions of the domicile test. The income earned from the
international sail Inc. is referred to as the foreign source income. Along with this, he has not
entitled to avail the exemption under sub div 118-B, because the house was rented by the
James for the earning purpose.
PART B
Income tax is charged on the assessable income of the assessee. As per the provisions of
income tax act, at the time of computation of the assessable income from the business,
assessment should include all the gross receipt and the proceeds generated from the normal
activities from the business. However, there are many receipts which are not generated from
the ordinary course of business but also included in the assessable income of the assessee.
With this regards, sometimes government also provide the payment in the form of grants and

subsidies, such as for the manufacturer of the alcohol excise rebate, the amount received
under the apprenticeship incentive program, fuel tax credit, subsidies for carrying out the
business. All the payment which will include in the assessable income must be related with
the business of the assessee.
In the case of Commissioner of Taxation v Stone [2005], Joanna stone was the leading javelin
throwers of Australia. In her sporting year stone received money in the form of prize money,
grants from the government, scholarship, attendance fees. The commissioner treated all the
receipt in the assessable income of the assessee. The court held that sporting skills of the
stone had shifted towards for earning money, hence it is considered as the running on a
business as a professional athlete. Therefore the receipt is considered as the income generated
from the assemble income of the assessee.
In the case of FCT v Rowe [1997], in this case, the taxpayer incurred the legal expense with
the relation of the appearing at the inquiry to his suspension from the local government
authority. The legal expense is the deductible expense in the income tax. The state
government made the payment as a reimbursement for his legal expense. The issue is whether
the payment made as a compensation of the deductible expense is considered as the receipt
from the ordinary activities. In this case, the court held that payment was not made as a
reward for the services of the taxpayer at the time of employment. It is not considered as the
remuneration but as a reimbursement. Therefore the receipt is not considered as the income
of the assessee.
From the above analysis, it has been observed that in the case of Commissioner of Taxation v
Stone [2005], the grants received from the government is included in the assessable income
of the assessee but in the case of FCT v Rowe [1997], the payment received by the
government did not include in the assessable income of the assessee. The main difference in
both the case is that in case of the stone the payment is regarded as the income generated
from the ordinary course of business because the profit motive was present for receiving such
grants. However, in case of Rowe, the payment received is just as a reimbursement of the
expense incurred by him earlier, there is no profit motive or payment received which can be
regarded as the income from the ordinary course of business.

REFERENCES
Barkoczy, S. (2018). Core Tax Legislation and Study Guide 2018. OUP.
Butler, D., & Fettes, W. (2016). Superannuation: Automatically reversionary pensions and
super reform. Taxation in Australia, 51(3), 154.
Clarke, T. (2018). The governance and regulation of the superannuation industry: systemic
failure in the Australian retail sector. Law and Financial Markets Review, 1-7.
Deutsch, R., Friezer, M., Fullerton, G., Hanley, P. & Snape, T. (2017). Australian Tax
Handbook: Tax Return Edition 2017. Thomson Reuters.
Duncan, A., Hodgson, H., Minas, J., Ong, R., & Seymour, R. G. (2018). The income tax
treatment of housing assets: an assessment of proposed reform arrangements. Sage.
Edmonds, M., Holle, C., & Hartanti, W. (2015). Alternative assets insights: Super funds-tax
impediments to going global. Taxation in Australia, 49(7), 413.
Jenner, S. (2015). An update on capital management issues. Tax Specialist, 19(1), 40.
Kopczuk, W., & Munroe, D. (2015). Mansion tax: the effect of transfer taxes on the
residential real estate market. American economic Journal: economic policy, 7(2),
214-57.
O’Connell, A. (2017). Australia. In Capital Gains Taxation. Edward Elgar Publishing.
Soltana, G., Sabetzadeh, M., & Briand, L. C. (2016, September). Model-based simulation of
legal requirements: Experience from tax policy simulation. In Requirements
Engineering Conference (RE), 2016 IEEE 24th International(pp. 303-312). IEEE.
Steen, A., & Peel, V. (2015). Economic and social consequences of changing taxation
arrangements to working holiday makers. J. Austl. Tax'n, 17, 225..
Woellner, R. (2016). Australian Taxation Law 2016. OUP.
Zelinsky, E. A. (2016). Defining Residence for Income Tax Purposes: Domicile as Gap-
Filler, Citizenship as Proxy and Gap-Filler. Mich. J. Int'l L., 38, 271.