Taxation Law Assignment (LAW5230): Residency and Income Tax Analysis

This assignment report delves into Australian taxation law, examining the tax implications for a working holiday visa holder, Catherine, and analyzing her residency status and income tax liability under relevant legislation, including ITAA 1936 and ITAA 1997. It assesses whether Catherine is considered an Australian resident or a foreign resident, considering her income sources and the application of tax rates. The report also explores Australia's residency rules, comparing them to New Zealand's, and evaluating the Board of Taxation's recommendations for reform, encompassing the resides test, domicile test, 183-day test, and Commonwealth superannuation fund test. It provides a critical assessment of current rules, recent case law, and the need for potential changes to address complexities and uncertainties in the global economy, emphasizing the importance of tax residency in determining worldwide income taxation.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Part A:........................................................................................................................................2
Issues:.....................................................................................................................................2
Laws:......................................................................................................................................2
Application:............................................................................................................................2
Conclusion:............................................................................................................................5
Requirement (I):.....................................................................................................................5
Requirement (II):....................................................................................................................5
References:.................................................................................................................................6
Part B: Australia’s Residency Rules..........................................................................................7
References:...............................................................................................................................17

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Part A:
Issues:
 Is an individual that comes to Australia with the working holiday visa amounts to an
Australian resident in accordance with the definition given in “Subsection 6 (1) ITAA
1936” or a foreign inhabitant within “sec 995-1 ITA Act 1997”?
 Is the income made by working holiday visa holder liable for tax as Australian
occupant under “sec 6-5 (2) ITAA 1997” or taxable as foreign resident under
“section 6-5 (3) ITAA 1997”?
Laws:  “Section 6 (1) ITAA 1997” “Section 6-5 (2) ITAA 1997” “Section 6-5 (3) ITAA 1997” “Gregory v FC of T (1937)” “Nathan v FCT (1918)” “Moore v Griffiths (1972)” “FCT v Spotless Services (1995)”
Application:
As apparent from the case evidences established by Catherine, she cannot be held as
occupant of Australia within the definition given in “Subsection 6 (1) ITAA 1936” despite
the fact that she had lived in Australia under the twelve month working holiday visa1.
Catherine must be held as foreign occupant within the meaning established in “sec 995-1
ITA Act 1997”. Representing the decision given in “Gregory v FC of T (1937)” despite the
fact that Catherine has stayed in Australia for a period of twelve months, her behaviour did
1 Coleman, Cynthia, and Kerrie Sadiq. Principles of taxation law 2016.

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not demonstrate to be living in Australia2. Catherine primary objective was having a working
holiday and fund her expenses through a casual employment or through an irregular work.
Even though Catherine was living in Brisbane she did not considered any place as her home
or separate from other place where an individual might stay when they are on working
holiday. By taking into the consideration the explanation cited by ATO, most of the
individuals that visit Australia with a working holiday visa they are not held as resident of
Australia for tax purpose under the description given in “subsection 6 (1) ITAA 1936”.
The primary reason for considering Catherine as the non-resident since her visit is
consistent in accordance with her visa requirement. Catherine has no intention of living in
Australia and only intents to have a holiday and at the same time working for short duration.
Unlike most of the people3. Apart from most of the person, the behaviour of Catherine while
she lived in Australia is not constant with the purpose of residing permanently and not
constant with those residing in Australia. Catherine should not be viewed as Australian
occupant inside the classification given in “Subsection 6 (1) ITAA 1936” just because she
lives in a shared rented house with other working holiday maker or lived in other place for a
long time period4. The ATO further clarified that the first $37,000 is levied taxes based on the
rate of 15%. Being a working holiday maker, Catherine is liable to pay tax at a rate of 15%
on her first $37,000 while the remaining amount will be taxable on the basis of ordinary rates.
Beside the residency status of an individual, the sources of proceeds is held vital for
those that are non-residents. Mentioning the case facts of “Nathan v FCT (1918)”
2 Deutsch, Robert Et Al. Australian Tax Handbook 2018. Thomson Reuters Australia, 2018.
3 Woellner, R. H, Stephen Barkoczy, and Shirley Murphy. Australian taxation law 2019.
4 Kenny, Paul, Michael Blissenden, and Sylvia Villios. Australian Tax 2018.

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ascertaining the main sources of income is regarded as the matter of fact5. Similarly in case of
Catherine, the employment income that Catherine has earned from her service in Wales does
not has any source in Australia and therefore it is not included in her assessable returns.
Catherine has derived salary by working in a café, hotel and cattle station. These receipts has
the source in Australia and will be included in Catherine calculable earnings for taxable
purpose.
Late in the case study Catherine also reports that she won a prize of $250 from a pie-
winning contest. As noticed in the circumstance of “Moore v Griffiths (1972)”, simple prize
winnings are not regarded as taxable earnings6. Referring to the decision made in above
stated case in the factual situation of Catherine the prize of $250 will not be included in her
taxable income.
She also reported a receipt of $50 as interest in her Australian bank account. Referring
to the decision made in “FCT v Spotless Services (1995)” interest received by Catherine
from her Australian bank account has been sourced in Australia and will form the subject of
taxation in Australia for Catherine7.
On one occasion she reports the sale of her excess clothes, sleeping bags and other
private belongings on eBay during June prior to leaving Australia. Since Catherine is
conducting any online business activity the sum of $350 received from the sale of personal
items will not be contained within in her calculable earnings8.
5 Kenny, Paul. Australian tax 2015. Chatswood, N.S.W.: LexisNexis Butterworths, 2015.
6 Krever, Richard E. Australian taxation law cases 2016. Pyrmont, N.S.W.: Thomson Reuters, 2016.
7 Morgan, Annette, Colleen Mortimer, and Dale Pinto. A practical introduction to Australian taxation law. North Ryde
[N.S.W.]: CCH Australia, 2015.
8 Sadiq, Kerrie et al. Principles of taxation law 2018.

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Conclusion:
The case can be concluded by stating that Catherine is a foreign occupant under the
definition of “sec 995-1 ITAA 1997”. Catherine is only required to pay taxes as foreign
resident under “section 6-5 (3) ITAA 1997” on income that has an Australian sources. Her
salary earned from Wales will not be included in Australian tax return because it is not
sourced in Australia.
Requirement (I):
If Catherine is a Resident
If Catherine is a Non-Resident
Requirement (II):

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References:
Coleman, Cynthia, and Kerrie Sadiq. Principles of taxation law 2016.
Deutsch, Robert Et Al. Australian Tax Handbook 2018. Thomson Reuters Australia, 2018.
Kenny, Paul, Michael Blissenden, and Sylvia Villios. Australian Tax 2018.
Kenny, Paul. Australian tax 2015. Chatswood, N.S.W.: LexisNexis Butterworths, 2015.
Krever, Richard E. Australian taxation law cases 2016. Pyrmont, N.S.W.: Thomson Reuters,
2016.
Morgan, Annette, Colleen Mortimer, and Dale Pinto. A practical introduction to Australian
taxation law. North Ryde [N.S.W.]: CCH Australia, 2015.
Sadiq, Kerrie et al. Principles of taxation law 2018.
Woellner, R. H, Stephen Barkoczy, and Shirley Murphy. Australian taxation law 2019.

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Part B: Australia’s Residency Rules
Introduction:
The board of taxation has recently released a report which contains the review
regarding the tax position of a person for income tax purpose. The report provides a
conclusion that the present rules relating to residency is not efficient and unsuitable to deal
with present-day life and work patters in the global economy (Jones 2018). A full reformation
is recommended of the complicated and antiquated residency test by replacing the same with
a new legislative test that includes the primary days count, bring line test and the secondary
test taking into the account the single, objective list of applicable factors with prescribed
weightage should be assigned to every factor.
Further recommendations that is outlined by Board of Taxation in the report
comprises of limiting the tax concession for temporary residents to a time span of four years
and studying the negative concerns relating to the 2009 limitations to the previous foreign
employment tax exemption on income. The government and the Australian Taxation Office is
yet make a comment on the recommendations and finding despite the fact that the ministry of
finance has recommended the Board of Taxation to undertake additional investigation and
consultation (Brydges 2019). The timeline associated to change is not yet clear. Individuals
and the employers are required to continue application of present rules at this moment.
The present essay will be outlining the present rules relating to tax residency of an
individual in Australia. A critical assessment of the “Board of Taxation’s recent suggestion
will be made combined with the recent case law. A comparative study of Australia’s
residency rules with New Zealand will be made as well to conclude whether the present rules
of individual tax residency should be changed or not. The essay further suggest that a review

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relating to the rules with sources of income, as in majority of the cases there is a close
possibility of distortion relating to an individual’s tax residency.
Discussion:
Tax residency is regarded as the most significant component of Australia’s income tax
system because it is essential in ascertaining the base of income based on which Australia
imposes tax on resident. An individual is normally held for tax on the income that is made
from the worldwide sources while a non-resident is compulsorily needed to pay tax on the
income that are only sourced from Australia (Sheridan and Lee 2015). The present rules of
residency in Australia was formed in the year 1930 and since then it has stayed mainly
unchanged. During the year 2016 in April the BoT has initiated as review regarding the
residency rules of Australia after the increase in the litigation associated to the question of
residency.
On the basis of previous and Board’s discussion, assumed that the total number of
persons that are affected and the problems which has arisen from the system of self-
assessment, the complexity as well as uncertainty of the current rules has increased costs and
efficiency. There is also the potential or manipulated results which has contributed to
inequality and lowered reliability, this allowed the board to conclude that the present
description of residency is lacking in actual practice (Bembrick 2018). This implies that the
rules fail to satisfy the policy objective relating to equity, simplicity, efficiency and integrity
as they are presently applicable in Australia and needs reformation as the matter of priority.
At the time of conducting review the “Board of Taxation” has commenced an
autonomous study and has involved with several consulters in order to find a better
understanding of the present individual residency rules which is applicable for the income tax
purpose (Chen et al. 2018). Under the current rules that was enacted in 1st July 1930, a

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person’s residency for taxation purpose is ascertained in accordance with the definition given
in “subsection 6 (1) ITAA 1936”. As per the “subsection 6 (1) ITA Act 1936” the residency
of an individual includes a person separately from the business that exist in in Australia and
also considers an individual that has the residence in Australia excepting when the officer is
contented that an individual has the perpetual location of abode is in foreign (Mares 2016).
The explanation also take account of a person to be an Australian occupant that has been in
Australia continuously or in breaks for no less than six months or 183 days all through the
year. Under the present rules there are four test that is used to ascertain the residency status of
a person. This comprises of the “resides test”, “domicile test”, the “183-days test” and the
“commonwealth superannuation fund” test. A person is under obligation of passing only one
test to be held as Australian occupant.
The first test of determining individual nationality is the “Resides Test” where the
courts have mainly shown their reliance on dictionary definitions given in “FCT v Miller
(1946)”. It mainly involves the query of fact and degree. The second test involves the
“Domicile Test”. A person only meets this test if they are having their home in Australia,
excluding when the officer is pleased that the person’s fixed dwelling place is out of
Australia (Hao and Liu 2017). The federal court in “Applegate v FCT (1979)” have held that
“permanent” signifies greater than a simply temporary or transitory, but involves less than
everlasting.
The third test is the “183-day test”. As per this test a person will be held as Australian
resident if they are found to be present in Australia for at least of one-half of the income year
either continually or in breaks. This test is mainly applicable on those individuals that come
to Australia (Wickramasuriya 2014). The superannuation test is the final test that is
applicable on the outbound individuals which cannot be viewed as residents under the other

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test. Usually under this test a person is a held as Australian resident if they are found to be
member of government superannuation funds.
The “resides test” and the “183-day test” is viewed as inbound residency test while
the “domicile test” and the “superannuation test” is viewed as outbound residency test. The
forgoing analysis conducted above suggest that the complex matrix should be navigated to
ascertain a person’s residency. Arguably, most of the persons that are residents would meet
the conditions given in “resides test”, while “inbound” and “outbound” individuals should
assess a wide number of difficult thresholds which is subject to important governmental and
jurisdictive uncertainty (Taylor and Richardson 2014). The dependence on general facts and
conditions tests should be applied on the basis of case-by-case, against the wide range of
undefined lawful conception in most of the cases, designates that the residency rules have
changed in the manner that there is lack of simplicity, do not offer any certainty and can lead
to unfair and inconsistent results amongst the taxpayers. Furthermore, it also raises concerns
related to integrity as well.
The absence of clear pronunciation of modern residency policy has contributed to the
concerns associated to equity, simplicity, certainty and integrity. Changes in Australian
individual tax residency rules is very much overdue from a long time. The present rules
relating to residency does not provide any clear articulation to individual regarding their tax
residency policy. As commented by Arnold, Ault and Cooper (2019), there is a limited
records available in public that are concurrent with the consultation, since the introduction of
definition of resident in 1930. It is also noticed that, over the last 90 years ever since the
introduction of residency rules, a considerable amount of advancement has been made in a
manner in which a person lives, work and travel. A large changes has also been made in the
worldwide income tax system.

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As identified by Braithwaite (2017) there are some characteristics of residency rules,
particularly applying the conception of domicile is now obsolete and needs suitable
reassessment. A prominent lack in the present residential rules regarding a clear enunciation
of government’s individual tax residency policy is also evident. The taxpayers and the
advisers does not has any clear declaration of who must be treated as occupant in order to
consider whether the outcome of particular situation is intentional or unintentional. Since
there is no such overarching policy statement as what an individual resident signifies, such
absence contributes to the uncertainty of scope and government intent towards policy.
The “Board of Taxation” current proposal to amendments in residency rules notes the
question of what methods signifies the best outcome for attaining the current policy
objectives of the government is difficult to justify since residency procedure should be
discovered from several tests of present rules. This contributes towards uncertainty in
application. As noted by Blissenden and Kenny (2019) there is a difficulty in the application
of present residency rules and also involves integrity concerns. Several consulters have
suggested the board of taxation consistently that the present rules of residency is difficult and
expensive to apply. It is argued that there are several tests and difficult feature of common
law meanings signifies that giving a conclusive information on the residency is problematic
and needs substantial resources at considerable costs to a person.
As noted by Norbury (2019) figures obtained at the time of consultation have
indicated that a simple letter of advice may cost from $5,000 to $10,000 per person and the
number of person who are looking for advice is considerable and also rising. This is largely
supported by the noteworthy tendency of rise in appointment with the ATO in the recent
years. From the year 2009, there is also a noteworthy rise in “private rulings” on residency.
Only a small number of rulings were issued prior to 2009 and since then ATO has issued
several rulings. Furthermore, there are more than 30 cases which has been heard collectively

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by courts, tribunals and Australian employers has continuously applied for “class rulings”
from ATO to get certainty relating to their employer duties under numerous income tax and
fringe benefit tax legislation.
As confirmed by Bankman et al. (2018) throughout discussion that such figures even
though convincing, under-represents the scale of issues and may be like a “tip of iceberg”
with majority of the consulters have stated that the expert consultants helps thousands of
taxpayers with the matters which is very problematic to ascertain the residency rules.
Arguably it is noted that individuals that are seeking to influence their residency status with
the help of known honesty concerns that arises at the time of implementing the test that can
be subjugated by persons that has higher risk desire (Woellner et al. 2016). As a general note,
the best way of resolving the issue relating to certainty, integrity, equity and simplicity is by
making a wholesale legislative changes.
The recent suggestion of board of taxation to change the rules of residency highlights
the concerns relating to inadequate income tax policy setting. Over the time the different
residency test have changed into a difficult part of income tax law. Miller and Oats (2016)
argues that it is not suitable that these tests, applied to each individual, must be multifaceted
and hence requires explanation. The board of taxation also agrees with the feedback that is
obtained from numerous consultants on these problems and understands that the data of ATO
might under represent the extent of concerns as it is apparent in practice.
As drawn above, the complexity as well as the lack of foregone conclusion, unreliable
results and issues associated to integrity in the residency rules is very much noteworthy and
requires re-examination. There is also a significant increase in cost of compliance that has
increased to levels which does not appear appropriate. As evident from the fundamental
significance of residency rules, the difficulty and trouble in their application intensifies the

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cost that is shouldered by a big proportion of taxpayers (Harding 2014). Such kind of
compliance cost considerably increases the importance of simplification in this area. Having
regard to the legal analysis that is conducted in the preceding paragraphs, the present rules of
residency have been failure in outlining any all-encompassing policy direction, while the
individual test does not anymore sufficiently offer any “certainty, equity, simplicity and
integrity”.
As it has been noted earlier, the residency rules of Australia presently begins with the
“resides test”. It requires an understanding of principles of common law and the application
of guidance that are available from ATO on wide range of individual situations. As stated by
Schmalbeck, Zelenak and Lawsky (2015) for majority of the “inbound and outbound”
persons, there is an unwanted barrier that commonly needs the specialist tax advice to
ascertain the tax residency status. The multitude of every test is not certain because of the
insufficient judicial and managerial guidance, levies a substantial load of compliance on the
taxpayers and their employers. An overseas comparison
As noted recently, international developments in the residency status has been seen in
New Zealand where it has adopted tests that comprises of “bright line” component in their
residency rules. The bright line test mainly involved using a “days count” test (Henry 2014).
For instance, in New Zealand an inbound person is mechanically treated as inhabitant if they
are existent in New Zealand physically for a minimum of 183 days in the span of 12 month
period. As per the 183 days count test, the period of twelve month is not based on the income
year, it is simply based on any of the “rolling twelve month period” commencing from any
day on which a person was physically present in New Zealand (Eeckhout and Guner 2015).
Under the days count test, a person spending any part day in New Zealand will be counted as
full day spent in New Zealand.

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While for the non-resident under the days count test, a person will be held as non-
resident for New Zealand for taxation purpose if one is absent physically from New Zealand
for a period greater than 325 days in any 12 month period (Hill and Mancino 2014). Identical
to the days count test the twelve month period is not based on the income year rather it is
based on any rolling 12 months period commencing from the day when a person was absent
physically from New Zealand. It is worth mentioning that to satisfy this test and be a non-
resident, an individual is only required to spend a period of 39 days in New Zealand in the
twelve month span after their departure. This includes a careful analysis of business trips and
holidays back to New Zealand following an individual’s departure.
As outlined above most of the residency cases can be established with the modest,
objective test with only added or more complex fact based tests being implemented given an
individual fails to meet the “bright line test” (Murphy and Higgins 2014). This can
substantially lower the burden of compliance on individuals and in many cases their
employers under the ancillary obligations such as the PAYG.
Just like New Zealand, several consultants have considered the application of bright
line test to residency rules of Australia as this would help in addressing the major concern
and settle the vast majority of residency related cases. As suggested by Wilson (2015) if
rectified appropriately, a bright line test would help in enhancing the simplicity as the
objective, factual test which offer greater certainty to majority of the taxpayers. It was further
recommended that different “bright line test” might be suitable for individuals that are
inbound concerning outbound individuals.
Just a month before the Board of Taxation report was made available, the decision of
the federal court in “Harding v FCT (2018 FCA 837)” was handed down and the 153
paragraphs of reasoning clearly established that a higher level of analysis is needed and

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integral difficulty, in interpreting the current rules of Australian residency (Pope, Rupert and
Anderson 2014). The case took into the account the residency status of an Australia that lived
and worked in Middle East for several years. The law court have held that Mr Harding was
not living in Australia in agreement with the ordinary concept test, even though his family
was living in Australia in a family home. This represented a clear rejection of practice of
ATO in evaluating a person’s residency on the basis of their family (Arnold, Ault and Cooper
2019). Nevertheless, the law court noticed that Mr Harding did not have any permanent
dwelling place out of Australia and hence he was domiciled in Australia as an Australian tax
resident.
The ATO evaluated Mr Harding residency status and assessed his 2011 tax return as
the resident and also included for assessment his foreign sourced employment income
(Barkoczy 2016). The taxpayer made an appeal but the appeal was dismissed by the federal
court since the taxpayer has failed to prove that a permanent place of abode was out of
Australia despite the court accepted the fact that he did not had any intention of coming back
to Australia. On the basis of this finding, the accommodation of Mr Harding was only
temporary since all his future and fittings of apartment was supplied under the lease
agreement. The case law of Harding clearly highlights that present rules of residency for both
the outbound and inbound individuals should be changed to increase the certainty and
simplicity for the taxpayers at the time of ascertaining their taxation affairs.
Conclusion:
The essay conclusively supports the aspiration of improving the residency rules and
how the test should be interpreted in order to offer greater amount of certainty and equality in
outcome to individual taxpayers as well as their employees that are working and living in
overseas. The government is yet to indicate any kind of timeline for the next phase of review

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and consultation. Unfortunately individuals and employers will have to continue to their
operation under the current complex framework for foreseeable future. The degree of
consultation needed suggest that it would require considerable amount of time before the
modifications can be enacted. It is necessary to engage in a consultation with the Board of
Taxation and Government on applying suitable reformations and highlight the same as the
main concern in central operations of Australian income tax system.

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References:
Arnold, B.J., Ault, H.J. and Cooper, G. eds., 2019. Comparative income taxation: a
structural analysis. Kluwer Law International BV.
Arnold, B.J., Ault, H.J. and Cooper, G. eds., 2019. Comparative income taxation: a
structural analysis. Kluwer Law International BV.
Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2018. Federal Income Taxation.
Aspen Publishers.
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Bembrick, P., 2018. Taxing times for Australian expats overseas. Taxation in
Australia, 53(5), p.238.
Blissenden, M. and Kenny, P., 2019. Residence tests for individuals: Impact of the Harding
decision. Taxation in Australia, 54(6), p.302.
Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion.
Routledge.
Brydges, N., 2019. Residency of a trust: Don't get it wrong. Taxation in Australia, 54(2),
p.90.
Chen, D., Chen, Y., Li, O.Z. and Ni, C., 2018. Foreign residency rights and corporate
fraud. Journal of Corporate Finance, 51, pp.142-163.
Eeckhout, J. and Guner, N., 2015. Optimal Spatial Taxation: Are Big Cities too Small?.
Hao, J. and Liu, Q., 2017. The Impact of Australian Accounting Education on Repatriates'
Career Development. Australian Accounting Review, 27(1), pp.52-60.
Harding, C., 2014. Taxation of non-residents. Tax Specialist, 17(5), p.200.

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Henry, K., 2014. ITAA 1936. transfer, 2008(561).
Hill, F.R. and Mancino, D.M., 2014. Taxation of exempt organizations.
Jones, D., 2018. Complexity of tax residency attracts review. Taxation in Australia, 53(6),
p.296.
Mares, P., 2016. Not quite Australian: How temporary migration is changing the nation. Text
Publishing.
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Murphy, K.E. and Higgins, M., 2014. Concepts in Federal Taxation 2015. Cengage
Learning.
Norbury, M., 2019. Mr Harding's residence reconsidered. Taxation in Australia, 53(9), p.497.
Pope, T.R., Rupert, T.J. and Anderson, K.E., 2014. Prentice Hall's Federal Taxation 2015
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Schmalbeck, R., Zelenak, L. and Lawsky, S.B., 2015. Federal Income Taxation. Wolters
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Sheridan, N. and Lee, E., 2015. Tax changes on the horizon for expatriates working in
Australia. Governance Directions, 67(7), p.428.
Taylor, G. and Richardson, G., 2014. Incentives for corporate tax planning and reporting:
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Wickramasuriya, T., 2014. Dempsey: Don't call Australia home. Taxation in Australia, 49(3),
p.138.

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Wilson, J.D., 2015. Tax competition in a federal setting. In Handbook of Multilevel Finance.
Edward Elgar Publishing.
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