Taxation Case Study: Ms. Sierra's Residency and Income Tax

This case study examines the tax implications for Ms. Sierra, an individual employed on a luxury liner. The analysis focuses on determining her residency status based on Australian tax law, considering factors such as her apartment ownership, time spent in Australia, and domicile. It then assesses the taxability of her income, considering that she works for a company incorporated in the Cook Islands and earns salary from services performed outside of Australia. The study also addresses the tax treatment of income derived from her horse breeding activities, determining whether these activities constitute a business under tax legislation. The conclusion summarizes Ms. Sierra's residency status and the tax treatment of her various income sources, providing a comprehensive overview of her tax obligations.

Running head: TAXATION
Taxation
Name of the Student
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Table of Contents
Issues:.........................................................................................................................................2
Discussion by using tax legislation and case laws:....................................................................2
Conclusion:................................................................................................................................6
References..................................................................................................................................7

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Issues:
The issue involved in the current case includes the determination of residency and
source of taxation for Ms Sierra and the sources from where the income is derived. The issues
also include whether the taxpayer will be exempted from income derived from the sources
that are out of Australia and whether the activities of the horse breeding undertaken amounts
to business activities by the taxpayer.
Discussion by using tax legislation and case laws:
According to the “section 6-1 (1), ITAA 1936” or “section 995-1 of the ITAA 1997”
resident or the resident of Australia includes person that are residing in Australia and includes
those people that has their residence in Australia, unless the taxation officer is satisfied that
the person has the perpetual place of residence outside of Australia (Blackstone & Chase,
2017). According to the “section 995-1, ITAA 1997” occupant of Australia means an
individual that has actually been living in Australia, constantly or intermittently all through
the six months of the income year, except the taxation commissioner is content that an
individual has the actual place of dwelling outside Australia and that individual has no
intention of taking up the Australian residency.
The description of inhabitant of Australia consists of four different tests and the last
test is evidently an objective (Coleman & Sadiq, 2013). As evident in the current situation of
Sierra she is employed on a luxury liner that travels the Mediterranean Sea and owns an
apartment in Australia. Following the divorce, the apartment has been rented out to her uncle
and she lives in that apartment whenever she returns to Australia. During the present income
year, she spent eighty days by living in that apartment.
To determine the residency status of Sierra certain residency test are conducted;

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Test 1: Resides in Australia:
Whether or not an individual is residing in Australia forms the main test in
determining residency and it is identified as the common law test. A person would be held as
Australian citizen for the taxation purpose if he or she actually lives in Australia, irrespective
of their people, citizenship or the location of their permanent home (Grange et al. 2014). The
“taxation ruling of TR 98/17” states that to determine the character of an individual’s
behaviour in Australia it is necessary to determine the meaning or purpose of presence,
domestic or employment ties and also includes the maintenance and location of taxpayer’s
assets. To determine the residency status, it is necessary to ascertain the social and living
arrangements as well as the period of physical presence in Australia that forms the relevant
factor.
As held in “Iyengar v FCT (2011)” the taxpayer was engineer and took up the 2 year
plus overseas employment however kept his family residence and ties in Australia to which
he returned eventually and was held as Australian resident (Jover-Ledesma, 2015). As
evident in the current situation of Sierra she has maintained her family home in Australia and
stays in that apartment whenever she returns. It can be said that Sierra has maintained her
assets in Australia despite being physically present for only eight-days in the current income
year. Sierra is in compliance with the reside test.
Test 2: Domicile Test:
Under the domicile test a person is considered as the Australian resident given their
domicile is in Australia, except when the commissioner is gratified that the person has their
permanent place of residence outside of Australia. A person generally acquires the domicile
of origin at birth or the residence of choice where the taxpayer aims to make their home
indefinitely. According to the “section 6 (1)” the commissioner considers whether the person

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has the permanent place of residence outside of Australia (Kenny, 2013). As per “taxation
ruling of IT 2650” there are certain factors that should be considered in ascertaining whether
the person that leaves Australia on temporary basis to reside in overseas acquires a place of
abode permanently outside Australia and hence, ceases to be the Australian resident during
their absence (Krever, 2013). The factors comprise of intended and the actual length of
overseas stay, whether any fixed home has been established out of Australia along with the
durability of an individual’s continuous association with the place in Australia.
As held in “Boer v FCT (2012) AATA 574” and “Sully v FCT (2012) AATA 582”,
the taxpayers were considered to be the Australian residents of Australia all through their stay
in abroad because the taxpayers did not establish any permanent place of dwelling out of
Australia (Sadiq, 2018). Similarly, in the case of Sierra during her employment with luxury
liner, she did not establish a fixed home out of Australia and there was a continuous
durability with the house in Australia as she returned to stay in her apartment for eighty days
during the current income year.
Therefore, Sierra satisfies the domicile test as her residence is in Australia and retains
her house during her overseas absent. Therefore, her permanent place of abode remains in
Australia.
Test 3: 183-day test:
A person that is in Australia for a period of more than one half of the income year
would be held as the Australian dweller except when it is understood that their normal place
of residence is out of Australia and does not has any intention of setting up the residency in
Australia (Robin, 2019). As evident in the current tax year, Sierra has been present in
Australia only for eighty days. Therefore, Sierra here does not meet the criteria of 183 days’
test as she was present for less than 183 days.

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Test 4-Superannuation Test:
This test is considered as the independent test because it simply requires the
membership to the specified superannuation structure (Morgan et al. 2016). The test was
actually designed to introduce salaries paid to an individual that is engaged in High
Commission staff inside the Australian taxation field and generally has restricted application.
In the current context of Sierra, the superannuation test is not applicable because she
is not the member of any specified superannuation fund. Therefore, the superannuation fund
does not apply to Sierra.
On the basis of the above stated test Sierra has satisfied the Resides test and Domicile
test as her permanent place of abode remains in Australia during her overseas stay. Within the
“section 995-1, ITAA 1997” she will be considered as the Australian resident for taxation
purpose.
A resident of Australia is subjected to taxation on income irrespective of the source,
however there are numerous exemption such as income tax offsets and special rules in
relation to the foreign income that may be available for income that are sourced overseas.
Similarly, as held in “FCT v French (1957)” income which consists of remuneration for
services performed is usually sourced where the services are carried out (Sadiq et al. 2014).
There are situations where the location of entering into the contract might be very noteworthy
in ascertaining the source. As held in “Mitchum v FCT (1935)” even though the services
were carried out in Australia, the contract for services was made out of Australia and the
income was considered to be source out of Australia. The Australian taxation system is such
that it generally provides exemptions to the foreign income that are derived by the Australian
residents from the Australian taxation burden.

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As evident in the current situation of Sierra the contract of employment was signed
out of Australian in Hong Kong and the company was incorporated in Bermuda. The salary
income earned by Sierra has a source that is out of Australia. The contract for services were
made and performed both outside of Australia by Sierra. Referring to the case of “FCT v
French (1957)” the income derived from the employment will be exempted from taxation to
avoid the double taxation of salary (Woellner, 2013). The income is sourced outside of
Australia and hence it is exempted.
Gains originating from carrying on of the business comprises of the ordinary income
under “section 6-5 of the ITAA 1997”. Depicting the receipts as the ordinary income from
the business comprises of two steps procedure. First, it includes determining whether the
taxpayer is carrying on the business, secondly due consideration should be paid whether the
receipts would be treated as normal proceeds of that business activity (Sadiq et al., 2016).
The court in “Ferguson v FCT (1979)” held that no single characteristics can be considered
decisive. Similarly, in “Thomas v FCT (1972)” it is necessary to determine whether the
activity undertaken amounts to more than the recreational activity.
As evident Sierra has been undertaking the activity of horse breeding and in the
current income year she has made a profit from this activity. The activity of horse breeding
by Sierra amounts to business activities as there was profit making intention and the scale of
activity undertaken was repetitive in nature which constitutes business. The activities
involved commercial approach and was more than recreational activity. Therefore, it amounts
to business under the “section 995-1 of the ITAA 1997”.
Conclusion:
Conclusively, Sierra will be treated as Australian resident within “section 6-1 (1),
ITAA 1936” as she has successfully met the criteria of domicile test and resides test. The

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sources of income derived were from outside of Australian and hence it is exempted from
taxation while the activities of horse breeding undertaken amounts to carrying on of the
business within the legislative definition of business under “section 995-1 of the ITAA
1997”.

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References
Blackstone, W., & Chase, G. (2017). Commentaries on the laws of Australia. Holmes Beach,
Fla.: Gaunt.
Coleman, C., & Sadiq, K. (2013). Principles of taxation law.
Grange, J., Jover-Ledesma, G., & Maydew, G. (2014). principles of business taxation.
Jover-Ledesma, G. (2015). Principles of business taxation 2015: Cch Incorporated.
Kenny, P. (2013). Australian tax. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. (2013). Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Morgan, A., Mortimer, C., & Pinto, D. (2016). A practical introduction to Australian
taxation law. North Ryde [N.S.W.]: CCH Australia.
Robin, h. (2019). Australian taxation law 2019. Oxford University Press.
Sadiq, K. (2018). Australian Tax Law Cases 2018. Thomson Reuters.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., & Ting, A. (2014).
Principles of taxation law.
Woellner, R. (2013). Australian taxation law select 2013. North Ryde, N.S.W.: CCH
Australia.