Taxation Law 13 - University Assignment: Residency, Income and Tax

This document presents a comprehensive analysis of Australian taxation law, addressing key aspects such as residency, income, and deductions. The assignment examines the application of the Income Tax Assessment Act (ITAA) 1936 and ITAA 1997 to determine resident status using various tests including the resides test, domicile test, 183-day test, and Commonwealth Superannuation Fund test. It further explores the classification of income sources, differentiating between business and hobby income, and the tax implications of each. The assignment provides case studies to illustrate the application of tax laws, including the taxability of personal service income, business receipts, gifts, and lottery winnings. It also addresses permissible deductions for business expenses, such as contractor fees, office rent, and employee salaries, while clarifying non-deductible expenses such as private travel. The document concludes with a determination of the total tax owed and the application of carried-forward losses.

Running Head: TAXATION LAW
TAXATION LAW
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer to question 1:.................................................................................................................3
Part A:........................................................................................................................................3
Issues:.....................................................................................................................................3
Rule:.......................................................................................................................................3
Application:............................................................................................................................5
Conclusion:............................................................................................................................6
Answer to Part B:.......................................................................................................................7
Issues:.....................................................................................................................................7
Rule:.......................................................................................................................................7
Application:............................................................................................................................8
Conclusion:............................................................................................................................8
Case Study 2: Part A:.................................................................................................................8
Issues:.....................................................................................................................................8
Rule:.......................................................................................................................................9
Application:............................................................................................................................9
Conclusion:............................................................................................................................9
Case Study Three.......................................................................................................................9
Issues:.....................................................................................................................................9
Rule:.......................................................................................................................................9
Application:..........................................................................................................................10

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Conclusion:..........................................................................................................................12
References:...............................................................................................................................13

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Answer to question 1:
Part A:
Issues:
Conferring to the definition of “sec6 (1), ITAA 1936” will Rachel be viewed as an
Australian occupant for the relevant income year.
Rule:
The general sense of the expression “resides” as stated by the tax commissioner in the
“TR 98/17” are the people who has come to Australia as workers, migrants, teachers with
pre-determined work agreements (Woellner et al., 2016). This is stated in the in the
description of dweller in the “subsection 6 (1), ITAA 1936”.
According to “sec 6 (1), ITAA 1997” an Australian occupant is a person who is
residing in Australia with a permanent residence in Australia. The individual will be treated
as an Australian resident unless the officer is not complacent about the taxpayer having a
perpetual house anywhere outside (Barkoczy 2016) Australia and having no meaning of
leaving Australia. There are four alternative test as stated in the definition of “sec 6 (1),
ITAA 1997”. These tests are as follows-
a. The Resides Test
b. The Domicile Test
c. The 183-Day Test
d. The Commonwealth Superannuation Fund Test
The Resides Test:
Here the word “reside” means to live on a enduring basis or for a significant period of
time. Relevant considerations are required for this test such as-

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a. Intention of existence in Australia
b. Family, employment or business relationship
c. Maintenance or location of assets
d. Communal and living preparation.
Every factor should be given importance. Likewise, the taxpayer in “Iyengar v FCT
(2011)” who was an Australian resident and took up a two years’ overseas employment. But
managed to maintain his personal relationships and home in Australia (Jones 2018).
Domicile Test:
An individual, who has its home in Australia will be called an Australian occupant
even if it resides in overseas. A person is no more be called a resident of Australia if it can
satisfy the ATO about choosing another country as the permanent home of its own. Several
relevant factors like relationship durability of a person having with Australia is considered
important. The law court in “Applegate v FCT (1979)” stated that Applegate besides
maintaining its domicile has also established a permanent house somewhere outside Australia
(Norbury 2019). The intention of the person for living permanently or temporarily is also an
important factor to be considered.
The 183-Day test:
The 183-Day test identifies the existence of Australian either on a constant basis or
for 183 or more days in breaks.
Superannuation Fund Test:
The Superannuation test is applicable for those who has a membership of a particular
commonwealth super fund.
Sources of Income:

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The sources of income are ascertained on the basis of determination of material facts
(Burman et al., 2016). The liability of tax imposition originates when the services are carried
forward according to the federal court stated in “FCT v French (1957)”.
Application:
The available evidences show that Racheal stayed in Australia for 12 months as the
service of agreement required her to stay till 1st December in Australia. The four relevant test
is applied for Racheal’s case according to “sec 6 (1), ITAA 1936”.
Resides Test:
Racheal is an Australian dweller under “reside” test. Since Racheal is present in
Australia for substantial time. Referring the tax ruling of “TR 98/17” Racheal visited
Australia with a pre-arranged contract with her company in which she is employed (Keyzer,
Goff and Fisher 2017). Referring “Iyengar v FCT (2011)” Racheal is an Australian dweller
as she is living in Australian for 12 months. Other factors such as maintenance of home in
Australia contributes to her physical presence.
Domicile Test:
Racheal does not has a enduring home in Australia. Referring to “FCT v Applegate
(1979)” Racheal permanent home is in UK and she cannot be held resident under Domicile
Test.
The 183-Day Test:
Notwithstanding that Racheal is a citizen of Australia under “Resides Test”, she is an
Australian dweller under 183-days since she is existent in Australia for 12 months during the
year. On satisfying the 183-day test Racheal is Australian dweller inside the classification of
“sec 6 (1), ITAA 1936”.

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Commonwealth Superannuation Test:
This test is not relevant for Racheal since she has no membership of superannuation
fund.
Sources:
The sources of income is derived in Australia from Australian employment. Citing
“FCT v French (1957)” Racheal is assessable from her employment earnings because it has
an Australian source (Prebble and Prebble 2017). Meanwhile the bank interest and
employment income from 1st December 2018 is sourced in UK. With respect to Double
Taxation Agreement between UK and Australia Racheal is exempted from her employment
and bank interest income earned from UK.
Conclusion:
Racheal is an Australian inhabitant under “sec 6 (1), ITAA 1936” because she has
met 183 day test and “Reside Test”. While the employment occupation from Australian
sources are taxable under “sec 6-5, ITAA 1997”.

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Answer to Part B:
Issues:
Whether or not John will be viewed Australian dweller under “subsection 6 (1),
ITAA 1936”.
Rule:
Resides Test:
Reside test implies to live in Australia for considerably or permanently. The “resides
test” includes a person’s behavior when they are present in Australia. It takes into
consideration the intention of coming to Australia and place of fixed home in Australia
(Sadiq 2019). The judgment in “Dempsey v FC of T (2014)” considered taxpayer was
employed in Saudi Arabia and was held as not a dweller of Australia. This is because the
taxpayer has the intention of living outside Australia.
Domicile Test:
Domicile implies the permanent home of the taxpayer. The Federal Court in
“Harding v FCT (2019)” considered taxpayer as non-resident because he had permanent
home in Bahrain (Butler 2019).
The 183-Day test:
The 183-Day test classifies the presence of an Australian citizen either on a incessant
base or for 183 or more days in interruptions.
Superannuation Fund Test:
The Superannuation test is valid for those who has an association of a particular
commonwealth super fund.

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Application:
The relevant test is implemented to understand the resident status of John.
Resides Test:
Under this test John is not Australian resident. This is because he is out of Australia
from a very long time and has also taken all his belongings to Brunei. Referring to “Dempsey
v FCT (2014)” John has expressed his intention to live in Brunei (Morgan, Mortimer and
Pinto 2018). John has successfully passed the “resides test”.
Domicile Test:
After going to Brunei John has demonstrated that he choice of home is in Brunei and
has also renewed his Brunie apartment lease for another 12 months. Referring to “Harding v
FCT (2019)” John is not an Australian under this test (Murray et al. 2018).
183-Day Test:
John was not present in Australia for both 2017/18 and 2018/19. Hence, this test is not
relevant.
Commonwealth Superannuation Test:
This does not applies to John.
Conclusion:
The test conducted above states that John has a place of abode in Brunei and he
should be considered foreign inhabitant under “sec 995-1 (1), ITAA 1997”.

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Case Study 2: Part A:
Issues:
Is the painting receipts amounts to business proceeds or hobby under “section 995-1,
ITAA 1997”?
Rule:
Under “sec 6-5, ITAA 1997”, gains from business amounts to ordinary earnings while
gains from non-commercial undertakings such as hobby is not a taxable income (Morgan and
Castelyn 2018). Important factors such as presence of profit earning intention is important
factor in classifying the receipts of hobby as income. In “Stone v FCT (2005)” lack of profit
deriving intent cannot prohibit an activity from being treated as business. The degree of
capital and regularity of activity or any commercial approach undertaken must be considered.
Application:
Nadine to relieve her work stress does paintings. On being advice by one her friend
she decides to display her paintings in market for sale and also earned $4,500 as sales
receipts. The receipts from Nadine’s painting is not an income. Referring to “Stone v FCT
(2005)” her activities is only for relieving stress and only for hobby purpose (Cavenagh et al.
2018). Nadine also has no such intent of making profit nor does her activity involved any
regularity. No commercial approach was taken by her so her activities are classified as hobby.
Conclusion:
The proceeds from sale of painting is classified as hobby and the sum of $4,500 is not
a taxable income.

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Case Study Three
Issues:
Is the money earned from personal services and business receipts are taxable as ordinary
earnings under “sec 6-5, ITAA 1997”.
Rule:
Income derived from own efforts under “sec 6, ITAA 1936” are considered taxable as
ordinary earnings. In “Dean v FCT (1997)” salary received from service was a chargeable
pays under “sec 6-5, ITAA 1997”. While gains that do hold income nature are not held for
tax. The Federal Court in “Hayes v FCT (1956)” stated that gift received as shares by former
boss was not a taxable income (Main 2019). Receipts of interest is taxable under “section 15-
35”. While windfall gains does not attracts tax liability. In “Moore v Griffiths (1972)” mere
prize earnings was not a chargeable earnings.
Deduction for expenses is allowed in “section 8-1, ITAA 1997” to taxpayers when it
is occurred in creating an calculable income. This includes outgoings occurred in the ordinary
business course (Morgan and Castelyn 2018). Whereas taxpayer are deprived of deduction
under “negative limbs” of “sec 8-1(2)” for outgoings that are capital or private expenses.
Small business with revenues of less than $10 million or less is permitted to instantly
write off the assets purchased for $20,000 or less. Entertainment expenses by way of meal or
food is permissible as tax deduction under “sec 32-10 (1), ITAA 1997”. Travel from home
and office is a private expenditures and not permitted for deduction under “sec 8-1, ITAA
1997”. In “Lunney v FCT (1958)” deduction was disallowed to taxpayer for travelling
amongst home and office.

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Application:
The receipt of $450,000 from accounting business is chargeable as normal business
proceeds under “sec 6-5, ITAA 1997”. Sam reports receipts of wedding gift amounting to
$10,000. Citing “Hayes v FCT (1956)” the wedding gift amount is exempted from tax since
it is a personal gift. Incentives for advertisement by Sam from publishing company is
assessable business receipts under “sec 6-5, ITAA 1997”.
The part-time employment wages received by Sam amounts to personal exertion
income and taxable under as normal receipts under “sec 6-5, ITAA 1997”. While the bank
interest will be chargeable income for Sam under “section 15-35” (Keyzer, Goff and Fisher
2017). Citing “Moore v Griffiths (1972)” winnings from lottery of $15,000 is a non-taxable
windfall gain.
Business expenses of S contractor, office rent and salary to employee is permissible
business deduction under “sec 8-1, ITAA 1997” because it was occurred in ordinary business
course for making income. The photocopier bought by Sam is allowed for immediate write-
off since its cost base is less than $20,000. The meal expenses on client is deductible under
“sec 32-10 (1), ITAA 1997”.
No deduction for travel expense is permitted to Sam under “sec 8-1, ITAA 1997”.
Citing “Lunney v FCT (1958)” Sam cannot claim general deduction for private travel
expense. The carried forward loss of $12,000 is permitted for offset from exempted income
and hence it should be subsequently carried forward to next year.