Taxation Law Report: Assessing Mike's Residency and Taxable Income

This report examines the taxation implications for Mike, an American dermatologist undertaking a fellowship in Australia. It analyzes Mike's residency status under Australian tax law using the common law, domicile, 183-day, and commonwealth superannuation tests, concluding he is a foreign resident. The report then assesses Mike's assessable income, considering income from share sales, property sales, fellowship grants, and bank interest, determining which income sources are taxable in Australia based on residency and source of income principles. The analysis is supported by relevant legislation, including ITAA 1936 and ITAA 1997, and case law, providing a comprehensive understanding of Mike's tax liabilities.

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
Issues:.........................................................................................................................................2
Rule:...........................................................................................................................................2
Application:................................................................................................................................5
Conclusion:................................................................................................................................7
References:.................................................................................................................................8

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Issues:
Whether Mike will be held as occupant of Australia within the legislative provision of
“sec 6 (1) ITAA 1936” or a foreign inhabitant under “sec 995-1 ITAA 1997” for the
2018/19?
Whether the receipts derived by Mike will be viewed as assessable income inside
ordinary concepts of “sec 6-5 ITAA 1997”?
Rule:
According to the legislation of “sec 6-5 (2)” and “sec 6-10 (4) ITAA 1997”, an
Australian dweller is usually assumed taxable on the ordinary income and statutory income
(Woellner et al. 2016). The Australian inhabitant taxpayer are commonly held taxable for the
earnings which is produced directly or indirect from every sources whether inside or outside
of Australia. As noted in “sec 6 (1) ITAA 1936” Australian resident means those people that
has their home in Australia except when they establish a fixed home outside Australia.
Most importantly the meaning of “resident” individual includes four alternate tests;
1. The “common law” test
2. The “Domicile” test
3. The “183-day” test
4. The “commonwealth superannuation fund” test
1: The “Common Law” Test:
This test involves the behaviour when a taxpayer is living in Australia. It mainly involves
determining the behaviour that is viewed consistent with those of an individual resident
(Barkoczy 2016). The relevant considerations are
a. Main intention or the objective existence in Australia

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b. Occupation, business or family relations
c. The place and maintenance of taxpayer’s assets
d. Communal and living engagements made by taxpayer.
The time physically spent by taxpayer in Australia should be treated as a noteworthy
factor as well. Appropriate weightage should be given to every factor because they will vary
based on the circumstances of each cases and no single factor is held decisive.
2: The “Domicile” Test
When the taxpayer is found to be domiciled in Australia, in such circumstances a
person might be said as Australian inhabitant despite the fact that they live in foreign. A
person might not be said as dweller of Australia if the ATO is content that an individual
taxpayer has made their home permanently in another country (Blakelock and King 2017). As
per the “Taxation Ruling of IT 2650” there are relevant considerations to consider a person
as an Australian occupant. This involves;
a. The planned time span of an individual’s visits in overseas nation.
b. The interval and continuousness of one’s presence in an overseas country.
c. Any motive of coming back to Australia at a certain point of time or travelling to
alternative country.
d. Leaving of any residence in Australia; and
e. The permanency relation which a person has in Australia with a specific place.
The domicile test is usually not applicable when a person demonstrates that their
permanent home is out of Australia. In “FC of T v Applegate (1979)” the court of law
explained that the term permanent does not indicates forever and its objectivity is evaluated
every year (Taylor et al. 2017). The taxpayer was noticed to have a fixed home of habitation
outside Australia despite the fact that he returned to Australia.

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3: The “183-days” test:
An individual under this test is viewed to be truly residing in Australia on a constant
basis or occasionally for approximately 183 days of income year or six months unless the tax
official is very much satisfied that the taxpayer has usual residence outside Australia with no
objective of coming back to Australia.
4: Commonwealth Test:
An individual who is a member of superannuation fund along with their family
members are held to Australian citizens for levying tax.
Sources of Income:
In order to impose tax, the sources of income are held as fundamental factor for tax
purpose. The sources of income are held central in getting relief from double taxation. As
noticed in the case of “FCT v Mitchum (1965)” where the taxpayer earns income from
professional services such as creative skills, specialized knowledge the factors determining
the source involves the place where contract is made (Morgan and Castelyn 2018). In another
instance of “FC of T v United Aircraft Corp (1943)” where the taxpayer earns royalties for
the technical knowhow and services supplied out of country, taxes are imposed in the source
country where the contract is made and the place where know-how is provided by the
taxpayer.
For the foreign sourced income of the resident’s exemptions are provided from the
domestic tax to the taxpayers. Usually the country of source is regarded as having the primary
rights of imposing tax with regard to the income that is derived by the overseas residents
(Long, Campbell and Kelshaw 2016). As noticed under “sec 6-5 (3) and 6-10 (5) ITAA
1997” foreign residents are usually held taxable in Australia only for their “ordinary and

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statutory income” which is derived whichever directly or indirectly from the Australian
sources.
Application:
The case facts of Mike Smith suggest that he is an American dermatologist who has
undertaken a two-year fellowship program in Australia that is sponsored by Australian
Cancer Council from 1st July 2018 onwards. To define the residency position of Mike
subsequent test are executed;
1: The “Common Law” Test:
Under this it can be stated that Mike was not existent physically in Australia for the
significant time during the relevant income year of 2018/19. It is assumed that Mike intended
to return back to America soon when his fellowship with Australian Cancer Council
completes. Throughout the year Mike was only present for two weeks in September,
December, February and May. Although he stayed in a service apartment in Perth and
Sydney but these factors cannot be held as significant enough to consider Mike as Australian
inhabitant under this test. Therefore, Mike under the “common law” test is not an Australian
within the sense of “sec 6 (1) ITAA 1936”.
2: The “Domicile” test:
During the relevant income year Mike stayed in a service apartment in Perth and
Sydney where he carried out his seminars and master classes at hospitals and clinics. Mike
has not provided any conclusive evidence to demonstrate that his choice of domicile is in
Australia. Mike’s stay in service apartment does not represents any permanency of
association with a specific dwelling in Australia. Denoting to “Applegate v FC of T (1979)”

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the gathered case facts of Mike suggest that his fixed home of residence is in America
(Morgan, Mortimer and Pinto 2018). Although Mike’s wife accompanied him to Australia for
one-week holiday trip, this does not demonstrate a conclusive evidence that is permanent
abode of dwelling is in Australia. Mike only visited for two weeks in each months of
September, December, February and May further adds weightage to the conclusion which is
drawn above. Hence, Mike is not an Australian occupant under the “domicile” test.
3: The “183-Day” test:
According to the case facts obtained it can be stated that Mike was present for two
weeks in each months of September, December, February and May. Therefore, he has not
been existent in Australia physically for six months during the year 2018/19. Hence, Mike is
not an Australian occupant under the “183-day” test.
4: The “Commonwealth Superannuation” Test:
This test cannot be implemented in the situation of Mike for the reason that he does
not hold any membership of “commonwealth superannuation” fund.
Overall, preceding from the above performed individual residency test, Mike should
be held as foreign resident under “sec 995-1 ITAA 1997”.
Sources of Income:
Mike during 1st June 2019 has sold shares in US company and derived a sum of
$25,000. He also reported the sale of investment flat in USA for a sum of $420,000 which he
acquired for cost of $230,000. It can be stated that these receipts have its source in USA and
it will not be contained within into the assessable earnings of Mike. However, during the year
Mike reports the receipt of $120,000 from his fellowship grant. The grant was paid in the
Australian bank account of Mike and also derived an interest of $2,000 from the bank

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account. Citing “FC of T Mitchum (1965)” the grant received from the fellowship and
interest from bank account has its source in Australia (Jones 2018). As Mike is treated as the
foreign resident with respect to “sec 6-5 (3) (a) ITAA 1997” the grant received from
fellowship will be included as “assessable” ordinary income in his tax return.
He also reports the receipt of interest amounting to $12,500 that is earned from the US
bank account. As the sum is not sourced in Australia therefore it will not be included in his
tax return. While Mike on 31st December 2018 reports winnings of $100,000 from pokies in
casino while celebrating new year. The sum of $100,000 is a windfall gain from gambling
and does not hold the character of income. Therefore, the amount will not be counted in his
chargeable pay for taxation purpose.
Conclusion:
Conclusively, Mike will be considered as foreign occupant under “sec 995-1 ITAA
1997”. With respect to “sec 6-5 (2) (a)” he will only be liable for tax on grant and bank
interest received from the Australian sources.

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References:
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data
matching. Proctor, The, 37(6), p.18.
Jones, D., 2018. Complexity of tax residency attracts review. Taxation in Australia, 53(6),
p.296.
Long, B., Campbell, J. and Kelshaw, C., 2016. The justice lens on taxation policy in
Australia. St Mark's Review, (235), p.94.
Morgan, A. and Castelyn, D., 2018. Taxation Education in Secondary Schools. J.
Australasian Tax Tchrs. Ass'n, 13, p.307.
Morgan, A., Mortimer, C. and Pinto, D., 2018. A practical introduction to Australian
taxation law 2018. Oxford University Press.
Taylor, J., Walpole, M., Burton, M., Ciro, T. and Murray, I., 2017. Understanding Taxation
Law 2018. LexisNexis Butterworths.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation
Law 2016. OUP Catalogue.