TAX 305 Taxation Law Assignment: Residency, Income and Taxation Issues

This taxation law assignment, submitted for TAX 305, addresses the complexities of Australian taxation, focusing on residency and income. The assignment analyzes two case studies, examining whether individuals are considered Australian residents under the Income Tax Assessment Act (ITAA) 1936 and ITAA 1997, applying the resides test, domicile test, and 183-day test. It also explores the sourcing of income and its taxability. The assignment further delves into business versus hobby income, analyzing whether receipts from activities like painting constitute taxable income, considering factors like profit-making intention and commercial approach. Finally, it examines the tax treatment of various income sources, including business income, gifts, and employment income, and the deductibility of expenses, referencing relevant case law and taxation rulings to support the analysis. The assignment concludes with a detailed analysis of each case, providing definitive answers to the presented issues.

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
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:.................................................................................................................9
Issues:.....................................................................................................................................9
Rule:.......................................................................................................................................9
Application:............................................................................................................................9
Conclusion:..........................................................................................................................10
Case Study Three.....................................................................................................................10
Issues:...................................................................................................................................10
Rule:.....................................................................................................................................10
Application:..........................................................................................................................11

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Conclusion:..........................................................................................................................13
References:...............................................................................................................................14

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Answer to question 1:
Part A:
Issues:
Will Rachel be held as Australian resident within the definition of
“section 6 (1),
ITAA 1936” for the applicable income year.
Rule:
As stated in
“taxation ruling of TR 98/17” the tax commissioner states that the
ordinary meaning of the term
“resides” under the definition of resident is provided within the
“subsection 6 (1), ITAA 1936” (Norbury 2019)
. The ruling is generally implemented on
those people that comes to Australia as the migrant, workers, teachers with pre-arranged
service agreements.
As explained in
“sec 6 (1), ITAA 1997” an Australian resident means a person that
resides in Australia and has permanent place of residence in Australia unless the
commissioner is content that the taxpayer has the perpetual home outside Australia and do
not have any intent of living in Australia (Harding and Scott 2015). The definition of
“sec 6
(1), ITAA 1997” provides four alternative test. These 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:
The word
“reside” here means to live on permanent basis or for significant time period
(Jones 2018). This test requires relevant considerations such as;

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a. Intention of existence in Australia
b. Family, employment or business relationship
c. Maintenance of location assets
d. Social and living preparation.
Weightage must be given in every factor. Similarly, in
“Iyengar v FCT (2011)” the
taxpayer was held as Australian resident who took up two year’s employment in overseas but
maintained his family home and relation in Australia.
Domicile Test:
An individual that has their home in Australia will remain an Australian citizen even
though they reside in overseas. A person may not be held Australian citizen if they satisfy the
ATO that they have chosen another country as their own permanent home. Relevant factor
such as durability of relation that a person has with a place in Australia is important. The law
court in
“Applegate v FCT (1979)” held that though Applegate had maintained his domicile
but has established a permanent home outside Australia (Idris 2018). A person intention to
live permanently or temporary is important factor.
The 183-Day test:
This test denotes the existence in Australian either constantly or in breaks for 183 days or
more.
Superannuation Fund Test:
This test is applied on those that has the membership of a specific commonwealth super fund.
Sources of Income:

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In order to ascertain the sources of income it is necessary to determine the material
fact. The federal court in
“FCT v French (1957)” held that the liability to impose tax
originates where the services are carried on (Thuronyi and Brooks 2016).
Application:
The evidences obtained puts forward that Racheal came to Australia for twelve
months with a service agreement which required her to stay in Australia for 1st December
2019. Referring to
“sec 6 (1), ITAA 1936” four relevant test is applied in case of Racheal.
Resides Test:
Racheal will be treated as Australian dweller given she is considered to have “reside”
in Australia for significant time period. Denoting the taxation ruling of
“TR 98/17” Racheal
came to Australia with service contract and lives in a house provided by his company. Citing
“Iyengar v FCT (2011)” Racheal will be treated as Australian citizen because she has been
residing here for twelve months (Bankman et al. 2018). The factors that contributes to her
residency is her physical presence, her children accompanying Australia and maintained of
home in Australia.
Domicile Test:
Under the Domicile Test, Racheal has a fixed abode out of Australia. Citing the case
of
“FCT v Applegate (1979)” Racheal has the fixed dwelling out of Australia and she is not
a resident under this test.
The 183-Day Test:
Regardless of whether Racheal is considered Australian occupant under the “Resides
Test”, she will be treated as Australian citizen under the 183-day test because has been
present in Australia for more than 12 months of the relevant income year. Therefore, Racheal

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has met the criteria of the 183-day test and she is an Australian resident under the meaning of
“sec 6 (1), ITAA 1936”.
Commonwealth Superannuation Test:
The commonwealth superannuation test is not relevant in the situation of Racheal
because she does not have any membership with any specific super fund.
Sources:
Racheal will be treated taxable for her wages that she has earned from her hospital
employment. Quoting
“FCT v French (1957)” the income from employment of Racheal is
sourced in Australia and will be included in her tax return in Australia whereas her bank
interest and employment income before 1st December 2018 has been sourced in UK (Buenker
2018). Under Double Taxation Agreement of Australia with UK Racheal is not required to
declare it in her tax return.

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Conclusion:
Under the meaning of
“sec 6 (1), ITAA 1936” Racheal is an Australian citizen for
taxation purpose because she “resides” here and has also met the 183-day test. Her
employment income from Australian sources will attract tax liability since it is sourced in
Australia.
Answer to Part B:
Issues:
Is John an Australian citizen under the explanation specified in
“subsection 6 (1),
ITAA 1936”.
Rule:
Resides Test:
This test considers the behaviour while present in Australia to be treated consistent
with that of Australian resident. This includes the intention or objective of presence and
location of home or assets in Australia. The law court in
“Dempsey v FC of T (2014)” held
that taxpayer was working in construction industry of Saudi Arabia and was not held
Australian citizen (Schenk 2017). The judged relied heavily on the intention of taxpayer to
live out of Australia.
Domicile Test:
The Domicile Test is defined in
“Domicile Act 1982”. A person’s home represents a
lawful relation with the nation based on which a person is able to summon the country’s laws
as their own. A person’s home represents a place where the permanent home is located
(Mertens and Montiel Olea 2018). The court in
“Harding v FCT (2019)” held the taxpayer
was non-resident of Australia since the taxpayer had the permanent place of abode out of
Australia.

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The 183-day Test:
A person is treated as Australian resident given they are physically existent in
Australia for more than six months of a year (Hoynes and Rothstein 2016).
Commonwealth Superannuation test:
This test is applied on members that has membership with the fund.
Application:
In order to ascertain the tax residency status of John the four relevant resident test are used.
Residency Test:
John has not been present in Australia for a considerable time period during the
income year. John has taken all his personal belongings to Brunei. Citing the example of
“Dempsey v FCT (2014)” John do not intend to return Australia (Oishi, Kushlev and
Schimmack 2018). Therefore, John is not an Australian resident under this test.
Domicile Test:
John following his move to Brunei for employment purpose has not illustrated
conclusively that his choice of home is Australia. To support this view, it is noticed that he
renewed his lease apartment in Brunei for another 12 months. Quoting
“Harding v FCT
(2019)” the circumstances gathered suggest that his permanent home is in Brunei.
183-Day Test:
John during 2017/18 and 2018/19 was not present in Australia physically. Therefore, he is not
a citizen of Australia.
Commonwealth Superannuation Test:
This test is irrelevant in the case of John.

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Conclusion:
John has passed successfully all the four alternative test and he is a foreign resident
under
“sec 995-1 (1), ITAA 1997”.
Case Study 2: Part A:
Issues:
Whether the receipts from paintings will be treated as business or hobby under
“section 995-1, ITAA 1997”?
Rule:
According to
“sec 6-5, ITAA 1997”, business gains are treated as ordinary income
whereas the non-business gains are treated as hobby and it is not treated taxable. It is
necessary to understand when the hobby or recreational activity becomes business (Auerbach
and Hassett 2015). There are some important factors that is considered by the court such as
the existent of profit making intentions. The court in
“Stone v FCT (2005)” found that lack
of profit making intention does not prevent an activity from being considered as business.
The extent of events together with the nature of capital and turnover forms the vital indicators
of business activity. It also includes whether the taxpayer has adopted any commercial
approach or not.
Application:
Nadine in her free time paints landscape for relieving her accounting work stress.
Following one of her friend’s suggestion Nadine decides to display three paintings for sale in
market. She made $4,500 from sales. The receipt of $4,500 by Nadine from selling the
paintings does not constitute any business activity because she did painting to release her
work stress and mainly for recreational purpose. Citing
“Stone v FCT (2005)” Nadine lacked
profit deriving intent because there was no such planning or any significant investment made

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(Woellner et al. 2016). Additionally, neither did she adopted any commercial approach to sell
the paintings and only attended market when she had one to sell.
Conclusion:
On a conclusive note, activities of Nadine constitute a hobby for recreational purpose
and the receipts are non-taxable as income.
Case Study Three
Issues:
Whether the receipts earned from the ordinary business course and employment will be
treated taxable as ordinary income under
“section 6-5, ITAA 1997”.
Rule:
As per
“section 6-5, ITAA 1997” usually majority of the business receipts are held as
ordinary income (Barkoczy 2016). Gains are not treated as income because it does not have
income character. In
“Hayes v FCT (1956)” shares received by accountant from company
boss was not held as income.
Where a taxpayer receives payment for rendering personal service then the income is
treated taxable under
“section 6-5, ITAA 1997” as ordinary earnings. The court in
“Dean v
FCT (1997)” employment remuneration was treated as taxable as ordinary income.
Where a taxpayer receives interest it is treated as taxable under the
“section 15-35”.
Similarly, windfall gains are not considered taxable earnings (Woellner et al. 2016). The
decision made in
“Moore v Griffiths (1972)” stated that simple prize winnings are treated as
income.

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As per
“section 8-1, ITAA 1997” an individual is only permitted to obtain deduction
from their assessable income for expenses that are incurred at the time of generating
assessable income or occurred at the time of performing business activities. While in negative
limbs of
“sec 8-1(2)”, no deduction is allowed for expenses that are capital or private in
nature.
The ATO states that small business owners having annual revenue of not greater than
$10,000 are permitted to immediately write off the assets which is bought for $20,000 or
lower. While the
“Taxation Ruling of TR 2004/6” explains that for claiming the expenses
associated to meal, allowances there should be written record for the same (Thuronyi and
Brooks 2016). Travel between home and work is regarded as private expenses and not
deductions is allowed. The court in
“Lunney v FCT (1958)” held that no deduction for travel
between home and work is allowed.
Application:
Sam received $450,000 from his accounting business. The receipt will be treated as
income from business and it is taxable as ordinary income under
“section 6-5, ITAA 1997”.
He also received a wedding gift of $10,000. Referring to
“Hayes v FCT (1956)” the gift is
non-taxable income since it was received out of personal relationship. The advertisement
incentives received by Sam from publishing company is a taxable ordinary income under
“section 6-5, ITAA 1997”.
A salary of $34,000 was received by Sam from his part-time employment in
University. The salary is an income from personal exertion and citing
“Dean v FCT (1997)”
it will be taxable as ordinary income under
“section 6-5, ITAA 1997”. Whereas the interest
from bank is an income which is taxable under
“section 15-35” (Hoynes and Rothstein