Taxation Law Assignment: Residency, Income, Benefits, and Taxation

This assignment report analyzes two key taxation law questions. The first question examines Mary Joseph's residency status in Australia, considering the 183-day test, domicile, and her intention to reside in Australia for ten years. It assesses the assessability of her income, including salary, bonuses, and a stopover benefit, referencing relevant sections of the ITAA 1997 and case law. The report also addresses the Australia-UK Double Taxation Agreement concerning her rental and bank interest income. The second question investigates the tax treatment of non-cash business benefits, specifically focusing on the case of Jimmy and Jane's retail business. It explores the application of section 21 of the ITAA 1936 and the cash accounting method, determining whether free overseas holidays and gifts constitute assessable income. The report provides detailed computations of assessable income for both scenarios, citing relevant rulings and case law to support its conclusions.

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

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Table of Contents
Answer to question 1:.................................................................................................................2
The main issues:.....................................................................................................................2
Background: Mary’s tax status at the time of entering Australia:.........................................2
The assessability of Mary’s receipts for 2017-18 in Australia...................................................3
The Australia-UK Double Taxation Agreement:...................................................................4
Conclusion:............................................................................................................................5
Answer to question 2:.................................................................................................................5
The Main Issue:......................................................................................................................5
Non-Cash Business Benefits:.................................................................................................5
Background: Assessability of non-cash business benfits under section 21, ITAA 1997:......6
Conclusion:............................................................................................................................7

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Answer to question 1:
The main issues:
The present issue here is related to the determination of residency status under
“section 6 (1) of the ITAA 1997” and whether the receipts would be included for assessment
within the ordinary concepts of “section 6-5 of the ITAA 1997”.
Background: Mary’s tax status at the time of entering Australia:
The resident of Australia includes the individual that has their home in Australia,
unless the commissioner of taxation is content that the taxpayer’s permanent place of
residence is out of Australia1. The domicile Test under is used to determine the residency of a
person that have their domicile in Australia2. Domicile is obtained by choice where the
taxpayer intention is to make their home. 183 days’ test is used if a person has been in
Australia either continuously or intermittently for more than one half of the income year.
While superannuation test is implemented on the employee that are employed in the
government sector and deemed to be a tax resident of Australia.
In “Joachim’s case” the taxpayer stayed in Australia with the taxpayer’s having
permanent residency of Australia and maintained a family home in Australia3. The
commissioner held the taxpayer to be an Australian resident. As evident from the
circumstances of Mary Joseph she lived in UK before arriving in Australia under the work
permit with Lifestyle Pty Ltd for ten years. The domicile test is applied in case of Mary as
she entered Australia with the prearranged employment contracts and obtained the domicile
with the intent of making her home. She also meets the criteria of 183 days’ test as she has
been presented in Australian for more than 183 days. Citing “Joachim v FC of T (2002)”
Mary will be treated as the Australian resident within the ordinary meaning of the act because
1 “section 6 (1) of the ITAA 1997”
2 section 6 (1)(a)(i)
3 “Joachim v FC of T (2002)”

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she came to Australia with the intention of residing here for ten years from the arrival4. The
period of ten years for Mary constitutes significant time which also reflects continuity of
residing in Australia. The superannuation test cannot be applied as she is not the member of
commonwealth superannuation fund.
The assessability of Mary’s receipts for 2017-18 in Australia
“Section 6-5 of the ITAA 1997” explains that majority of the income that is received
by the taxpayer is held as the ordinary income based on the ordinary concepts. The court in
“Scott v CT (1935)” held that income is not the term of art and requires application of
principles to define the receipts in agreement with the ordinary concepts.
Correspondingly, in “Pritchard v Arundale (1972)” lump sum compensatory
payment received for giving up their “partner” status was not regarded as income5. The
taxpayer should include in their taxable the gross income derived6. The court has held that the
cash method was the most appropriate method of assessing the employment income7. Income
from salaries, wages or other occupation are taxable based on receipt method even though
they are related to past, future earnings period.
Mary employment was also provided with the stopover cost in Singapore and
considering the application of “section 15-2” the sum of $2500 amounted to statutory income
that holds relation with the employment or services rendered. The sum will be included into
Mary’s assessable income. Mary also received $200,000 for giving up her independent status.
Citing “Pritchard v Arundale (1972)” lump sum payment received for giving up their
independent status was not regarded as income The sum of $200,000 will not be included in
her assessable income.
4 “section 6 (1) of the ITAA 1997”
5 “Pritchard v Arundale (1972)”
6 “subsection 6-5 (2) of the ITAA 1997”
7 “FC of T v Firstenberg (1976)”

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Mary also reported the receipt of salary and bonus during the end of 2018. The salary
amounted to income from personal exertion and will be included for assessment with in the
ordinary meaning of “section 6-5 of the ITAA 1997” 8. By citing the event of “FC of T v
Firstenberg (1976)” the bonus which was paid on 10 July to Mary is included for assessment
because employment income is taxed on receipt basis even though bonus is related to future
earnings period.
The Australia-UK Double Taxation Agreement:
The source of income forms the fundamental factor in the imposition of tax. The
double taxation limits the ability of the ATO in imposing tax on the certain types of income
by allocating the taxing rights to a particular country. The court have stated that source
should be determined where the obligation of paying interest arises9.
Mary following her departure received a rent of £36,000 out of which £3000 was
related for July month. She also received bank interest that amounted to £3600 out of which
£800 was associated to the period ending 30th June 2018. As Australian has DTA agreement
with UK the rental and bank interest would not be taxed in Australia and the right for taxation
is allocated to the source nation in UK.
Particulars Amount (AUD)
Assessable Income
Gross Salary 1,50,000
Bonus 30,000
Total Assessable Income 1,80,000
Computations of Assessable Income
For the year ended 2017/18
Conclusion:
Date Nature of Tax Treatment Relevant Authority
8 “Scott v CT (1935)”
9 “Spotless Service Ltd v FC of T (1995)”

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Payments
1 September 2017 to
30th June 2018
Salary Payment
Bonus payment
Assessable Section 6-5 of the
ITAA 1997
1 September 2017 to
30th June 2018
Stopover in
Singapore for $2500
Assessable Section 15-2 of the
ITAA 1997
Answer to question 2:
The Main Issue:
The current issue is based on determining the adoption of appropriate method of
determining the tax accounting for items under the “subsection 6-5 (2) and (3) of the ITAA
1997”. Whether the non-cash business benefits amount to assessable income under “section
21A of the ITAA 1936”?
Non-Cash Business Benefits:
The ruling defines that business income or income obtained from the business
activities represents income produced from carrying on of the business10. Under the receipts
method income is derived when the taxpayer receives it either actually or constructively
received11. The Carden’s case provides that the method of tax accounting should provide the
correct reflex and hence appropriate in concluding from all the relevant circumstances the
taxpayer’s income. The cash method of accounting brings into the account the taxable
income where all cash amount is received during the income year.
Benefits that is inconvertible into money can be treated as if it was convertible into
cash12. Within the meaning of this act if a tax payer derives a non-cash business benefit will
be treated as income and the benefit shall be bought into the account at the arm’s length value
10 “taxation ruling of TR 98/1”
11 “subsection 6-5 (4) of the ITAA 1997”
12 “section 21 of the ITAA 1936”

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reduced by any contribution of the recipient. The value of free overseas holidays that are non-
transferable & could not be converted into money provided by the retailers as the part of sales
incentives will be not be treated as income13. However, the principle of “section 21 of the
ITAA 1936” provides that non-cash business benefits will be treated as income based on the
ordinary concepts.
As per the ATO an individual may receive amounts that are not subjected to tax and
hence not included in taxable income. Rewards or small cash gifts are not treated as income
however gifts may be taxable if they are large amount and received as the part of business
like activity or received in respect of income generating activities as the employee or
contractor.
Background: Assessability of non-cash business benfits under section 21, ITAA 1997:
The case study provides that Jimmy and Jane operated a retail business as Orange that
sells computers and software. The business reported receipts that amounted to $1,200,000.
Referring to the “taxation ruling of TR 98/1” the cash receipts constituted business income
obtained from carrying on of business. Referring to Carden’s case the cash receipt received
by Jane and Jimmy is classified under “subsection 6-5 (4) of the ITAA 1997” of cash
accounting method.
Jane and Jimmy was awarded with the free trip to Hong Kong for achieving highest
sales. Citing the court judgement value of non-transferable free overseas holiday will be
treated as non-cash business benefits14. Citing the “section 21” the sum of $10,000 as non-
transferable business benefit constitute income for Jane and Jimmy which will be included
for assessment based on the ordinary meaning of income.
13 “Cooke & Sherden v FC of T (1978)”
14 “Cooke & Sherden v FC of T (1978)”

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Jane also reported the receipt of iPad as that has the value of $500 from one of its
customer on the 10th anniversary of business. The gift holds the market value of $500 and will
be considered taxable since it is received by Jane as the part of business activity and holds
connection with the income-earning activities of Jane.
Particulars Amount (AUD)
Receipts
Cash Receipts 12,00,000
Add:Opening Debtors 2,30,000
Less: Closing Trade Debtors 3,20,000
Gross Receipts 11,10,000
Non-Cash Business receipts 10,000
Non-Cash Gifts (Ipad) 500
Total Assessable Income 11,20,500
Computations of Assessable Income
For the year ended 2017/18
Conclusion:
Date Nature of Payments Tax Treatment Relevant Authority
July 2017/18 Cash receipts Assessable Section 6-5 of the
ITAA 1997
November 2017 Non-cash business
receipts
Assessable Section 21, ITAA
1936
13 May 2018 Ipad as Gifts Assessable Section 6-5 of the
ITAA 1997

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