LAW 511 Taxation Law Assignment: Income and Residency Analysis

This document presents a comprehensive solution to a taxation law assignment, addressing both income assessment and residency determination. Part A of the assignment meticulously analyzes Harry's various income sources and expenses for the financial year ending June 30, 2019, classifying each item as assessable income or deductible expense and providing detailed reasoning based on relevant legislation, case law, and rulings. The analysis covers diverse income types, including sales of paintings, salary, interest, capital gains from the sale of shares and motor vehicles, and a lottery win, as well as various expenses like rent, purchase of paintings, bookkeeping fees, advertising, and travel expenses. Part B delves into the complex issue of Harry's residency status, considering his potential work outside of Australia for an extended period. It examines the relevant rules and tests outlined in the Income Tax Assessment Act 1936 (ITAA 1936), including the resides test, domicile test, 183-day test, and the Commonwealth superannuation fund test, while also considering the implications of the Harding v Commissioner of Taxation [2019] FCAFC 29 case. The solution provides a detailed application of these rules to Harry's situation, considering factors such as his intentions, family ties, and financial connections to Australia. The document concludes with an analysis of the potential consequences of Harry's decision to work overseas and its effect on his Australian tax residency.

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
Part A:........................................................................................................................................2
Part B........................................................................................................................................12
Issues:...................................................................................................................................12
Rule:.....................................................................................................................................12
Application:..........................................................................................................................14
Conclusion:..........................................................................................................................15
References:...............................................................................................................................16

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Part A:
Income
Assessable Particulars Legislation, Case
law, Ruling,
Reasoning
Item-2019 Tax
Return
Y/N
Yes Sale of Paintings The sales proceeds
from the sale of
business is a
business income
under “sec 995-1”.
The sales proceeds
will be treated as
ordinary gains from
business and will be
held taxable within
the “ordinary
concepts” of “sec 6-
5 ITAA 1997”1.
Item 9
Yes Bonus Ordinary Income
under “sec 6-5
Item 2
1 Arnold, Brian J., Hugh J. Ault, and Graeme Cooper, eds. Comparative income taxation: a
structural analysis. Kluwer Law International BV, 2019.

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ITAA 1997”.
Income from
personal service
“(Brent v FCT
1971)”.
Yes Salary Personal exertion
income under “sec 6
ITAA 1936”. Citing
“Dean v FCT
(1997)” it is a
Personal service
income and taxable
as ordinary income
Item 1

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under “sec 6-5
ITAA 1997”2.
Yes Interest on banks Ordinary income
under “sec 6-5
ITAA 1997”.
“Riches v
Westminster Bank
Ltd (1947)” interest
represents flow
concept3.
Item 10
Yes Sale of motor
vehicle
Motor Vehicle is a
Personal Use Asset
in under “sec 108-
Item 18
2 Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).
3 Barkoczy, Stephen. "Foundations of Taxation Law 2016." OUP Catalogue (2016).

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20 (2) & (3)”.
Capital gains is
taxable under “sec
102-5 ITAA 1997”4.
Yes Sale of shares CGT asset under
“sec 108-5, ITAA
1997”. Capital gains
from will be taxable
as statutory income
under “sec 102-5
ITAA 1997”.
Item 18
Yes Receipt of Award Ordinary income
under “sec 6-5
ITAA 1997”. Citing
“Kelly v FCT
(1985)” Nexus is
established with
employment and
income producing
activities of
Item 9
4 Sadiq, Kerrie. Australian Taxation Law Cases 2019. Thomson Reuters, 2019.

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taxpayer5.
No Lottery win Non-assessable
windfall gain
derived as a matter
of luck. Hence it is
non-taxable as
ordinary income
under “sec 6-5
ITAA 1997”.
Expenses
Deductible Particulars Legislation, Case
law ,Ruling,
Reasoning
Item-2019 Tax
Return
Y/N
Yes Rent on market stalls Allowable general
5 Morgan, Annette, Colleen Mortimer, and Dale Pinto. A practical introduction to Australian
taxation law 2018. Oxford University Press, 2018.

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deduction under
“sec 8-1 ITAA
1997”. Expenses
falling under
positive limbs.
Yes Purchase of
paintings
Expenses related to
purchase of trading
stock will be
considered as
allowable deduction
for business under
“sec 8-1 and 70-15
ITAA 1997”6.
Yes Bookkeeping fees Allowable business
expenses under “sec
8-1 ITAA 1997” as
outgoings were
occurred for
producing taxable
6 ROBIN & BARKOCZY WOELLNER (STEPHEN & MURPHY, SHIRLEY ET
AL.). AUSTRALIAN TAXATION LAW 2020. OXFORD University Press, 2020.

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business income.
No New suit and shoes
for work at gallery
Non-deductible
under “negative
limbs” of “sec 8-1
(2)”. Referring to
“Mansfield v FCT
(1996)” it is an
ordinary article of
clothing irrespective
of whether the
outgoings are
occurred in
maintaining a
suitable appearances
in a particular work
or profession7.
Yes Purchase of
photocopier
“Division 40 ITAA
1997” immediate
deduction can be
claimed under the
small business rules
since the value of
7 Taylor, John, et al. Understanding Taxation Law 2018. LexisNexis Butterworths, 2017.

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asset is not more
than $30,000.
Yes Cost of meals and
entertainment
Meal and
entertainment
expenses occurred
for work purpose
will be viewed as an
allowable general
income deduction
under “sec 8-1
ITAA 1997”.
Item D2
Yes Advertisement for
market stall business
Nexus is established
with the business
activities of the
taxpayer and will be
considered as
allowable deduction
for business under
“sec 8-1 ITAA
1997”.
Yes Purchase of new
table
“Division 40 ITAA
1997” immediate
deduction can be

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claimed under the
small business rules
since the value of
asset is not more
than $30,000.
No Train fares for travel
to and from work
The expenses fall
within the negative
limbs of “sec 8-1 (2)
ITAA 1997”.
Referring to
“Lunney v FCT
(1958)” the travel
expenses are private
outgoings and it is
not permitted for
deduction.
No Rates on family
home
Non-deductible
within “negative
limbs” of “sec 8-1
(2)” because it is a
domestic or private
expenses and not
related to the
derivation of
assessable income8.

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No Electricity for family
home
Non-deductible
within “negative
limbs of sec 8-1 (2)”
because it is a
domestic or private
expenses and not
related to the
derivation of
assessable income.
No Taxi fares The expenses fall
within the negative
limbs of “sec 8-1 (2)
ITAA 1997”.
Referring to
“Lunney v FCT
(1958)” the travel
expenses are private
outgoings and it is
not permitted for
deduction since the
expenses did not
occurred in the
derivation of taxable
8 Taylor, John, et al. Understanding Taxation Law 2018. LexisNexis Butterworths, 2017.

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income.
Computation of Taxable Income:

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Part B
Issues:
Whether Harry will be considered as an Australian resident if he considers working
out of Australia for the extended period of time.
Rule:
The explanation given in “Sec 6 (1) ITAA 1936” says that a person will be treated as
Australian dweller if the person has the residence in Australia unless the taxpayer can
completely assures the taxation commissioner that they have a fixed dwelling outside of
Australia9. The definition that is given in “sec 6 (1) ITAA 1936” explain residents as
individual given they meet any of the four given alternative tests.
1: Resides Test:
This test is viewed relevant in determining the behaviour of taxpayer at the time of
their presence in Australia. This take account of the intention or objective of existence, family
or employment relations, “maintenance and location of assets and social or living
arrangements”. It also includes the time period till when an individual is present in Australia
physically.
2: The ‘Domicile” Test
If an individual has been domiciled in Australia, then they will be viewed as the
dweller of Australia even though they are staying in overseas. A person may not be treated as
Australian resident by ATO unless it is proven that an individual has made a new country
their fixed home. As per IT 2650 the “permanent place of dwelling” involves the intended
9 Taylor, John, et al. Understanding Taxation Law 2018. LexisNexis Butterworths, 2017.

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time of overseas stay. It take account of the duration and continuity of an individual’s
existence in overseas country10. The abandonment of home in Australian and durability of
relation a person has with a particular residence in Australia.
In the leading example of “Harding v Commissioner of Taxation [2019] FCAFC
29” the ATO in the earlier stage argued that Mr Harding did not have fixed house outside
Australia since his apartment was considered as “temporary” while he waited for his wife
and children to join him Bahrain.
While upon the successful plea by the Mr Harding, the “federal court” of Australia
allowed the plea of “taxpayer” and gave its verdict by stating that the “taxpayer” was not the
tax inhabitant of Australia. In the previous verdict, the “federal court” held that taxpayer
who was viewed as an Australian inhabitant residing out of Australia for a certain years and
had set up home in foreign, continued the tax dweller of Australia since the lodging of
taxpayer was not permanent in nature.
In approving the plea of taxpayer, the full court specified that at the time of
ascertaining the “residency status” of a person, the expression “permanent place of abode”
must not be understood by mentioning to the durability of a person’s home or place of
residence but it must be understood very widely to consider whether an individual is living
enduringly in a specific nation or state.
3: The ‘183-day’ Test:
10 Norbury, Michael. "Mr Harding's residence reconsidered." Taxation in Australia 53.9
(2019): 497.

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The “183-days test” considers whether a person is living in Australia in a constant
manner for no less than six months of the “income year” either continuously or in breaks.
4: The Commonwealth ‘superannuation fund’ test:
A person is an Australian inhabitant if they are having the membership of
“commonwealth superannuation fund”.
Application:
The situation provides that Harry is considering to work out of Australia for the
extended time period. Citing the verdict of “Harding v Commissioner of Taxation [2019]
FCAFC 29” it can be stated that for Harry “a place of dwelling” can be town or country
instead of specific dwelling with necessary consideration involving whether Harry has
abandoned his residence in Australia11. It may be easy for Harry to establish that he is not
present in Australia for the tax purpose if he can demonstrate that he has made life out of
Australia. For the purpose of taxation, Harry’s intention is relevant to whether he is deemed
to be an inhabitant of Australia instead of any other connections with Australia or facts which
can be decisive in determining his residency status.
In spite of the positive outcome received in case of Harding, there are few vital risks
which remains for Harry when it comes to ascertaining the tax residency position as if he
maintains a family or financial relations in Australia. This may be viewed as high risks. The
ATO will be taking into consideration certain number of factors to ascertain residency and
not simply “permanent place of abode”. The number of days Harry is physically not present
11 Jones, Daryl. "Complexity of tax residency attracts review." Taxation in Australia 53.6
(2018): 296.

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in Australia will be considered ATO based on the factors such as length, frequency and
objective of visiting in overseas country.
Conclusion:
It can be concluded that the decision made in Harding case during the first instance
for those that are looking to work in overseas may be concerning. By taking into the
consideration the term “permanent place of abode” the decision has made it tougher for
Harry to break the “Australian tax residency” even though he has the purpose of staying in
foreign for the extended time period.