BFA391 - 2018

Tutorial One – Introduction, Residency and Source

A NOTE ON TUTE ANSWERS: Please note well that answers to scenario type
questions, where you have been asked to use the IRAC method, will be provided
in short point form only. You are expected to write full paragraphs in your
answers similar to the example questions and answers in the tutorial book. The
answers to this type of question are meant to be suggestions only as to some of
the points you may have raised. It is possible to discuss other rules or cases and
come to a different conclusion and still have a “good” answer.

Question 1
It is important to decide whether a taxpayer is an Australian resident or a foreign resident for
tax purposes as there are several differences in the tax treatment of the two types of taxpayer.
Residents are taxed on all their income from sources in and out of Australia, sec 6-5(2), 6-10(4)
ITAA97. They get a tax free threshold of $18,200 and then pay tax at incremental rates with
the lower increments being less than those for foreign residents. They pay Medicare Levy and
are entitled to offsets (such as the low income offset) if eligible.

Foreign residents pay tax on income from Australian sources only, sec 6-5(3), 6-10(5) ITAA97.
They do not get a tax free threshold, paying 32.5% from the first dollar earned with increments
as income increases. They do not pay Medicare Levy (and are not entitled to Medicare
benefits) and are not entitled to offsets.

Question 2 (As mentioned above, these are suggestions for points that may be
raised in a “good” answer. You should have formed your answer in complete
paragraphs.)
Issue - Would Samantha Saxon be considered an Australian resident for income tax purposes
in the 2018 tax year and in the 2019 tax year?

Rule – Resides Test

 The definition of a resident in s 6-1 Income Tax Assessment Act 1936 (ITAA36) gives rise
to four tests for determining residency. Only one of the four tests needs to be satisfied for a
taxpayer to be considered a resident.
 Ordinary concepts or “resides” test is the primary test for determining residency. This test
considers the question of where an individual actually resides.
 Taxation Ruling 98/17 applies to individuals entering Australia (such as Samantha) and
lists different factors to take into account when determining if someone is residing in
Australia. These factors include: intention or purpose of presence; business and family
ties; maintenance and location of assets; and social and living arrangements.

Application –
Arguments in favour of Samantha being a resident
 Certain aspects of Samantha’s behaviour are consistent with residing in Australia. She has
brought her husband with her and has taken out a 12 month lease on a property.
 She opens a bank account and establishes social ties (joins the tennis club).
 She is establishing business ties as she works to establish her branch office.
 The purpose of her trip is more than that of a mere traveller and she is initially unsure how
long she will need to be in Australia.

Against being a resident

 In the end she only stays for ten months.
 She still has assets back in New York where she maintains her house and has not rented it
out.
 Her daughter stays in New York.

Conclusion -
Although she has maintained her house and some family ties in New York, based on her
behaviour since arriving in Australia it is likely that Samantha would be treated as a resident
under the ordinary concepts or “resides” test. Under this test she would be considered a
resident only during the actual time she is present in Australia, that is from the date of her
arrival in November until the day of her departure in August (an individual can be a resident
for part of the year).

Rule – 183 Day Test

 The sec 6-1 definition also gives rise to three statutory tests.
 Under the 183 day test, a taxpayer is considered a resident if they are in Australia for more
than 183 days AND their usual place of abode is not outside Australia.
 The determination of usual place of abode and the ordinary concepts test are closely related
and usually correspond.

Application -
 Samantha is in Australia for more than 183 days in the 2018 tax year.
 Determination of “usual place of abode” is similar to “resides”.

Conclusion -
 If Samantha is considered to “reside” in Australia under the ordinary concepts test then she
would pass the 183 day test for the 2018 tax year as her usual place of abode would be in
Australia.
 She would not pass this test for the 2019 year as she is not here for the required number of
days.

NOTE: It is not clear whether a person who satisfies the 183 day test is deemed to be a resident
for the whole income year in question or only the actual days they are present in Australia.
Early cases treated individuals who met this test as residents throughout the whole year in
question, (Case 78 11 CTBR 78 and Case 20 (1965) 12 CTBR(NS) 20). Later decisions have
disagreed (Case S19, 85 ATC 225, Case 29 (1985) 28 CTBR(NS) 29).

Two different tests have been discussed here but in reality a person only has to pass one test in
order to be considered a resident. Samantha is most likely a resident for tax purposes for a part
of each year under the ordinary concepts test and she would also pass the 183 day test for the
2018 year.
Question 3
Issue - Are the different components of Jason’s income assessable in Australia? To determine
this we must determine whether Jason is a resident or foreign resident and also the source of
the various components of Jason’s income.

Rule (residency) -
 Sec 6-1 (ITAA36) defines what a resident is for tax purposes and this definition gives rise
to four tests for determining residency.

Application and Conclusion -

 The ordinary concepts test looks at where a person actually resides and takes into account
factors such as physical presence, business and social ties, maintenance and location of
assets and social and living arrangements (TR 98/17).
 Jason is working in one location whilst in Australia but he is only here for about four
months and never intends to take up residence here.
 We are not given information about his accommodation whilst in Australia but it is
unlikely he would take out a long-term lease on a unit for such a short stay.
 His salary is deposited into his Singapore bank account so it appears he has not established
an account in Australia.
 The intention seems to have been that his stay would be temporary.
 Jason would not pass any of the three statutory tests.
 He is not here for more than 183 days.
 Although Jason was born in Australia, his permanent place of abode is Singapore (having
lived and worked there for seven years) so he would not pass the domicile test.
 He is not a member of a Commonwealth of Aust superannuation fund.
 Therefore it is likely that Jason would be considered a foreign resident for the entire 2018
tax year.

Rule (source) -
 According to s 6-5(3)(a) (ITAA97), foreign residents (including Jason) are assessable in
Australia on ordinary income derived from Australian sources.
 To determine if Jason is assessable in Australia on any of his income we therefore need to
determine the source of his income.
 There are very few statutory rules concerning source. Therefore source is usually
determined using common law rules.
 The general principle is to look for the place at which the substantial elements of
production of the income occurred.
 To determine source, income is usually divided into categories.
 Income from personal services or wages would usually have its source in the place in
which the services are performed, FCT v French (1957) 98 CLR 398, FCT v Efstathakis
(1979) 79 ATC 4256.
 The source of income from the rental of real property is where the property is located, even
if the lease is executed elsewhere.

Application -
 The salary of A$38,500 Jason earns whilst in Australia is likely to have an Australian
source as he performed the services in Australia. This is despite it being deposited into his
Singapore account by the office in Singapore (however, see note below re double tax
agreements).
 Jason also derives rental income from a house in Hobart. As Hobart is in Australia the
rental income would have an Australian source.
 The income he earned in the office in Singapore (while present there) does not have an
Australian source as it is foreign income earned by a foreign resident.

Conclusion –
Jason is likely to be considered a foreign resident for the 2018 tax year. However the wages
earned whilst in Australia, and his rental income have an Australian source and he is likely to
be assessed on this income in Australia.

Note: this answer has ignored the implications of any tax treaty that may exist between
Australia and Singapore. The main purpose of tax treaties is to avoid double taxation and they
are sometimes called “double taxation agreements”. The existence of such a treaty would most
likely see the wages not assessable in Australia as Jason is a resident of Singapore. The rental
income would still be assessable here however as the real property is located here.