PACC6006 Taxation Law

Peter Jones is a British architect making a name for himself in the field of repurposing industrial buildings for residential purposes. In June 2017, Peter was approached by Smith Constructions who were wishing to release a new range of designer apartments in Australia. The company was very keen to employ Peter to design this range and has therefore offered Peter a one off payment of $100,000 to move to Australia and join Smith Constructions. Peter accepted the offer. On 1 July 2017, Peter Jones, who was born in and resided in England up until that date, arrived in Australia to take up full time employment as a designer with the company. The one off inducement payment of $100,000 was paid to him on 15 July 2017. His employment contract was for 12 months, with an option to renew at the
end of that term.

Peter is a single parent with two children. The two children will not travel with him to Australia but stay with their grandparents (Peter’s parents). Peter decided to retain the house he owns in England, and rent a house in Australia until such time as his employment contract was extended. Peter intends to stay in Australia if possible.On the 23rd September 2017 Peter is transferred to the company’s office in New Zealand to assist with a special project. The project is for approximately 9 months and he returns to the Sydney office permanently on the 12 June 2018.On moving to Australia, Peter rented out his house in London for $2,000AUD a month. On 7 July, Peter received a Statement of Income and Expenditure from his real estate agent which showed that as 30 June 2018, the rental income was
$28,000AUD including $2,000AUD related to the month of July 2018. The Statement of Income and Expenditure included allowable deductions totalling $15,000AUD.

 

As part of his employment contract, the company agreed to pay Peter a relocation allowance of $5,000 to cover the costs of removal or storage of his household effects on moving to Australia. The company also agreed to pay Peter
allowance on the costs of his home telephone account. The allowance is paid on a monthly basis, calculated at an estimated rate of $100 per month. As at 30 June 2018, the total amount paid on the telephone allowance was $1,200.
When Peter moved to Australia, he was most excited to learn of the OzLotto lottery. Over the years, Peter developed a ‘system’ which he believed would enable him to win the Lotto jackpot. His system was based on a discussion that he had with a clairvoyant, who told his that his lucky numbers would be the birth of his children,and it involved rotating the numbers of his children’s birthdays so that a new set of numbers of generated. He documents his system each week to keep track of the numbers she has used. On 13 May 2018, Peter is ecstatic when his system finally succeeds in selecting the first division numbers, and as a result, he wins $1 million AUD.

 

Required:

Peter’s salary for the year was $100,000AUD. 75% of this salary was earned while working in New Zealand. In addition to the above, Peter incurred the following
expenses during the year:
• $2500 in registration fees for a conference on Australian designs that was offered by an industry specialist;
• $1500 course fees for a “Certificate in Australian Design”, offered by the Australian Institute of Architects.
• A gift of $100 cash, paid to the Royal Brisbane Hospital;
• $50 to subscribe to the magazine “Australian Architecture”;
• $1500 to the Southern Cricket Club. The club’s activities are only related to the development of youth cricketers in the community.
• $1500 to Hunter Sports Club. Hunter Sports is a sports conglomerate that makes substantial amounts of money from poker machines, entertainment and property development. They are registered as a deductible gift recipient on
the Australian Business Register.
1. In the form of a professional correspondence you are required to advise Peter Jones of his taxation residency status.
2. Assuming he is an Australian resident for taxation purposes calculate his taxable income for the income tax year ending 30 June 2018. (Justify all decisions to include or not include income/deductions etc)

Issue

The central issue in the given case is to outline the tax residency of a British architect Peter for the year FY2018 considering the available information.

Relevant Rule

For determining the tax residency of an individual taxpayer, the primary statute is subsection 6(1), ITAA 1936. However, more recently the tax ruling TR 98/17 also assumes high importance as it outlines the various tests which an individual taxpayer can apply for ascertaining the tax residency which is typically an annual affair unless there are no material changes in the circumstances and location of the taxpayer (Woellner, 2014). The available tests are outlined below.

• Domicile Test

This test is exclusively applied for Australian domicile holders or Australian residents as  one of the imperative conditions that the underlying taxpayer would have to fulfill is to hold an Australian domicile for the year under consideration (Barkoczy, 2015). This has to be complemented with location of the permanent abode in Australia only or else the taxpayer would fail to pass this test. A critical role in determining the permanent abode location is played by the tax ruling IT2650 which reflects on the key decision variables focused by the Tax Commissioner (Gilders et.al., 2016)/

• 183 Day Test

This is almost entirely applied to the foreign residents who do not hold domicile of Australia. Hence, for these taxpayers, in order to obtain the Australian tax residency by satisfying this test namely two conditions are vital as highlighted below (CCH, 2013).

• The taxpayer in the assessment year must have spent a minimum of 183 days in Australia either intermittently or continuously.
• It is essential that the taxpayer must have he underlying intent to setting up permanent residence in Australia going ahead

Even if one of the conditions above is not adhered to, the taxpayer would fail to pass the test.

• Superannuation Test

This is a statutory test of specialized nature as it has only limited applicability on those Federal government employees that have been stationed abroad for discharging their professional duties as directed by the government. The only factor relevant to their tax residency determination is whether they may contribution in the dedicated superannuation funds or not. The remaining factors are ignored for this test (Sadiq et. al., 2016).

• Ordinary “Resides” Test

The Australian statues lack a legal definition for the word “reside” and thereby in this regard the focus is primarily on the court cases and tax rulings to highlight the critical elements and apply this given test. Based on these, the critical factors for identification of a taxpayer as Australian tax resident are summarized below (Deutsch et. al., 2016).

• Visit purpose – A significant purpose for a visitor would include employment or education. In case of employment the duration must exceed six months so as to be termed as Australian tax resident.
• Personal and professional relations maintained by the taxpayer in Australia and comparison of the same with country of origin.
• Visit frequency, duration of stay and purpose of the same to foreign land in particular the country of origin.
• Underlying social arrangement while residing in Australia and the extent to which this is similar to those in the country of origin.
• If the above factors are inconclusive, then Tax Commissioner may also consider nationality of the taxpayer.

In wake of the facts outlined in the given problem, the above tests can be applied for Peter as indicated below.

• Domicile Test – The domicile test would not be passed by Peter as he does not a domicile of Australia as he is a British citizen and has come to Australia only during the FY2018 for professional reasons. Hence, as per this test, Peter is not an Australian tax resident.
• Superannuation Test – Peter is not an employee of the Australian Federal government and hence this test would also not result in Peter getting Australian tax residency.
• 183 day Test – This test is also not satisfied even though there is an intention on part of Peter to settle down in Australia. This is because he does not stay in Australia for a period of 183 days which is the threshold value. This happened because from September 23, 2017 to June 11, 2018, he was stationed in New Zealand for professional purpose.
• Resides Test – This test is passed by Peter and there he would be considered as Australian tax resident for the year FY2018. This test is satisfied owing to following reasons.
• The reason to come to Australia is significant in terms of employment extending to atleast 12 months which may further get extended.
• Peter does not travel to England (country of origin) even once during the stay in Australia and New Zealand and also has plans to settle down in Australia if his employment contract got extended.

 Based on the above analysis of the applicable tests and fulfillment of these tests by British citizen Peter, it may be concluded that for the year FY2018, he would be considered as an Australian tax resident.

Based on the above analysis, it is apparent that Peter is an Australian tax resident for FY2018 and hence in accordance with s. 6-5(2), all the income derived by him irrespective of the underlying source would be considered for taxation in Australia in accordance with the relevant provisions. As a result the underlying source of the various proceeds will not matter and henceforth not considered (Nethercott, Richardson and Devos, 2016).

• Rent income  for house in London = AUD 2,000 per month or AUD 24,000 annually would be ordinary income as per s. 6(5), ITAA 1997. Further, the deductible expenses on account of the property need to be deducted from this amount to $ 15,000 in accordance with tax ruling ATO ID 2003/324 (Barkoczy, 2015).
• Relocation allowance of $ 5,000 paid in FY2018 – In accordance with IT 2614 and TR 95/17, it is pivotal to note that allowances for relocation contribute to taxable income whereas reimbursement in this regard is non-taxable. This is because the allowance payment is fixed and would be paid irrespective of the amount of actual expense and thus could potentially cause a benefit to the employee which would be captured under s. 6-5 (CCH, 2013).
• Telephone allowance of $ 1,200 in FY2018 – In accordance with the above understanding, on account of fixed allowance being given which is independent of actual expense incurred would result in potential benefit and hence this would be ordinary income under s. 6-5, ITAA 1997 (Woellner, 2014).
• Salary of $ 100,000 in FY2018 -  Irrespective of the fact that 75% of the income is generated from New Zealand, the complete amount of $ 100,000 would contribute to ordinary income as per s. 6-5, ITAA 1997 (Gilders et. al., 2016).
• Lottery winnings of $ 1 million in FY2018 – In accordance with IT2584 and TR 2004/D17, the lottery winnings would not be considered as assessable income in the given case. This is because the lottery winnings have been derived purely on chance and not on the basis of any skills possessed by Peter (Sadiq et. al., 2016). The information about how Peter chooses the winning number using the birth dates of his children is neither a technique or a skill and it was a mere coincidence which in all likelihood would not repeat again.
• One off inducement payment to the tune of $ 100,000 in FY2018 – It is apparent that the payment is not regular and thus not ordinary income (s. 6-5). Considering the payment is cash based, hence it is not statutory income (s. 6-10). This is essentially capital receipts in line with tax ruling TR 1999/17  and therefore would not contribute to assessable income (Deutsch et. al., 2016).
• Legal fee to the tune of $ 2,000 for tax planning -  As per tax ruling TD95/60, the $ 2,000 would be considered as tax deductible for FY2018 and hence would be a deductible expense in the computation of the taxable income (CCH, 2013).
• Registration fee to the tune of $ 2,500 – It would be considered a deductible expense in line with tax ruling TR 95/15 since the conference is delivered by an industry expert and related to Peter’s own profession through which assessable income is generated (Nethercott, Richardson and Devos, 2016).
• Self Education expense to the tune of $ 1,500 – Since the course is related to Peter’s profession of architect, hence in accordance with TR 98/9, the expense would be deductible for tax (Barkoczy, 2015).
• Cash payment of $ 100 to Brisbane hospital as gift – Brisbane hospital being a public hospital is entitled to receive gifts which would be considered deductible for tax purposes in accordance with TR 2005/13 (Deutsch et. al., 2016).
• Magazine expense to the tune of $ 50 – Since the magazine is related to Peter’s current profession, hence in accordance with TR 95/18, the expense would be deductible for tax (Gilders et. al., 2016).
• Southern Cricket Club expense of $ 1,500 – This would not be tax deductible expense as it is not related to production of assessable income (Sadiq et. al., 2016).
• Hunter Sports Club expense of $ 1,500 – The club generates revenue and the given information does not suggest that the payment was a gift. Thus, it seems highly likely that Peter took services of personal nature in exchange of the money and thus this would not be tax deductible expense since it is not related to assessable income production.

Based on the above, the taxable income computation is summarized below.

 References

Barkoczy, S. 2015, Foundation of Taxation Law 2015, 7^thed., North Ryde: CCH Publications

CCH 2013, Australian Master Tax Guide 2013, 51^st ed., Sydney: Wolters Kluwer

Coleman, C 2011, Australian Tax Analysis, 4^th ed., Sydney: Thomson Reuters

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. 2016, Australian tax handbook 8th ed., Pymont: Thomson Reuters,

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. 2016, Understanding taxation law 2016, 9^th ed., Sydney: LexisNexis/Butterworths.

Nethercott, L., Richardson, G. and Devos, K. 2016, Australian Taxation Study Manual 2016, 4^th ed., Sydney: Oxford University Press

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 8^th ed., Pymont:Thomson Reuters

Woellner, R 2014, Australian taxation law 2014, 7^th ed., North Ryde: CCH Australia.