TAX LAW sushmita (4560379)

Assignment-1

Australian Income Tax Law (BLO5539)

Submitted by: Sushmita Shilpakar (4560379)

Submitted to: Carlo Soliman

Contents

TOC o “1-3” h z u 1.Introduction PAGEREF _Toc493320407 h 31.1Importance of residency and income source to taxation Law PAGEREF _Toc493320408 h 32.Tests PAGEREF _Toc493320409 h 32.1 Ordinary Test PAGEREF _Toc493320410 h 32.2 Statutory Tests: PAGEREF _Toc493320411 h 31.Domicile Test: PAGEREF _Toc493320412 h 32.183 Day Test PAGEREF _Toc493320413 h 43.Superannuation Test PAGEREF _Toc493320414 h 43. Application PAGEREF _Toc493320415 h 44.Conclusion PAGEREF _Toc493320416 h 4Question 2 PAGEREF _Toc493320417 h 51.Introduction PAGEREF _Toc493320418 h 52.Law PAGEREF _Toc493320419 h 52.2 Assessable income PAGEREF _Toc493320420 h 52.3 Ordinary Income: PAGEREF _Toc493320421 h 52.4 Statutory Income PAGEREF _Toc493320422 h 62.5 Capital Gain Tax (CGT) PAGEREF _Toc493320423 h 63. Application PAGEREF _Toc493320424 h 64.Conclusion PAGEREF _Toc493320425 h 7References PAGEREF _Toc493320426 h 8

Question 1

IntroductionThis case raises central issues of being resident i.e. whether Jenny is resident of Australia for tax purposes or not. The first important thing is to know the tax situation and find out if she is a resident of Australia or foreign resident for tax purposes. The income tax rate is different for the non-resident and resident of the Australia (Sadiq et al. 2017).

Importance of residency and income source to taxation LawResidency status is one of the core criteria which decides an individual’s liability to Australian income tax. (Australian Taxation Office 2017). Liability to tax is determined on a year to year basis. According to ATO 2017, “Australian resident”, as defined in section 995-1 of the act, means a person who is resident of Australia for the purpose of Income Tax Assessment Act 1936. In order to determine whether an individual is considered as resident of Australia for tax purposes, Section 6(1) of Income Tax Assessment Act 1936 (ITAA 36) comprise four test and it contains: An individual who resides in Australia, Individual whose domicile is in Australia, unless the commissioner is satisfied that his permanent place of residence is outside Australia, an individual who resides in Australia for more than one-half of the income year, an individual who is eligible for Superannuation scheme (Coleman et al. 2010). To be considered as a resident of Australia, a taxpayer need to satisfy at least one test. If fails to satisfy any of the test, a person is considered a foreign resident for taxation purposes. An individual will be eligible for an Australian resident for tax purposes if they reside in Australia, accepting the ordinary meaning of the term, or meet at least one of the three statutory tests i.e. Domicile test, The 183-day test, commonwealth superannuation fund test (Australian Taxation Office 2017). In comparison to Australian residents, the tax rate of foreign residents is high.

2.Tests2.1 Ordinary Test:

Ordinary concept test is based on common law. This test determines whether an individual is a resident for tax purpose or not. Under ITAA 1936 or ITAA 1997, there is not any clear definition mentioned about residency. Various factors by the court are consider under this test such as: during the year of income, taxpayer has to spend some time physically in Australia, duration of stay, regularity, frequency or the purpose of visitor. Relevant cases IRC V Lysaght (1928) AC 234 and Levene v IRC (1928) AC 217 maintenance of place of residence for taxpayer’s use in Australia, to be consider for residency, person’s nationality is not a relevant factor (Sadiq et al. 2017).

2.2 Statutory Tests:Domicile Test: The first statutory test of residence is domicile test. If a person’s Domicile is in Australia, then he or she is a resident of Australia. According to common law and statutes, there are three basic types of domicile i.e. by origin, choice and operation of law (Sadiq et al. 2017) Domicile test apply to the outgoing individual who moves overseas but do not change their domicile. According to Section 10 of Domicile act 1982 individual who want or intent to make domicile by choice in a country must have aim to make home in that country. Relevant cases FCT v Applegate (1979) 9 ATR 899 and FCT v Jenkins (1982) 12 ATR 745 (Sadiq et al. 2017).

183 Day Test: In this test an individual should be physically presence for more than half the income year in Australia. The 183day test is an objective test, based on physical presence in Australia. See: Ruling TR 98/17. This test generally applies to an individual who comes from another nation. Under this test if an individual has lived in Australia for more than 183 days in a year then he/ she will be considered as resident for tax purposes. Relevant case Re koustrup v FCT (2015) AATA 126 (Sadiq et al. 2017).

Superannuation Test: In this test, if an individual is active in contributing superannuation fund under the Superannuation Act 1990 (Cth) then a person is resident of Australia for tax purposes. Superannuation test applies to Commonwealth Superannuation fund members and their families. Baker v FCT (2012) AATA 168 can be referred for superannuation test (Sadiq et al. 2017).

3. ApplicationJenny stays in Australia for three months does not satisfy any of the four test. She came to Australia on 25th of April 2016. For the first three month in Australia, she did not work and stay as a tourist by traveling and staying in several motels. Which mean she does not have home, community ties and job. Moreover, her stay was for short period and also, she has no plan to stay in Australia permanently. Therefore, it shows that she failed all four test for tax purposes. Later, she increases her stay in Australia for nine months and started working. She also leases an apartment for her stay in Australia near her office. Jenny’s stay in Australia from early July make her foreign resident for tax purposes, which also meet the criteria for the 183-day test. According to the 183-day test if a person lives in Australia for more than 6 months of income year then he or she is liable to pay tax. So, in this case Jenny is liable to pay tax as her stay in Australia is more than 6 month of income year.

4.ConclusionJenny was not liable to pay tax for the first three month because she was not working then and, her stay during that period was like of a tourist traveling different place staying in various motel. But, from early July she intends to extend her stay as a worker in Australia. During, her stay this time as a worker she leases an apartment. From early July, Jenny is a resident of Australia for tax purpose and should pay tax to the government because, her stay in Australia is more than 6 month of income year. Moreover, she satisfies the two test i.e. ordinary test and 183-day test for tax purpose.

Question 21.IntroductionThis case raises central issue of assessable income, whether both the receipts $400,000 and the $100,000 are ordinary income under s 6-5 of ITAA97 or whether any part of the receipts is capital for giving up the right to income.

2.Law2.1 Income:

It is essential to understand the meaning of income because Australia’s Taxation System depend heavily on personal income tax (Australian Taxation Office nd). Goods and services in some situation can be treated as income. Therefore, income may not always be in the form of money. The most common income classifications are: Assessable income, Exempt income, Taxable income (Sadiq et al. 2017).

2.2 Assessable income: Income that can be taxed is known as assessable income. In the taxation process the first step is to determine assessable income (Australian Legal Information Institute 2017). Assessable income can provide individuals to earn enough to exceed their tax-free threshold (Sadiq et al. 2017). Instances of assessable income are: wages, salary, payments for the services provided such as tips, gratuities, pensions, rent, income from investments such as dividends etc. According to (Coleman et al. 2010), from an income tax perspective, assessable income s 6-1 includes: Ordinary income: s 6-5(2), Statutory income: s 6-10(4). Therefore, assessable income (s 6-1) is broadly ordinary income (s 6-5) and statutory income (s 6-10) minus exempt income (s 6-20)

2.3 Ordinary Income: Under Section 6-5 of ITAA 1997, ordinary income means a gain that is regarded by courts as being of an income character that tell us what is the “ordinary income” made assessable by s 6-5 of the tax law. A gain must be cash and cash convertible as well as genuine gain to be ordinary income. A gain that comes from earning source in regular, recurrent and periodic basis is more likely to be ordinary income compare to the gain that is paid as a lump sum. Further, it is usually a product of personal exertion, skill and judgement. There is also the notion of the receipt being a reward for services rendered as well as principal of mutuality. Relevant cases are FCT v Blake (1984) 15 ATR 1006, the court decision was, the receipt was of an income nature. In FCT v Dixon (1952) 86 CLR 540, the fact that the taxpayer relied on the receipts to support himself and his family was important in the court to conclude that the receipts were replacement for income. Moreover, the receipt fall under the main characteristics of income i.e. periodic, recurrent and regular. Scott v FCT (1966) 117 CLR 514, FCT v Arthur Murray (NSW) Pty Ltd also discussed the idea of Ordinary income (Sadiq et al. 2017).

Examples of Ordinary income includes salary, wages rent, commissions, bonuses, fees for services and other payment because they all discussed the characteristics of ordinary income. The concept of ordinary income, in general terms means three broad types of receipts such as: The amount receives by an individual as a reward for performing services. For instance, the wages received by an individual, the amount receives by a person as profits from carrying on a business, the amount receives by a person as a return on the person’s investment. For instance, dividends on shares, rent on investment properties, royalties (Sadiq et al. 2017).

2.4 Statutory Income: Statutory income consists of amounts that are not ordinary income but are included in assessable income by specific provision of income tax legislation under Section 6-10(2) of ITAA 1997 (Sadiq et al.2017). Assessable income includes statutory income from all sources, whether in or out of Australia, if you are an Australian resident. Whereas, assessable income includes statutory income from all Australian sources, if you are a foreign resident (Australian Legal Information Institute n.d). The gains that are cash and cash convertible and non-cash convertibles are the characteristic of statutory income. Statutory Income provisions includes: Return to work payments section15-3, Royalties section15-20, Net capital gains section 102-5, Allowances for employment/services section15-2, Dividends (distinguishing between non-resident and resident TPs) section 44(1) ITAA 1936, Bounties/subsidies section 15-10 etc (Sadiq et. al. 2017).

In the case FCT v Harris (1980) 10 ATR 869, the court held that the receipt received by the Harris was not assessable as ordinary income but it was assessable as statutory income. In Smith v FCT (1987) 19 ATR 274, the high court held that scheme provided by the employer was to increase employee’s productivity by motivating them to be more highly educated in related field. The amount received under this scheme was assessable under the predecessor s 15-2. In FCT v Holmes (1995) 31 ATR 71, the court held that receipt of money for helping to prevent was assessable under s 15-2 (Sadiq et. al. 2017)

The examples of Statutory Income include annuities, superannuation, bonus, performance incentives as they all discussed the characteristics of statutory income.

2.5 Capital Gain Tax (CGT): Under Section 102-5 ITAA97, any kind of property or any kind of legal or equitable right that is not property falls under Capital gain tax asset or Capital income (Sadiq et. al. 2017). Thus, Capital gain is anything which can be owned by an individual such as, investment properties, land, shares etc. Capital gains are not income. For instance, sale of a capital asset is a capital gain, not income as per ordinary concepts. On the other hand, Capital gain taxation is not a separate tax, it is part of income tax. Net capital gains included in assessable income: s 102-5(1). Compensation paid for the loss of salary is ordinary income. Whereas, compensation paid for loss of the actual job or some of the right related to that job is capital (Sadiq et. al. 2017). If the reward is given for services performed by employee’s, then it is ordinary income. However, the payment received by the employees by giving up a valuable right is most likely capital gain in nature

In the case Hepples v FCT (1991) 22 ATR 465, the court held that, the taxpayer was paid after retirement for not disclosing the secrets of his employer. See case Higgs v Olivier (1952) Ch 311, where the payment was made for the termination of a service not for his service as employee, which was capital in nature, FCT v Woite (1982) 13 ATR 579 also discussed the idea of capital income (Sadiq et. al. 2017).

3. Application

In the given case, the annual salary of $100,000 that was received as a salary after accepting the offer is clearly assessable as ordinary income as there is a clear nexus with the services provided and this receipt shows many of the characteristics of the ordinary income i.e. regular, periodic, relied on and nexus with personal services etc. The amount of $100000 that was received as a salary after accepting the offer is considered as assessable income because it is a gain that she received for the service and employment. Therefore, she will be receiving that amount until she works in that company.

The lump sum amount $4,00000 was paid to encourage her to join in new television network. Under, the concept of ordinary income s 6-5 ITAA total money received by her is not a periodic or regular receipt. It does not have any link between services and gain. Moreover, she has not provided any service in return of that amount. The $400000 receipt is not ordinary income and should be compared with decision such as in the case FCT v Woite (1982) 13 ATR 579.

4.ConclusionFrom the above discussion of law, relevant cases and legislation the lump sum amount of $400000 is capital in nature as the receipt does not show any character of ordinary income as it is more like a gift to the renowned television personality of her goodwill. Therefore, $400000 is capital in nature and not consider assessable under ordinary income. Whereas, the $100000 receipt is assessable income as it satisfies the characteristics of ordinary income i.e periodic, regular and recurrent and it is taxable.

ReferencesAustLII 2017, INCOME TAX ASSESSMENT ACT 1997 – SECT 995.1 Definitions, Commonwealth Consolidated Acts, viewed 11TH August2017, <http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/itaa1997240/s995.1.html>.

Australian Taxation Office n.d., Income tax: residency – permanent place of abode outside Australia, Commonwealth of Australia, viewed 18 August 2017, <http://law.ato.gov.au/atolaw/view.htm?Docid=ITR/IT2650/NAT/ATO/00001>.

Australian Taxation Office n.d., Income tax: residency status of individuals entering Australia, Commonwealth of Australia, viewed 19 August 2017, <https://www.ato.gov.au/law/view/document?Docid=TXR/TR9817/NAT/ATO/00001#P9>.

Australian Taxation Office 2017, What is income? Commonwealth of Australia, Viewed 22 August 2017, <https://www.ato.gov.au/Individuals/Lodging-your-tax-return/In-detail/What-is-income-/#Assessableincome>.

AustLII n.d., INCOME TAX ASSESSMENT ACT 1997- SECT 6.10 Other assessable income (Statutory income), Commonwealth Consolidated Acts, viewed 22 August 2017, <http://www.austlii.edu.au/cgibin/viewdoc/au/legis/cth/consol_act/itaa1997240/s6.10.html#>.

Coleman, c., Hanegbi, R., Hart, G., Jogarajan, S., Krever R. E, McLaren, J., Obst, W., Sadig, K. (2010). Principles of Taxation Law. Harris Street Pyrmont, Australia: Thomson Returns.

Sadiq, k., Coleman, C., Hanegbi, R., Jogarajan S., Krever R. E., Obst, W., Teoh,J. & Ting, A. (2017). Principles of Taxation Law. Harris Street Pyrmont, Australia: Thomson Returns.

Cases

Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314

Baker v FCT (2012) AATA 168

FCT v Applegate (1979) 9 ATR 899

FCT v Jenkins (1982) 12 ATR 745

FCT v Blake (1984) 15 ATR 1006

FCT v Dixon (1952) 86 CLR 540

FCT v Harris (1980) 10 ATR 869

FCT v Holmes (1995) 31 ATR 71

FCT v Woite (1982) 13 ATR 579

Hepples v FCT (1991) 22 ATR 465

Higgs v Olivier (1952) Ch 311

IRC V Lysaght (1928) AC 234

Levene v IRC (1928) AC 217

Re koustrup v FCT (2015) AATA 126

Scott v FCT (1966) 117 CLR 514

Smith v FCT (1987) 19 ATR 274