Topic 3 Residency Source Derivation Flashcards
QUIZ 1
Great Outdoors Ltd is incorporated in the UK and operates in Australia as an adventure tours business offering tours into the Northern Territory. All of the managers reside in London and the directors hold their meetings there. All the major shareholders are Australian residents and the annual general meeting and any extraordinary general meetings are held in Melbourne.
Under the Corporation’s articles of Association, the shareholders have the power to remove the board of directors under an ordinary resolution.
Determine the residential status of the Corporation using relevant case law and taxation legislation to support your answer.
- RAISES ISSUE OF RESIDENCY OF A COMPANY
- FROM FACTS; INCORPORATED IN UK, CENTRAL MANAGEMENT & CONTROL IN UK.
- THUS COMPANY IS A UK RESIDENT.
- HOWEVER:
- AS THE COMPANY CARRIES ON BUSINESS IN AUSTRALIA AND
- ITS VOTING POWER IS CONTROLLED BY AUSTRALIAN RESIDENTS
- IT IS ALSO AN AUSTRALIAN RESIDENT COMPANY.
- REFER FTL PARA 9.2
QUIZ 2
Jacko is an Australian resident and during the year ended 30 June 2016, Jacko worked under contract as an exploration engineer on an Oil-Rig registered in Iran.
The Oil-Rig was leased to an American based company for use in carrying out work in Mexico. Jacko worked on the Oil-Rig in Mexico and was paid from the American company’s subsidiary in Vietnam.
The source of the income derived by Jacko is:
A. Vietnam
B. America
C. Mexico
D. Iran
Jacko is an Australian resident and during the year ended 30 June 2016, Jacko worked under contract as an exploration engineer on an Oil-Rig registered in Iran.
The Oil-Rig was leased to an American based company for use in carrying out work in Mexico. Jacko worked on the Oil-Rig in Mexico and was paid from the American company’s subsidiary in Vietnam.
The source of the income derived by Jacko is:
A. Vietnam
B. America
C. Mexico
D. Iran
MEXICO – where worked was performed.
QUIZ 3
Fong is a public accountant operating in Glenferrie Rd and has one staff member who acts as a receptionist and accounts clerk.
His income accounts are:
Accounts receivable as at 30 June 2016 $25,000
Cash received during the year ended 30 June 2017 $150,000
Accounts receivable 30 June 2017 $ 35,000
Fong’s assessable income for the year is:
A $150,000
B $160,000
C $185,000
Fong is a public accountant operating in Glenferrie Rd and has one staff member who acts as a receptionist and accounts clerk.
His income accounts are:
Accounts receivable as at 30 June 2016 $25,000
Cash received during the year ended 30 June 2017 $150,000
Accounts receivable 30 June 2017 $ 35,000
Fong’s assessable income for the year is:
A $150,000
B $160,000
C $185,000
ANSWER
CASH RECEIVED $150,000
LESS OPENING RECEIVABLES $25,000
$125,000
PLUS CLOSING RECEIVABLES $35,000
ASSESSABLE INCOME $160,000
QUESTION 1
In July 2015 Jack, who had lived in Australia all his life, was transferred by his company from the Melbourne office to the Singapore office for an intended period of three years. It was expected that he would return to Australia at the end of this period. Jack was accompanied by his wife and their two children. They leased their Melbourne residence for three years and rented a house from Jack’s employer while in Singapore.
His wife obtained a part time position in Singapore and his children went to a local Singapore school. After 18 months in Singapore Jack’s wife became ill and they returned to Australia.
Required:
Discuss Jack’s residency status and its impact on his liability for Australian income tax with reference to case law and relevant ITAA sections for the tax year 2016/17.
Issues to be resolved are 1) whether Jack is a resident according to the ordinary meaning or 2) whether he has established a permanent place of abode in Singapore.
Relevant law: Definition of residency of an individual in s. 6(1) ITAA36
Arguments for residency under ordinary principles
Where an individual has previously been a resident and maintains family, business or investments ties for which regular returns to the country are made then they may remain a resident (Levene v IRC).
Jack has been a resident of Australia all his life and maintains an established home here. His absence from Australia is only temporary and he has retained his possessions, even deriving assessable income in Australia from his property. His employer was and remains in Australia. Significant ties remain with Australia (IT2650).
Arguments for being a non-resident under ordinary principles
Absence from Australia for an extended period is an indicator of the taxpayer not being a resident under the normal meaning (FCT v Applegate).
Jack has established a new home for his family and work, ‘a man resides where he sleeps and lives’ (FCT v Miller). Both parents work there and the children attend school in Singapore which makes that dwelling their place of abode (R v. Hammond).
Arguments for residency under the domicile and permanent place of abode test
Jack has maintained Australian domicile through his intention to return to Australia one day. Individuals with Australian domicile remain residents whilst overseas unless they have established a permanent place of abode in another country (s. 6(1) ITAA36)
Jack has not abandoned his family home in Australia, rather it is temporarily leased with an intention to return and occupy. The furniture is also retained which indicates that this is a place of abode in Australia. Additionally, Jack knows his provisional return date of three years with no apparent anticipation of extending his stay.
Whilst Jack has an abode in Singapore it seems to lack a durable association due to it being provided by his employer on a fixed contract. It appears that the abode in Singapore is not ‘permanent’ due the contingency of remaining with that employer whilst he has maintained his Australian home (Case Q68). If there was reasonable expectation that he might extend his posting then this may lead to a different conclusion (Case S19).
Arguments for non-residency under the domicile and permanent place of abode test
‘(FCT v Applegate). Therefore Jack’s intention to return to Australia does nPermanent’ does not mean everlasting, rather it requires a place of abode that is more than temporary or transitory ot prevent his Singapore home from being a permanent place of abode. Additionally, a fixed term contract does not preclude an abode from being ‘permanent’ where the intention is of substantial duration (FCT v Jenkins). Jack’s contract is for three years which is substantial according to the two year benchmark set by the Commissioner (IT2650).
The nature and quality of Jack’s Singapore residence is more like his usual place of abode because his family is there and his life habits revolve around that dwelling (R v Hammond).
It does not appear necessary to abandon any home or assets in Australia provided they are dealt with in a more permanent manner such as leasing a residence and storing furniture (FCT v Jenkins).
Conclusion on the balance of probabilities
Jack is not a resident of Australia under ordinary principles due to his extended absence from Australia with his family.
Jack is likely a non-resident under the domicile and permanent abode test due to his contract being for 3 years which is substantial according to IT2650 and Singapore being his usual place of abode with his family also there..
QUESTION 2
When Sean Moore resigned in August 2014 from his position as Chief of Intelligence Operations ASIO, he signed an agreement not to publish any details of his work with ASIO for a period of 10 years after his resignation, nor to engage in any employment in any way relating to his ASIO activities. He was given A$250,000 for undertaking this agreement.
Moore took an appointment at Oxford University (UK) in September 2014 for three years as a Visiting Lecturer in International Relations with a salary of 80,000 Pound Sterling (UK) per annum. Whilst at Oxford he wrote his memoirs which were duly published in July 2015 and immediately became a best seller.
On 1st August 2016 Moore received an initial advance of 60,000 Pound Sterling (U.K.) from the publisher for his memoirs and a lump sum on completion of 240,000 Pound Sterling (U.K.). Both sums were paid into a Swiss bank account in Moore’s name.
In September 2016, film rights for Moore’s memoirs were negotiated with an American company for world wide distribution. The American company paid Moore US$280,000 which was deposited into his UK bank account.
Moore returned to his Melbourne residence in February 2017. Employees of the C.I.A. had occupied the house in his absence and net rentals received by Moore for the period totalled AUD$48,000.
Required:
Discuss the taxation implications of the following receipts with reference to appropriate tax cases:
(i) $250,000 from the agreement with ASIO;
(ii) remuneration from Oxford University;
(iii) monies received from the publisher for his memoirs;
(iv) monies received for the sale of the film rights; and
(v) rentals received from the C.I.A.
(Students should determine whether Moore is a resident or non-resident of Australia at the time of the payment, as well as the source of the income).
(i) $250,000 from agreement:
This is restraint of trade and payment regarded as capital
Refer Dickenson and Woite cases.
(ii) Remuneration from Oxford:
Residency status of Moore ? – Classed as a non-resident as appointment at Oxford University in UK is for more than 2 years.
Refer Applegate and Jenkins cases and tax ruling IT 2650.
Oxford University remuneration is “personal exertion income” and thus assessable. However as Moore is classified as a non-resident he is not subject to income tax in Australia..
Refer FTL paras 9.2 & 9.3
(iii) Monies received from publisher (£60,000 and £240,000)
Not told where publisher is located – assume UK
Not told where contract is made/signed – assume UK
Not told where service is performed – assume UK
Payment made into a Swiss bank account
Moore is a non-resident and monies derived/sourced in UK
Therefore not subject to income tax in Australia.
Refer FTL paras 9.2 & 9.3
(iv) Monies received from film rights (USD$280,000)
Not told time of negotiation or payment – assume US or UK
Not told where contract is made – assume US or UK
Source:- Dominant factor would be making of contract as no further activity required.
Lump sum for sale of film rights (sale of an asset) would be capital.
Moore is a non-resident and monies derived/sourced out of Australia
Therefore not subject to income tax in Australia.
Refer FTL paras 9.2 & 9.3
(v)
Rentals received from CIA in Australia
Thus Australian Sourced Income
Moore is a non-resident and monies sourced in Australia
Therefore subject to income tax in Australia.
QUESTION 3
Income tax is payable on income derived by a taxpayer during the year of income. For each of the following situations determine the appropriate basis of derivation and what amount of income, if any, has been derived during the year of income ended 30 June 2017.
(i) On 23 June 2017 an employee received $6000 in respect of long service leave which is to commence on 2 July 2017.
(ii) A finance company lends $20,000 on 1 July 2016 on the condition that both the principal and interest, $22,499 in total, are repaid on 30 June 2017. Payment was actually received on 1 July 2017.
(iii) A judo instruction school charges $150 for ten lessons payable in advance. At 30 June 2017 the school had received fees totalling $75,000 for the year of which fees received for lessons still to be taught amounted to $7,500.
(iv) Ben and Matt, Public Accountants, have practiced in partnership for several years under the following conditions. Clients are billed in the partnership name but revenue is to be allocated on a partner responsible basis.
Would your answer change if you were told that Ben and Matt employ a receptionist/secretary and a 1st year graduate accountant, as well as hiring the services of a tax accountant on a contract basis?
(i) Personal exertion income is derived on receipt; (ie. on cash basis). Thus assessable in year ended June 2017.
(ii) Interest income is trading income for a finance company. Thus use accruals basis and so interest is assessable in year ended June 2017.
(iii) Receipts in advance are only brought to account when earned.
Provided amounts are refundable and amounts kept in an unearned account.
Refer Arthur Murray case.
(iv) (a)
(i) clients billed in partnership name indicates business and therefore accruals basis applies. However revenue share is allocated on basis of who earned income. Thus can argue that personal effort derives income and so cash basis is appropriate.
(ii) Refer Firstenberg case.
(iii) Refer FTL para 16.2
(b)
(i) Employment of staff may indicate that partnership is carrying on a business. That income is being derived from employees and a contractor. Thus accruals basis is appropriate.
(ii) Refer Henderson’s case 4
(iii) Refer FTL para 16.2
QUESTION 4
Lleyton is a professional tennis player born in Australia in 1972 who spent all his life there until 1990 when he travelled to France and the USA to play in tennis tournaments. He spent 9 months overseas each year until 2015 when he married an American citizen and purchased a home in California. During the income year to 30 June 2017 he spent 6 months in the USA and 2 months in France and spent the remaining time in that year living with his parents in Australia.
a) Is Lleyton an Australian resident for the income year to 30 June 2017?
b) If he won prize money in each of those countries in the year is any of it liable for taxation in Australia
- WHERE A PERSON RESIDES IS ESSENTIALLY A QUESTION OF FACT
- LLEYTON’S PERMANENT PLACE OF RESIDENCY APPEARS TO BE THE USA
- HE HAS A HOUSE THERE
- HE SPENT 6 MONTHS THERE IN 2016-17
- HE IS MARRIED TO A USA CITIZEN
- HE LIVED IN TEMPORARY ACCOMMODATION WHEN IN AUSTRALIA
ADDITIONAL INFORMATION WOULD HELP – SUCH AS:
- DOES HE HAVE MOST OF HIS OTHER ASSETS IN THE USA?
- WHERE IS HIS BANK ACCOUNT?
- DOES HE EXPECT TO LIVE IN CALIFORNIA WHEN HE RETIRES FROM PROFESSIONAL TENNIS
- IT APPEARS THAT HE IS A RESIDENT OF THE USA FOR AUSTRALIAN TAX PURPOSES
- THEREFORE ONLY HIS ‘AUSTRALIAN SOURCED’ EARNINGS WOULD BE ASSESSABLE IN AUSTRALIA.
ADDITIONAL TESTS
- THREE STATUTORY TESTS;
- WHERE IS HIS DOMICILE OR PERMANENT PLACE OF ABODE?
- DOES HE SATISFY THE 183 DAY RULE?
- IS HE A CONTRIBUTOR TO THE COMMONWEALTH SUPER FUND?
