Week 2 Flashcards
Derivation of income
Recognition of when income is received
Can be on an accrual basis or on a cash basis
Accrual basis
When invoice sent to customer
Cash basis
When cash actually received from customer
Switching between cash and accrual
Switching accounting methods (e.g. as a business grows) is permitted and the uncollected amounts earned in a prior year are untaxed earnings. Only allowed once. Note: Continual method switching could trigger anti-avoidance provisions in Part IVA and impose penalties
Repayments and layby
Moneys received in advance of goods or services being supplied, does not constitute income to be “derived”.
Basically layby payments aren’t considered income. Income is derived when services are rendered
Dividend
Dividends are “derived” when they have been paid (cash or through reinvestment), not when declared.
Overall guide: When is a taxpayer a tax resident of Australia?
Firstly, are they and individual or a company?
Firstly, are they and individual or a company?
They’re an individual
Are they a resident, non resident or here on a whv (work holiday visa)
Different tax rates for each of these
Firstly, are they and individual or a company?
They’re a company
Resident or not resident
Different rates based on a threshold
What sources of income are residents and non residents taxed on
residents are taxed on all sources of income
Non residents are taxed on australian sources only
How do we determine what type of unit an individual is
4 tests for individuals, only have to pass one and theyre a resident
How do we determine what type of unit a company is
3 tests for companies, only have to pass one and it’s an australian resident
Individual tests
Ordinary/resides test
Domicile test
183-day test
Superannuation test
Resides test
Known as the “residence according to ordinary concepts” test.
The term “resides” is not defined in statute and its ordinary meaning is ascertained from a dictionary, for example:
“to dwell permanently or for a considerable time” (Macquarie Dictionary).
Ultimately, the determination of tax residency rests on a question of fact and degree: Miller v FCT (1946).
Resides test: Factors considered by the courts
Time physically spent in Australia.
If the person is a visitor, the frequency, regularity and duration of visits: IRC v Lysaght [1928].
Purpose of the visits to Australia and abroad.
The maintenance of a place of abode in Australia for the taxpayer’s use.
The person’s family, business and social ties: Levene v IRC [1928].
The person’s nationality may be considered for borderline cases.
Resides test:The Commissioner of Taxation’s view
The Commissioner places emphasis on:
Intention or purpose of presence
Family and business or employment ties
Maintenance and location of assets
Social and living arrangements.
In addition to the above behavioural characteristics of the taxpayer, the Commissioner considers there must be sufficient time elapsed to demonstrate continuity, routine or habit.
See, Tax Ruling 98/17.
Domicile test
Considers origin at birth, intention to make a place home indefinitely. Passport
183-day test
Under the 183-day test, an individual is a tax resident of Australia when his or her physical presence in Australia, continuously or intermittently, is for more than one-half of the income year.
There is a whv test (when they don’t intend on living permanently)
Superannuation test
Applies in relation to Commonwealth superannuation funds.
Under the superannuation test, the member of a Commonwealth superannuation fund (ie, Commonwealth public servants) and the member’s family are deemed to be tax residents of Australia.
3 company tests
Place of incorporation test
Central management and control test
Controlling shareholder test
Place of incorporation test
A company that is incorporated in Australia under the Corporations Act 2001 (Cth) is automatically a tax resident of Australia, regardless of any other factors.
Central management and control test
Central management
- does the company carry on business in australia
- where is management based
Control
- Who makes day to day decisions
Controlling shareholder test
Two-limb test:
Voting power is controlled by shareholders who are residents of Australia (that is, more than 50% of the voting power at general meetings); and
The company is carrying on business in Australia (same as the first limb of the central management and control test).
