Week 2

Question 1

Derivation of income

Answer 1

Recognition of when income is received

Can be on an accrual basis or on a cash basis

Question 2

Accrual basis

Answer 2

When invoice sent to customer

Question 3

Cash basis

Answer 3

When cash actually received from customer

Question 4

Switching between cash and accrual

Answer 4

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

Question 5

Repayments and layby

Answer 5

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

Question 6

Dividend

Answer 6

Dividends are “derived” when they have been paid (cash or through reinvestment), not when declared.

Question 7

Overall guide: When is a taxpayer a tax resident of Australia?

Answer 7

Firstly, are they and individual or a company?

Question 8

Firstly, are they and individual or a company?

They’re an individual

Answer 8

Are they a resident, non resident or here on a whv (work holiday visa)

Different tax rates for each of these

Question 9

Firstly, are they and individual or a company?

They’re a company

Answer 9

Resident or not resident

Different rates based on a threshold

Question 10

What sources of income are residents and non residents taxed on

Answer 10

residents are taxed on all sources of income

Non residents are taxed on australian sources only

Question 11

How do we determine what type of unit an individual is

Answer 11

4 tests for individuals, only have to pass one and theyre a resident

Question 12

How do we determine what type of unit a company is

Answer 12

3 tests for companies, only have to pass one and it’s an australian resident

Question 13

Individual tests

Answer 13

Ordinary/resides test

Domicile test

183-day test

Superannuation test

Question 14

Resides test

Answer 14

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).

Question 15

Resides test: Factors considered by the courts

Answer 15

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.

Question 16

Resides test:The Commissioner of Taxation’s view

Answer 16

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.

Question 17

Domicile test

Answer 17

Considers origin at birth, intention to make a place home indefinitely. Passport

Question 18

183-day test

Answer 18

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)

Question 19

Superannuation test

Answer 19

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.

Question 20

3 company tests

Answer 20

Place of incorporation test

Central management and control test

Controlling shareholder test

Question 21

Place of incorporation test

Answer 21

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.

Question 22

Central management and control test

Answer 22

Central management

• does the company carry on business in australia
• where is management based

Control
- Who makes day to day decisions

Question 23

Controlling shareholder test

Answer 23

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).