CHAPTER 1
Chapter 4
Residence and source
2018 Thomson Reuters (Professional) Australia Ltd. All Rights Reserved.
Jonathan Teoh, Monash University
.
General principles
A resident of Australia for tax purposes will be taxed on income from all sources:
See, s XXXXXXXXXXIncome Tax Assessment Act 1997 (ITAA97).
A foreign resident for tax purposes will be taxed on income from Australian sources only:
See, s XXXXXXXXXXITAA97.
PoTL 2018 paragraphs [4.10] – [4.20]
Tax residency: impact on individual taxpayers
Individual tax rates:
Differ depending on whether the individual tax payer is a resident for tax purposes or a foreign resident.
Broadly, a foreign resident does not receive the benefit of the tax-free threshold.
Foreign residents do not have access to many personal tax offsets.
Foreign residents are not liable for the Medicare levy.
PoTL 2018 paragraph [4.30]
Overall guide:
When is a taxpayer a tax resident of Australia?
PoTL 2018 paragraphs [4.10], [4.40]
Is the taxpayer a resident of Australia?
Individual
4 tests of residence:
1. Ordinary concepts;
2. Domicile;
3. 183-day test; o
4. Superannuation test
Company
3 tests of residence:
1. Place of incorporation;
2. Central management
and control; o
3. Controlling shareholders
Residency tests (overview): individuals
Only one out of four tests needs to be satisfied for an individual to be considered a tax resident of Australia:
See, definition of a resident in s 6(1) Income Tax Assessment Act 1936 (ITAA36).
PoTL 2018 paragraph [4.50]
1
Resides test
2
Domicile test
3
183-day test
4
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).
PoTL 2018 paragraphs [4.60] – [4.70]
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 a
oad.
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.
PoTL 2018 paragraph [4.80]
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 a
angements.
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.
PoTL 2018 paragraph [4.90]
Domicile test
Under the domicile test, an individual is a resident of Australia if his or her domicile is in Australia, unless the Commissioner is satisfied that the person has a permanent place of abode outside Australia.
‘Domicile’ is determined according to the Domicile Act 1982:
Domicile of origin at birth
Domicile of choice: country where the taxpayer intends to make their home indefinitely.
Generally applies to individuals moving overseas (eg, usually as a work posting), but not changing their domicile.
PoTL 2018 paragraph [4.100]
Domicile test:
“permanent place of abode outside Australia”
The domicile test does not apply when the individual can demonstrate that he or she does not have a “permanent place of abode outside Australia”.
In Federal Commissioner of Taxation v Applegate:
Taxpayer moved to Vila to establish an office of the Sydney law firm in XXXXXXXXXXStayed there for two years but returned on one occasion when his wife had a baby. The taxpayer became ill in 1973 and returned to Australia.
Commissioner of Taxation argued that this domicile was Australian that he had not satisfied the requirement that his “permanent place of abode was outside Australia”.
High Court held that permanent does not mean “forever” and is assessed objectively each year.
PoTL 2018 paragraph [4.110]
Domicile test:
The Commissioner of Taxation’s view
The Commissioner considers various factors in Ruling IT 2650 to ascertain whether a taxpayer has a “permanent place of abode outside Australia”. Factors include:
Intended and actual length of stay in the overseas country;
Intentions to stay in the overseas country permanently or temporarily;
Location of established home;
Duration and continuity of taxpayer’s presence in overseas country;
Durability of Australian associations (eg, place of education of taxpayer’s children).
PoTL 2018 paragraph [4.120]
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.
Exceptions:
If the Commissioner is satisfied that the individual’s usual place of abode is outside Australia; and
The individual does not intend to take up residence in Australia.
Working holiday visa holder who was in Australia for more than 183 days was not a resident as their “usual place of abode was outside Australia”: Re Koustrup v FCT (2015)
Special rules apply to working holiday makers, see slide 16.
PoTL 2018 paragraph [4.130]
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.
PoTL 2018 paragraph [4.140]
Period of residence
A person may be resident for a whole or part year, depending on the residency test used:
Tax free threshold in the individual progressive income tax rates is pro-rated for the residency period.
PoTL 2018 paragraph [4.145]
Test Residency Period
Resides (ordinary concepts) Commences from the date when the person first resides in Australia
Domicile Resident for the days when in Australia
183-day test Taken to be a resident for the whole yea
Temporary residents – individuals (Div 768)
Temporary residents are provided with tax relief, even if they meet a residency test:
Most foreign sourced income is not taxed in Australia
Pay tax at the Australian resident income tax rates
Capital gains arising from disposal of assets not having necessary connection with Australia disregarded
From 8 May 2012: no longer entitled to the 50% CGT discount
From 9 May 2017: no longer access the CGT main residence exemption (existing properties grandfathered until 30 June 2019)
Taxpayers are temporary residents if:
they hold a temporary visa under the Migration Act 1958
they or their spouse is not an Australian resident within the meaning of the Social Security Act 1991.
PoTL 2018 paragraph [4.150]
15
Working holiday makers
“Backpacker tax”.
A taxpayer is defined as a working holiday maker if they are in Australia under the following visa categories:
417 (working holiday)
562 (work and holiday).
Special income tax rates apply:
PoTL 2018 paragraph [4.155]
Threshold Rate
$0 - $37,000 15%
$37,000 + At ordinary rates
Residency tests (overview): companies
Only one out of three tests needs to be satisfied for a company to be considered a tax resident of Australia:
See, definition of a resident in s 6(1) ITAA36.
PoTL 2018 paragraph [4.170]
1
Place of incorporation test
2
Central management and control test
3
Controlling shareholders 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.
PoTL 2018 paragraph [4.180]
Central management and control test
A company is a resident of Australia if it:
Following Bywater Investments Limited & Ors v Commissioner of Taxation (2016) :
Location of a company’s central management and control is a question of fact and degree
No general presumption that the location is where the directors meet or where board meetings take place.
PoTL 2018 paragraph [4.190]
Ca
ies on business in Australia
Central management & control in Australia
Resident of Australia
(s 6(1) ITAA36)
Central management and control test:
Commissioner’s interpretation of Bywate
The Commissioner has determined in Draft Ruling TR 2017/D2 the relevant factual matters for consideration are as follows:
PoTL 2018 paragraph [4.200]
1
Does the company ca
y on business in Australia?
If a business has its central management and control in Australia, it will be ca
ying on a business in Australia
2
What does central management and control mean?
Determine location of where high-level decisions that set the company’s policies, direction of its operations and type of transactions it will enter.
3
Who exercises central management and control?
4
Where is central management control exercised?
Determine in reality who controls and directs the company (not the legal power or authority to control)
Determine in reality where decisions are made (not where merely recorded or formalised)
Controlling shareholders 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 ca
ying on business in Australia (same as the first limb of the central management and control test).
PoTL 2018 paragraph [4.210]
Source of income:
Overview
If an taxpayer is a foreign resident, the taxpayer is taxed only taxed on ordinary and statutory income sourced in Australia, unless deemed assessable income on some other basis.
Question of source has been described as “something which a practical man would regard as a real source of income” and a “practical, hard matter of fact”: Nathan v FCT (1918).
Source rules based on a combination of common law principles and statutory provisions.
Practically, it requires classification of income into different classes to determine source.
PoTL 2018 paragraph [4.230]
Source of income:
Categories of income
Sale of goods (trading stock):
Generally, the place where the trading activities take place.
Sale of property other than trading stock:
For real property, the place where the property is located.
Services:
Generally, the place where the performance of services occurs: FCT v French (1957); FCT v Efstathakis (1979).
PoTL 2018 paragraphs [4.240] – [4.260]
Source of income:
Categories of income (continued)
Interest:
Emphasis on the place where the contract for the loan was made and where the money was advanced: Spotless Services v FCT (1993).
Dividends:
The place where the company derived its profits: Esquire Nominees Ltd v FCT (1973).
Royalties:
The place where the location of the industrial or intellectual property from which the royalty flows.
PoTL 2018 paragraphs [4.270] – [4.290]