Seminar Number 3 

Question 1

Harry is an accountant who worked for a mid-tier accounting firm in Brisbane. In early 2017 his wife, Sally, got a job offer to work for a Canadian software company for four years. Harry and Sally decided that this career opportunity for Sally was too good to miss, and they would move with their two children to Toronto, Canada for four years so that Sally could take up the offer. They sold their house and put their furniture into storage. Harry resigned from his job and in May 2017 he moved to Toronto with Sally and their children aged 2 and 8 years. Prior to moving to Canada, none of the family had ever been overseas before. The family intends to stay in Canada for four years, although they might travel back to Australia in 2018 for a short holiday to visit friends and family. Upon arrival in Toronto they immediately rented a house to live in. Their 8 year old daughter was enrolled in a local school, and it was decided that Harry would not work in Canada so that he could look after their 2 year old son. Harry opened up a bank account in Canada to deposit his savings into. 

Harry received the following receipts (all amounts are in Australian dollars):

(i)A cheque for $1,900 on 14 August 2017 from his former Australian employer for unpaid salary due to him.

(ii)A royalty cheque for $10,000 on 31 January 2018 in relation to an industrial property (a Western Australian coal mine) that he has an interest in. Harry has notified the mine of his change of address.

(iii)$100 interest paid by the Bank of Canada into his savings account with them on 31 March 2018.

(iv)$600 interest paid by Commonwealth Bank of Australia from a 2 year term deposit. Harry had initially deposited the money on 4 August 2016 and the term deposit matured on 4 August 2018.

(v)A $500 unfranked dividend from Blue Mine Ltd, an Australian mining company which was deposited into his Bank of Canada account on 22 October 2017. The dividend is paid out of accumulated company profits that Blue Mine Ltd earnt back early in the 2015 year.

Required:

(1) Determine the tax consequences for Harry in respect of these receipts for the 2018 tax year. 

Hint: you should consider whether any of the receipts are income, and if so, when they have been derived in order to work out what Harry’s Australian tax consequences will be – there are 4 issues that you need to work through to arrive at a conclusion. The framework and application for the first issue is set out below to get you started. This is quite an involved problem, so please ensure that you work through all of the issues before attending your seminar.

(2)Consider whether your answer in (1) would change if Harry had to return to Australia for two weeks in November 2017 to be with his mother before she passed away.

Sub issue (1): Are any of the receipts a type of assessable income?

[Consider the material from Seminar #1 and #2]

There are five receipts by Harry here (indicate amount and description of receipt):

(i)$ __________ 

(ii)$__________

(iii)$__________.

(iv)$__________

(v)$__________

Pursuant to subsection __________of the ITAA97 Assessable Income = __________ + __________

Are any of the receipts a kind of ordinary income?

Step 1: Is there a legislative definition of ‘ordinary income’ under the ITAA97?

Subsection __________ defines ordinary income as __________ according to __________.

Step 2: Is there case law that defines ‘ordinary income’?

Chief Justice Jordan in Scott v FC of T (1935) 35 SR (NSW) 212 at 219 considered that ‘__________________________________________________ determined by __________________________________________________mankind’. The courts have clarified these concepts by identifying the key characteristics of ordinary income, and have categorised most receipts under the following 3 categories:

•Income from __________

•Income from __________

•Income from __________

Here:

(i)$1,900 salary would be  __________  from ________________________________________

(ii)$10,000 industrial royalty would be  __________  from ____________________________________________________________:

(iii)$100 interest would be  __________  from ______________________________.

(iv)$600 interest term deposit would be  __________  from ______________________________.

(v)$500 unfranked dividend would be  __________  from ________________________________________

So these receipts are ‘____________________’ as either ‘ordinary or statutory income’

Sub issue (2): In which income year are the payments derived?

$1,900 Salary:  

Harry received a cheque for unpaid salary on __________; however he left his employment in __________.  

In Hannavy v FC of T 2001 ATC 2162; [2001] AATA 370, Senior Member Muller said [at 2162]: 

“… the taxation legislation has been consistently applied in holding that employees are assessable upon the amounts ____________________in a particular year of income (irrespective of whether some part could be said to relate to another year of income).”

The Commissioner in TR 98/1 at para 42 says that:

42. Income from employment would normally be assessable on a __________ basis: per McInerney J in Firstenberg’s case at FLR 57; ATC 4154; ATR 313. Salary, wages or other employment remuneration are assessable ____________________even though they relate to a ______________ or________________ income period: Case 29 1 TBRD 88; 1 CTBR (NS) 225 Case 57; and Case B53 2 TBRD 223; 2 CTBR (NS) 125 Case 27.

Furthermore the High Court confirmed that the __________ basis is the appropriate basis for remuneration of personal services in __________ v FC of T (1971) 125 CLR 418. 

____________________a cheque is generally considered to be payment, so derivation cannot be avoided by __________a cheque until the following tax year: Ullrich v Commr of IR (NZ) [1964] NZLR 386. 

Therefore the salary would be derived under the ________________________________________. 

$10,000 Royalty:  

Generally the __________ basis is appropriate for royalties. Note that the Commissioner in TR 98/1 at para 48 says that:

48. Rent and royalties are generally assessable when ______________________________. However, where rent or royalties are business income, a substantially correct reflex of that income may be given by use of the earnings basis.

Therefore the royalty would be derived on __________ when ____________________, which is in the __________income year

$100 Interest

Generally interest is derived on the __________ (TR 98/1, para 47) unless one of the exceptions applies, which are:

____________________

____________________

____________________

____________________

None of the exceptions apply. 

So the interest will be derived when ________________________________________, which is the __________ income year. 

$600 Interest Term Deposit:  

Generally interest is derived on the __________ (TR 98/1, para 47) unless one of the exceptions applies. None of the exceptions apply. 

So the interest on the Term Deposit will be derived when ____________________ ____________________, which is the __________income year. Therefore ______________________________.

$500 Unfranked dividend:  

__________- derived when __________: section __________) ITAA36

The dividends are paid out of profit derived by the company back in __________ – however this ____________________when the dividend is derived by the shareholder.

Harry has received the dividend payment on __________ the dividend is derived in the __________ income year.

So the only income derived in the 2017/18 income year by Harry is (amount and description):

(i)$__________ 

(ii)$__________

(iii)$__________.

(iv)$__________

Sub issue (3): Is Harry a resident for Australian tax purposes according to the s 6(1) of the ITAA36 definition of ‘resident’ when the payments are derived (in the 2018 income year)?

We are interested in Harry’s residency status for tax purposes during the ______ income year as that is when he derived the four types of receipts.

How is the residency of an individual determined for taxation purposes? 

There are __________ residency tests, which are taken from the definition of ‘resident’ in section __________ ITAA36 – only __________ test needs to be satisfied for the taxpayer to be considered a resident of Australia for tax purposes.  

The tests are:  

MAIN TEST

(1)____________________; or

STATUTORY TESTS

(2)____________________; or

(3)____________________or

(4)____________________. 

Why is it important? __________…

1st Main Test (residency according to ordinary concepts):  

Does the person reside in Australia? s 6(1)(a)

Where a person “resides” is a “question of ____________________”.

Therefore the law in the ITAA is unclear, and you will need to refer to __________law to appreciate the meaning of “reside”. Factors have been established from the UK case law decisions of __________ and __________ that must be “weighed up” in establishing whether a person is a resident of Australia or not.

The factors that have evolved from the above cases are as follows:

Need to refer to the facts of your case, apply the factors to the facts, and weigh up your arguments for and against the person being a resident of Australia.  

FactorsResides in AustraliaDoes not reside in Aust.

Physical presence in Australia

Frequency/regularity of visits

Present habits/mode of life

Maintenance of a home in Australia?

Family ties

Business ties

Nationality – only for borderline cases

Weigh up facts and degree

Your conclusion ____________________________________

Domicile test: s 6(1)(a)(i)

“a person … whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside of Australia.”

Does the Harry have an Australian domicile?

What is Domicile? __________________________________________________. 

Everyone is attributed a domicile of origin at __________, and this is retained until the person demonstrates __________ __________ __________ __________ (domicile of choice).  

Does Harry have an Australian domicile? It appears that Harry has an ____________________ by birth. From the facts we are told that he had never been overseas before leaving for Canada. 

Has he changed his domicile by the move to Toronto? Here Harry intends to __________________________________________________. Therefore Harry has ________________________________________domicile.

Has the taxpayer established a ‘permanent place of abode’ (PPA) outside of Australia?  

If an individual is domiciled in Australia and does not have a PPA outside of Australia, they will pass the domicile test and be a resident of Australia.

Does Harry have an ‘abode’? As Harry has _____________ ________________________________ _________________________.

Is it ‘permanent’? The Full Federal Court in FC of T v Applegate said that ‘permanent’ did not mean __________ – it has to be something more than __________.  

The Commissioner in IT 2650 at para 23 provides some guidelines to assess whether an individual who has left Australia has established a PPA overseas: 



FactorsPasses test: Has not abandoned AustraliaFails test: Established PPA in Canada

Intended and actual length of the taxpayer’s stay overseas

Duration and continuity of the taxpayer’s presence in the overseas country

The durability of association that the person has with a particular place in Australia

Established a home outside of Australia

Retained a home in Australia

It appears that Harry has/ has not established a PPA outside of Australia, so even though Harry has retained his Australian domicile, he still would/ would not be considered a resident of Australia for tax purposes under the Domicile test.

183-day rule:

A person or entity would be an Australian tax resident if actually in Australia during more than half the year of income, unless the person’s usual place of abode is not in Australia and they don’t intend to take up residence here.

•Presence – count up the number of days and if required, hours in the particular income year. Note it needs to be a total of 184 days or more in a leap year. 

•Test can only be used to determine residency of someone __________ Australia – NOT a resident who is leaving Case S19  

 This test will apply/not apply to Harry, as he____________________: Case S19.  

Superannuation test

The individual is a member of a certain Commonwealth Government superannuation scheme or is a spouse of child of such an individual. 

 Harry was employed by a private accounting firm – he would not have been a member of such a superannuation scheme as he was not a Commonwealth Government officer. 

Your OVERALL conclusion on Harry’s residency status ______________________________________________________________________

______________________________________________________________________. 

Sub issue (4): Where is the source of the salary, royalty and interests payments?

We have now established that all five payments are types of assessable income (either ordinary or statutory income) and that __________ of those payments were derived during the __________income year. Harry was a __________ resident for tax purposes throughout that year.  

In accordance with section __________ Harry will be assessed on the four payments in Australia if the income is __________ sourced. 

$1,900 salary:

There are generally 3 possible places that the income could be seen as coming from:

-Where the ____________________;

-Where the ____________________: C of T (NSW) v Cam & Sons Ltd (1936) 36 SR (NSW) 544; FC of T v French (1957) 98 CLR 398; FC of T Efstathakis 79 ATC 4256 

-Where the ____________________. FC of T v Mitchum (1965) 113 CLR 401; Evans v FC of T 81 ATC 4512

Typically where the __________ is relied upon to determine the source of services income – here that is __________. Harry performed the work in __________. He entered into the employment contract in __________. The payment had been received by Harry in __________, it was made from __________ (cheque sent by ex-employer located in __________e). Salary is / is not sourced in Australia as Harry ______________________________.

$10,000 industrial royalty:

Royalties are sourced ______________________________, which is in ____________________. Therefore the royalty income has __________ source: section __________ITAA 36.  

$100 interest:

Interest income is sourced ____________________, and this is usually taken to be ______________________________: FCT v __________. So the source of the interest payment would be __________, as ________________________________________  

$500 unfranked dividend:

The source of dividends is determined by the __________ of the __________ out of which the __________ has been paid (s 44(1) ITAA 1936 or Esquire Nominees Ltd). Company conducts its mining operations in __________  __________.

CONCLUSION: 

RECEIPTSOURCEASSESSABLE IN AUSTRALIA?

Salary

Royalty

Interest

Dividend

As Harry is a __________for Australian tax purposes at the time he derived his Australian sourced salary payment, he will be assessed on it in Australia under s 6-5(3) of the ITAA97.  

Non-residents

If you are a non-resident for the full year, the following rates apply: ____________________

2. Consider whether your answer in (1) would change if Harry had to return to Australia for two weeks in November 2017 to be with his mother before she passed away.

__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________