Residency and source of income - Australia Assignments

Chapter 2

Residency and source

of income

Learning objectives

After reviewing this Chapter, you should be able to:

2.1 Explain the relevance of taxpayer residency for tax

purposes

2.2 Apply the tests for determining residency of

individuals

2.3 Apply the tests for determining residency of business

entities

2.4 Explain the relevance of the source of income to

determining whether it is subject to Australian tax

Learning objectives

2.5 Apply the rules for determining the source of various

types of income

2.6 Describe the basic features and operation of double

tax treaties

2.7 Describe how the challenges of taxing multinational

corporations are addressed in the tax law

2.8 Explain the implications of residency for the GST

2.9 Explain the main features of the planned individual tax

residency rules overhaul

Residency

The Basics

A taxpayer who is resident for Australian tax purposes will

be assessed differently from a foreign resident.

Australian residents are generally taxed on income

from all sources.

Foreign residents are taxed only on income sources in

Australia.

Residency

Challenges

Some income may taxable according to more than one

country’s tax rules.

These situations raise the potential for ‘double-taxation’

i.e. the income being subject to tax in both countries.

The Australian tax system has several mechanisms to

avoid double taxation. These include:

Foreign tax credit offset; and

Double Tax Agreements.

Individual Residency

The Basics

Australia’s individual residency tests are enshrined in law.

See ITAA36 s 6(1) ‘resident of Australia’

A taxpayer only needs to pass one of the following four

tests to be considered a resident for tax purposes:

the ordinary concepts test

the domicile test

the 183-day rule

the superannuation test

Individual Residency

Ordinary concepts test

Common law test which establishes several factors to be

considered to determine where a taxpayer would be

resident.

Some of the factors a court will consider include:

Frequency, regularity, duration and purpose of the

taxpayer’s visits to Australia.

Whether the taxpayer owns or maintains a house or

owns other significant assets in Australia.

Extent of physical presence in Australia or elsewhere.

Individual Residency

Domicile test

First of three statutory tests applicable where the

ordinary concepts test is not satisfied.

Domicile may relate to a person’s country of origin (like

citizenship) or later country chosen by a person as the

country in which they intend to permanently live.

Under this test, a taxpayer will be considered an

Australian resident for tax purposes if domiciled in

Australia. See IT 2650.

Individual Residency

183-day test

An individual will be considered a resident for tax

purposes if they have had a physical presence in Australia

for more than half the year (i.e. at least 183 days).

A taxpayer may not however be considered a resident

when both of the following apply.

The taxpayer’s usual place of abode is outside

Australia; and

The taxpayer doesn’t intend to take up residence in

Australia.

Individual Residency

Superannuation test

This test is only relevant to Commonwealth public

servants working overseas.

If a person is an Australian public servant – defined by

reference to membership of certain Commonwealth

superannuation funds – that individual will be considered

a resident, even if they would not be considered a

resident under any of the other tests.

Individual Residency

Potential overhaul to individual residency

The Government announced that it will move to act on a

recommendations to replace the current individual tax

residency rules with a simple 183 days bright line test.

Where an individual who spends 183 days or more in

Australia is regarded as a tax resident.

Individuals who do not meet the primary test will be

subject to secondary tests that depend on a combination

of physical presence and measurable, objective criteria.

Corporate Residency

The Basics

A company will need to satisfy at least one of the three

available tests to be considered an Australian resident for

tax purposes. The three tests are:

place of incorporation test

place of central management and control test

controlling shareholder test.

Note: A trust will be considered an Australian resident

trust for tax purposes if the trustee of the trust is an

Australian individual or corporate resident.

Corporate Residency

Place of incorporation test

The place of incorporation test is satisfied if a company is

incorporated in Australia under Australian Corporations

Law (the Corporations Act 2001) (Cth).

Corporate Residency

Place of central management and control test

A company can still be an Australian resident, even if the

company is not incorporated in Australia.

This is the case if it can be shown that the central

management and control (CM&C) of the company is

based in Australia and the company carries on some

business in Australia.

This test looks at where key stakeholders of the company

reside or meet to make management decisions.

See Taxation Ruling 2018/5.

Corporate Residency

Controlling shareholder (voting power) test

This test looks at whether the voting power in the

company is controlled by Australian residents and

whether the company does some business in Australia.

To satisfy the test, the company must carry on business in

Australia and have its shareholder voting power

controlled by Australian residents.

The relevant threshold for control for the purpose of this

test is legal ownership of more than 50 per cent of the

shares in the Company.

Source of income

The Basics

Working out the source of income is very important.

Courts have developed different rules for determining the

source of income depending on the type of income being

considered.

The source of income is very relevant to foreign residents

as all income sourced in Australia will be subject to tax.

Source of income

Services / Salary and wages

The source of income from providing services usually

depends on identifying:

The place where the services were performed,

Where the provision of services was formed, or

Where the payment of services was made.

See Federal Commissioner of Taxation (FCT) v

French [1957] HCA 73; FCT v Efstahakis [1979] FCA 28.