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Australian Taxation


Part A: Required 1: For Taxation purposes, is James a resident of Australia? What is the source of his salary from Sails International?

Answer: Analysis of the residential status of James & his source of salary from sails international:

For the taxation purpose of an individual it is at first required to analyse that whether the individual whose income will be assessed is an Australian or a foreign resident. The rules for obtaining residential status of Australia differs from that of the Department of Home Affairs which means that an individual can be a resident of Australia for the purpose of taxation even though he is not an Australian citizen or the individual holds visa of Australia but is not a resident for taxation purposes. The analysis of an income of an individual is possible only when the identity of that person is established resulting him be either resident or non-resident. The tax residency is determined basis the situation and the circumstance of the individual. To analyse whether a person is an Australian resident, there are four tests which should be conducted which is analysed as below:

• Resides test: This is the primary test wherein a person residing in Australia is considered as resident for taxation purposes and there is no need to apply for any other tests. Resides test includes tests which needs physical presence, intention and purpose, family, ties of business and employment, location of assets and social arrangements.

• Domicile test: In cases where the domicile i.e. the permanent home of an individual is in Australia then an individual is considered to be a resident for taxation purposes. This test supersede all the other test and requires the fact that the individual is an owner of a property which is located in the country Australia reflecting his domicile.

• 183 Days Test: This test is conducted on individuals that arrives in Australia. A person is considered as a resident if he/she is present there for more than half of the income year irrespective of continuity. In cases, where the person is passing the above two tests basically Reside test and the Domicile test then there is no need if conducting this test for checking the residential status.

• Commonwealth Test: This test is required to be conducted on employees of the Australian Government, working at posts, these are members of the CSS and PSS schemes and they including their spouse and children are considered as resident of Australia.

In the given case of James Cookie, he is physically present in Sydney for 80 days at his house but his property is at Sydney which complies the Domicile test and the furniture of the property at Sydney which he has rented belongs to him qualifying the Resides test. Thus, for the taxation James is an Australian Resident.

The source of the salary of James from Sails International is the amount which he receives in form of Salary and perquisites. All these income received is taxable in Australia and tax rates and the other provision applies as that for an Australian resident. The fact that the Australian Taxation Officer and the court therein have one thing in common while they settle those cases and follows the definition of "resides" and conducts various tests therein as discussed above to check the qualification of an individual for the purpose of resident of Australia. All these provisions in relation to the residential status have been contained in the Australian Income Tax Law. In case of James too although he is working at Sails International but his permanent place of abode remains Australia since he has a house at Sydney, Australia. There are many other factors on which the status depends such as the country in which one is going or coming have a treaty of tax with the government of Australia.

Required 2: If James sold his house, would he be entitled to the main residence exemption in Subdiv 118-B?

Answer: Analysis of applicability of main residence exemption in Subdiv 118-b when James sells his house: The income tax assessment act 1997 has laid many provisions that are applicable to individual while they sell their property in Australia. In the Subdivision 118-B of this Act, there have been analysis of the provision which is required to be followed in case where an individual incurs capital gain and loss while selling his property being a tax payer. Herein the focus has been given on the property belonging to person himself from the beginning of the year to constitute the property as personal property of the individual. In a broader sense the fact that needs to be analysed is that an individual purchasing a property i.e. a house in the country Australia then while selling the property whatever amount of profit or loss that will be occurred will pertain to that individual who bought the property earlier since he is the owner of the property. The provision contained within the subdivision 118-B, contains the fact that the tax amount on the source of income which is generated from the party and is received by individual in question will certainly have the measurement as ownership. 

In the given case, James Cookie, have spent most of his time during the income year in the cruise ship whereas 80 days have been spent by him in the Sydney at his own house where the house and the entire furniture belongs to him even though he have given the house on rent. He has further visited 20 days of the income year in question to Singapore for meeting his wife and children. This visit of him to Singapore will not be taken into consideration for the purpose of subdivision 118-B since there has been separation event that have occurred in between James and his wife. Therefore, as per 118-B, the house located at Sydney belongs to James as he is the owner of the same since beginning. Thus, when James will sell the house to anyone, he will definitely get entitlement as an resident of Australia and the income or gain that will generate out of the selling of house, will be received by the owner of the house which is James Cookie. However, it is to be noted that later the house will have a transfer in its ownership from James to the other party who purchases it. The provision in the 118-B is very clear with respect to its applicability for consideration of capital gain or losses in the individuals total income. James will thus get the main residence exemption as per 118-B for taxation purposes.


Part B: (a) In your own words, briefly outline the facts and issues in each case.

Answer: Facts And Issues Of Case FCT v Rowe (1997) & FCT v Stone (2005):

FC of T v Rowe, High Court of Australia, 29 April 1997:

Facts & Issues: In this case, an appeal was filed with the court where it was assessed that whether the general principle of law applies in cases where an amount is paid in the form of compensation for reimbursement of an expense which is deductible from tax taking into consideration ordinary concepts of taxation. The circumstances here was that the appellant required to have claimed a deduction for expenses requiring legal representation which was turned by the ATO since he found it very unreasonable of getting that done for the purpose of accounting. The fact that held here was that in absence of any provision being statutory in nature the appellant shall not receive any amount since that amount is claimed as deduction and allowed as expenditure including the reimbursed amount. In this case, AAT allowed the objection which was raised by Mr Rowe, in respect of the assessment made for the year 30 June 1989 where he had $24,748.24 as his income. Therefore, the amount received by Mr Rowe from Queensland Government has been established and seen as filling the place of a legal expense which is incurred on the account being revenue in nature. All the representations made were valid and thus the said expense was allowed as deduction by the court.

FC v T v Stone, High Court of Australia, 26 April 2005:

Facts & Issues: This case was filed so as to analyse the meaning of income as per the Income tax assessment Act, 1997 in relation to certain income being received by Ms Joanna Stone which is the tax payer for the year ended 30 June 1999. In this case, Stone received certain amounts as individual one which was not taken by her while computation of his assessable income since she was of the belief that individual amount is not considered as business income and thus no tax is required to be charged. It was thus held that some of the individual amount carried the individual payments constitute the nature of the taxable income even if she is not carrying a business. The judge therefore concluded the fact that in cases where there is no business of a taxpayer, three categories of the payments are required to be disclosed and will included in the taxable income, they were sponsorship payments, appearance fees and payment received under the scheme of Medal Incentive. Thus, the judge concluded, that Ms Stone even though not carrying a business but still is required to pay tax on the amount which are not income as per ordinary concepts but are received as prize money, sports grant, athletes grant and reward of any kind with respect to athlete being performed.

(b) Explain why the government grants to the taxpayer in Stone were income but the grant in Rowe's case was not.

Answer: Analysis of the government grants to the taxpayers stone and rowe and inclusion of them as income: It is seen that in the above two case laws, one case has come up with the fact that the government grant of Rowe was not income and therefore should not be included in the assessable income whereas in case of Stone all kinds of grants received have to be included in the assessable income for the purpose of taxation. Rowe received a sum of amount from the Government of Queensland and his income been assessed on receipt basis was disclosed. However, the authorities of income tax was of the thought that the amount received by him should be included in his income and tax is required to be imposed on the same. However, it is to be noted that in case of Rowe the amount received by him was mere reimbursement of the amount of expenses which have incurred on behalf of the government and the government had a kind of reimbursed his expense. Therefore, the amount received by Rowe as grant was not subjected to tax as it was a payment which he received towards an expense being incurred by him. However, in the case of Stone the grants received was assessable as income since all the amount received by her was towards her efforts which she put is for attaining the income and was not towards any reimbursements. Thus, when Stone did not include all that payments received from the government as income, the case was taken up for scrutiny. Thus, when the commissioner added that to her income she objected it as she was of the view point that these grants received did not have the characteristic of income and thus the court came out with the conclusion where it was explained that the tax payer being a police woman, have achieved many success in her sport and athlete career and receiving money for the same does not constitute as business income though those are assessable as income for the purpose of taxation. 

It is thus concluded that the Australian Law with respect to Taxation have many aspects where the clarity is not present and so there arises conflict of interest which is ultimately resolved at the courts. There is a requirement of having unbiased panel of judges as in the above case to get a fair assessment of the provisions contained with the Taxation Law. Mr Rowe was required to be paid all the expenses which he incurred on account of the case whereas Ms Stone had to comply with the decisions having all those costs in relation to legal action being charged. Although in normal eye "grants" are not income but the characteristics of the same is required to be analysed for the purpose of taxation.


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