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Taxation : Common Law Test

Question:

Discuss about the Taxation for Common Law Test.

Answer:

1 – a. Issue under consideration

Is Juliette a tax resident of Australia for the taxation year 2014/15?

Legislations

ITAA 1936

R v. Hammond

Discussion

As per the section 6-1 of the ITAA 1936, a person is are resident of Australia in the following scenarios

Common Law Test – As per this test a person is said to be a resident of the country based on few factors. Those are:

Behavior of the individual: The person when entering the country or living for a given period behaves as such as he is an Australian citizen. It can be determined by his intentions which includes having a bank account or a property leased for living, maintenance of asset’s at the place which is dwelling or a motor vehicle, or a household effect, Socially living arrangements including admissions of kids at nearby school, mails coming at such address, and the family or the business ties of the individual. Though, these factors cannot completely define the tax status, as a person may have his family ties in Australia but may not be living in the country. Another point which is covered under this test is of the physical presence of the person which if is more than half of the year will constitute residency.

Superannuation fund test – This test is applied on the employees who works for the Australian government but are working overseas. Their employees pay some amount into these funds.

Domicile test – As per this test a person has a permanent abode at a place. In the case, R v. Hammond it is defined that a place to abode is where the person lives with his family and sleeps with them. BY two means a person can be a resident as per this test. One is by birth which comes automatically from the father or the mother’s place of residence and the other is by choice, where the person acquires the residency.

Test of 183 days – In this test, a person who if present in the country for equal to or more than 183 days will be a tax resident. (Residency - the resides test | Australian Taxation Office. 2016)

To be a resident an individual has to satisfy one condition which can be a maximum up to all conditions. A tax resident is taxable for all her income from worldwide and any dual taxation is comes under concession. For foreign residents, only income earned from Australia is scanned for taxation.

In the given case, Juliette comes to Australia for work contract which was from the period 15th March 2015 to 15th March 2017. During this time she gives up the leased home in which she was living while being in England and had sold some of her furniture there. Her first visit scheduled on 1st February 2015 and she took exit on 28th February 2015 as her mother was not well in England. Later on, she comes back on 1st May 2015 and then leases up a home in Australia.

It can be seen that the individual’s intention was to come and live in the country for work for a period of two years and during such period her behavior was more of an Australian as she has leased a home in May 2015. For other tests also, her permanent place of abode will be Australia due the leased home but that place for an abode for not a full term period, but as per superannuation test and 183 days test, she was not a resident. However, to be a tax resident as per the law discussed above, for the least, one condition must be satisfied.

Hence she passes the test of common law test where she is residing as she had the intention of living in the country for a full term period of 24 months from 15th March 2015 to 15th March 2017 or an indefinite period.

Conclusion

Juliette as per the law of common law test is a  resident of Australia for tax purpose and will be taxable on all her income during such period earned from worldwide restricted to the incomes earned from abroad which will be taxed under the scanner of double taxation.

1 - b

Issue under consideration

Is Juliette assessable for her income earned during 2016/17 in Australia?

Legislation

ITAA 1936:

Discussion

Under the section 6(1) of the Income Tax Assessment Act 1936, it’s provided that, a person to be a tax resident has to satisfy the given below conditions for a minimum of one.

Test of Reside – An individual who has the intention or through his behavior from social, or family or his assets as of an Australian resident will be resident as per this test.

183 days – Being present in the country exceeding half of the year in a given taxation period which is a minimum of 183 days.

Domicile test – An individual residing in the country and has a place of residence which is owned or leased and can be called a permanent place to live will decide the tax residency. The word permanent shows that the person has the intention of coming back to the country if working overseas or anywhere in the world. During such time, he should not have any other place of residence. However, there can be a dual residency or a permanent place of residence in more than two countries but that does not mean, that in every country he will be a tax resident. Therefore, other factors too are counted.

Superannuation test – Those employees who are registered under the superannuation fund act1976 are the residents of Australia. ON the other hand any other taxpayer who is a spouse or children below 16 years, of such superannuated employee will be considered a resident as per this law.

It can be seen that Juliette who comes back again in May 1st 2015. Earlier she was having a leased home in the before taxation period. In the taxation period 2016/17, she plans to marry a dancer who is living in Sydney on September 1st, 2015 and has the intention of living in the country thereafter. In this period of time she buys a home in August 2015 where she and her husband will live.

However due to her mother illness she has to return back to England on mid of October 2015.The theatre group which employed her in Australia was still paying her the salary as she was providing the notes of the choreography through her husband. During her stay in England, her mother used to pay for her mobile bills. After her mother passed away she comes back to the country permanently on April, 10th 2016.

This shows that Juliette is a resident as per the common resides test, as she marries the dancer from the country and plans to live in the country thereafter. As per the test of domicile she has bought a house to live there with her husband which shows that her permanent placed of abode will be in Australia. For the test of 183 days, she passes this also as she is present in the country from 1st July to 14th October of taxation period for 106 days and from 10th April to 30th April for 82 days, totaling 188 days. It does not matter that she is living for some time in England as she is still a tax resident in the country under the three tests. (Foreign income | Australian Taxation Office. 2016). 

Conclusion

Juliette passes maximum of three tests which is more than sufficient to define her tax residency[1]. She will be taxable for tall her income earned form worldwide in Australia.

2. Issue under consideration

What amount of income from the rental property will be taxable for George during 2015/16 period?

Explain the components of the above statement.

Legislation

ITAA 1936

Discussion

Statement of calculation of taxable income from rental property

Description

Amount ($)

Rent from the property

13,900

Less: Deductions

 

-          Replacing roof

-

-          General Repairs and Maintenacne[2]

(6,000)

-       Furniture and Fittings

-

-          Repaint of front fence

(1,000)

-          Fixing of broken front door damaged in                vandals

(1,000)

Management’s commission

(695)

Decline in value of assets

(570)

Capital work related to replacement of roof

(375)

Net income from rental property

$4260

As per section 6 – 5 of ITAA 1936, any income which is earned through personal exertion will be dealt in this section and will be taxable under ordinary concept. Income from employment, business, and property are considered as income from personal exertion.

When talking about income from property, rent is considered to be the most seen income from such source.

There are certain expenses which are incurred on the rental property which are allowed from the income in the period when it is rented. (Rental Properties .2016).

There are three types:

Expenses which cannot be claimed – Capital expenses or the expenses of private nature cannot be claimed. These expenses can be the assets which are purchased and have their own useful life. Following can be the expenses under this head are kitchen cupboards, refrigerator, motor, replacement of a fence or a complete building, furniture, fittings, etc. However, certain concession is made for such asset. As they depreciate over their useful life, their decreased value incurs as a loss to the owner of such property. Therefore, deduction is allowed for the decreasing value of the asset. There are two methods which can be used for recording depreciation.

Diminishing value method, where the depreciation is calculated and claimed, and for the next year such depreciation is reduced from the principal or cost value of the asset. Here, the formula is base value * number of days it is held / 365 (366 in case of leap year) * 200% / asset’s useful life. Where the asset is purchased before 10th May 2006, then the percentage of 200 will reduce to 150 for calculating depreciating value.

Second method is Prime cost method. It assumes that the value of a depreciating asset decreases uniformly over its effective life. The formula for working out decline in value using the prime cost method is:

= asset’s cost * days held / 365 * 100% / asset’s effective life.

The effective life of the asset can be 366 in a leap year. The formula for this method will be adjusted if the cost or the useful life of the asset is revalued.

In either of the two methods, the allowable deduction for the expense of declining value can never exceed the principal amount of the asset.

The assets which are purchased for the rental property which are of capital nature and cannot be claimed directly for whole of their value can be claimed for their declining g value. They are as follows:

The taxpayer uses Prime cost method and the new items purchase date is December 1, 2015. The total number of days from their purchase date to the end of taxation period are, 31 days (Dec) + 31 days (Jan) + 29 (Feb) + 31 (March) + 30 (April) + 31 (May) + 30 (June) = 213 days for holding the asset. 

Stove: Cost - $900, Useful life – 12 years

Calculation = $900 * 213 days / 366 days * 100% / 12

= $43.64 approximately

Hot Water Service: Cost – $2,000, Useful life – 12 years

Calculation = $2,000 * 213 days / 366 days * 100% / 12

= $96.99 approximately

Carpets: Cost - $3,500, Useful life - 10 years

Calculation = $3,500 * 213 days / 366 days * 100% / 10

= $203.68 approximately

Furniture and fittings: Cost - $5,000, Useful life – 13 1/3

Calculation = $5,000 * 213 days / 366 days * 100% / 13 1/3

= $218.29 approximately

Total Depreciation or decline in value of the asset = $43.64 + $96.99 + $203.68 + $218.29 = $572.6 approximately or 570 rounded off to nearest zero.

Expenses claimed immediately in the year when incurred in the income year.

There are certain expenses which can be claimed immediately as they involve a renewal or the replacement of the broken parts of the building such as carpets, Management commission, council rates, land taxes, interest on borrowing funds, legal expenses, pest expenses, stationary, postage, telephone calls, Repainting, fixing broken doors, Insurance, electricity expenses, water charges, etc.

The expenses on repair and maintenance are allowed as deduction, which actually relates to the tear and the wear of the assets, and which got damaged due to renting of the property. It should be noted that replacement of damaged items not due to renting of the property comes in the category of capital expenses.

The following expenses are claimed from George’s income from rent.

Management commission - $13,900 * 5 / 100 = $695

General repair and maintenance amount of $6,000

Repainting of front fence - $2,500

Fixing broken door for $1,000.

Expenses claimed over the time.

Capital expenses which are allowed to be deducted on a fixed percentage on the amount incurred for the same. The allowable deduction for Capital work is 2.5% after the year 1987 i.e. 2.5% of $15,000

=$375

References

Residency - the resides test | Australian Taxation Office. (2016). Ato.gov.au. Retrieved 6 September 2016, from https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Residency/Residency---the-resides-test/

Foreign income | Australian Taxation Office. (2016). Ato.gov.au. Retrieved 6 September 2016, from https://www.ato.gov.au/Individuals/Income-and-deductions/Income-you-must-declare/Foreign-income/

 Rental Properties (2016).ato.gov.au. Retrieved 6 September 2016, from https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/Rental-properties-2015.pdf

Rental properties - claiming repairs and maintenance expenses | Australian Taxation Office. (2016). Ato.gov.au. Retrieved 6 September 2016, from https://www.ato.gov.au/General/Property/In-detail/Rental-properties/Rental-properties---claiming-repairs-and-maintenance-expenses/

Legal database - View: Rulings: TR 97/23. (2016). Ato.gov.au. Retrieved 6 September 2016, from https://www.ato.gov.au/law/view/document?docid=TXR/TR9723/nat/ato/00001

TR 98/17 - Income tax: residency status of individuals entering Australia (As at 25 November 1998). (2016). Law.ato.gov.au. Retrieved 6 September 2016, from http://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR9817/NAT/ATO/00001

[1] TR 98/17 - Income tax: residency status of individuals entering Australia

[2][2] Legal database - View: Rulings: TR 97/23


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