Taxation – Ordinary Resident Test – Archie Case Study Assignment Help

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Taxation Archie Case Study Assignment Help

Assignment Task:

Ordinary Resident Test

QUESTION 1:

Introduction

Archie will be a resident for tax year ending June 30, if he satisfies any one of the residency tests under s 6(1)(a)(1)of the Income Tax Assessment Act 1936 (ITAA 1936).

Residency is assessed on a year to year basis for tax and a person can be a ‘resident’ for only part of the year.

Ordinary Resident Test (ORT)

ORT is the primary test of residency; Archie will be a taxable resident if he ‘resides’ in Australia and this is a question of fact: Cases: Lysaght (1928) ; Joachim (2002).

The ATO’s guidance in Taxable Ruling 98/17 has suggested considering the following factors:

Archie has physically been in Australia for one month of this income year which is consistent with Case: Levene v IRC (1928) that this is not a considerable length of period of time. Hence, this suggests Archie does not reside in Australia.

However, this lack of enough physical presence in Australia is not determinative enough and other factors need to be considered: Case: Joachim (2002).

Archie moved to Australia for short-term work-related purpose only which suggests that he does not reside here. Case: Applegate (1979).

Archie is employed by a German company and has not opened an Australian bank account, but instead his salary was paid to his German bank account. This suggests that he has no economic ties to Australia, consistent with him not residing in Australia.

It is reasonable to assume that Archie has not established a home in Australia and his family ties are in Germany, which is consistent with him not residing in Australia.

Archie is a German citizen and is not a permanent resident of Australia which suggests that he is not in Australia although this factor is certainly not decisive.

Therefore, Archie is not a resident of Australia for tax purposes under this test for the year.

Double tax agreements (DTA):

‘Section 4 of the International Tax Agreements Act 1953 and can operate to restrict the imposition of tax under Australian domestic law. ‘

DTA – ‘in force’ 17/12/2016 (C2016G01655) – International Tax Agreements Amendment Bill 2016.

Income Tax Treaties:

 (An important consideration)

International Tax Agreements Amendment Bill 2016:  Australia – Germany Agreement.

QUESTION 2

Andrew a student, is a waiter at local restaurant:

Employed: 1 Jul 2016 – 31 Jan 2017 Hourly rate: $22.00; Shifts 3 X 5 hours each week

Ordinary Income is ‘income according to ordinary concepts’.

‘Ordinary income is your 

personal services income

’.

 

Indicia developed by the courts, is the nexus with the element of the earning activity, and the character of the income. It has been established, that income is remuneration for personal services

that displays regularity, periodicity

and recurrence.

Andrew provides personal services on a recurring basis for remuneration.

This is Andrew’s ordinary income. (ITAA 97 6-5(1)).

Tips $50 – $70 per shift.

TR 95/11 (

19) ‘The receipt of ‘tips’ by a hospitality employee is assessable income under paragraph 26(e) of the Act

‘

Tax treaties give the source country a taxing right over selected types of income, profits or gains, sometimes at limited rates. Each country has the right to tax the income of its

Tips Andrew receives are income ‘because they arise out of a service relationship and because they are an expected incident of such occupations.’

‘In

Calvin v Wainwright,

the court concluded that tips were not personal gifts but rather were payable in respect of services provided and thus constitute income from employment.’

Tips form a part of Andrew’s ordinary income.

Sept 2016 – $250 (employee of the month bonus)

A consequence of Andrew’s income-producing employment.

ATO guidelines: ‘Income you must declare’

; ‘Employment income’

; Salary and wages’- includes bonuses’.

This forms part of Andrew’s ordinary income.

Dec 15 – Gift of a bottle of wine valued at $80. ( all employees received it)

Kitto J, ‘contrasted gifts and ‘mere gifts’ – the latter being unrelated to earning activities or occupations and having no significant character other than a desire to benefit the donee. Clearly, the issue is whether the payment is sufficiently related to income-producing activities to be a reward for those activities.’

‘Not easily converted into cash.’

This is not a part of Andrew’s ordinary income

Nov 16 – $150  prize was a non-transferrable bookshop gift voucher

‘A prize won in a contest would normally not be ordinary income because it would not be the product of the tax payer’s services. It would not have separate income characteristics such as periodicity or compensation for lost income.’

‘Not convertible to cash’

, so would ‘not be ordinary income.’

Thus this will not form part of Andrew’s ordinary income.

Position in an accounting firm.

Feb 2017 – Accounting firm ( 5 months financial year ending 30th June 2017) $75,000 salary (inclusive 9% superannuation)

This is Andrew’s ordinary income defined by:

Ordinary income is defined as income according to ordinary concepts: s6-5(1)

ITAA97 – ‘A gain that is regarded by courts as having an income character will be “ordinary income”.

Sufficient nexus with an income-earning activity, it must have a connection with the income earning activity: income from personal service, business or property.’

Andrew’s annual salary, pro-rata, is defined by S6-1(1) ITAA97 and calculated as:

Assessable income = ordinary income (s6-5) + statutory income (s6-10)

Taxable income = assessable income – allowable deductions.

Tax payable = (taxable income x tax rate) – tax offsets.

Feb – 2017 paid $2,000 sign-on bonus.

‘Payments made to induce a person to resume work or providing services are assessable when received. Accessibility extends to payments made under any type of agreement, whether enforceable or not, by any person whether an employer or not. Usually,

payments made (for example) in the settlement of industrial disputes or an inducement to enter a new employment are ordinary income.’

ATO Pay as you go (PAYG) withholding Tax table for bonuses and similar payments:

One-off payments which do not relate to work performed in a particular period:

Adopt Example Two:

Annual taxable income = $75,000 – ($75,000 x 9%) =

$68,250

($1312 income/week.)

Bonus payment $2000 = $2000/52 = $38/ week additional income.

Total weekly income (regular income + Bonus) =$1312 + $38 = $1350.

Personal Income Tax Rates 2016-2017: Tax on $37000 is $3,572; 32.5% on excess.

Tax on weekly income of      $1312 = $264

Tax on total weekly income $1350 = $276

Annual tax on difference    ($276 – $ 264) x 52 = $624 paid week 1, Feb 2017)

Total withholding Week 1 (normal weekly pay of $1312 + Tax on bonus $2000)

= $264 + $624 = $888.

Andrew’s $2,000 sign-on bonus, calculated at $624, is accessible when received –

(week 1 pay).

Assume Andrew received $300 instead of the $150 non-transferable gift voucher.

‘The ordinary/judicial concept excludes windfall gains from income, because generally, they lack the commercial element evident in other income-producing activities. Windfalls are the product or good fortune. Seldom are they recurrent and regular; they are not seriously expected or relied on. They are not the product of employment, service or business.

To the contrary, prizes, grants and awards received by a sportsperson who was carrying on a business were held by the High Court in

FCT v Stone

, to be assessable income

.

Where the recipient is engaged in business activity, prizes and grants are income.’

‘Gifts (as money), not for service, is not considered ordinary income.’

Scott v FCT

(1966) HCA.

The $300 cash prize is not ordinary income to Andrew.

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