Brief Introduction to the Australian Tax System Legislation Case Law Ruling Private Ruling Public Ruling

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1 Brief Introduction to the Australian Tax System Sources of Law : a) Legislation Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 Fringe Benefits Tax Assessment Act 1986 A New Tax System (Goods and Services Tax) Act 1999 b) Case Law c) Ruling ATO is the agency that carries out the actual administration but in theory it is doing so on behalf of the Commissioner of Taxation. Refer actions of the ATO as act of Commissioner and advice also from Commissioner Private Ruling TP who are genuinely unsure how the law apply to a particular transaction can protect themselves from the risk of a penalty by asking Commissioner for a private ruling on how ATO would apply. Commissioner must honour the ruling and shield TP from any penalties if TP follow advice of ruling even though the court decides it is an incorrect interpretation of law. ( binding ) Public Ruling Commissioner often issues public rulings which set out more generally ATO s view on the way in which a provision of an Act should be applied to determine the extent of tax liability. Use to explain which factors taken into account by Commissioner when exercising discretion provided in the tax law and how factors affect decision. Similar to private ruling, it is binding and TP will not be penalised if court state it s incorrect interpretation. Why Tax? 1. Main Source of funding for government expenditure such as provision of public goods and services (cannot exclude and private sector do not provide due to free rider problem and no profit) 2. Provide social goods such as education, health and defence services 3. Redistribution through welfare and social security system. Transfer funds from those who have benefited from the market and enjoy a great ability to pay to those who are less fortunate 4. Socio-economic purposes / achieving policy objectives Eg : Sin Taxes on alcohol tobacco and gambling, R&D deduction (encourage) 5. Alternatives to tax on government funding have costs

2 Jurisdiction to Tax (Residency Test) Right to Tax S3-5 ITAA1997 Provide income tax payable for each year by each individual and company and certain other entities (does not include partnership & trust) S4-10 ITAA 1997 How much tax you pay Income Tax = (Taxable Income x Rate) Tax Offsets S4-10(1); S995-1 Financial year defined as the 12-months period beginning on 1 July S18 ITAA 1936; S4-10 Note 1 ITAA1997; Practice Statement PS LA 2007/21 - TP with different financial year for accounting purposes can use a substituted accounting period if allowed by Commissioner where TP must demonstrate accounting period ending 30 June is inappropriate or impractical balance date. S4-15 ITAA 1997 Taxable Income Taxable Income = Assessable Income - Deductions S6-1(1) ITAA 1997 Assessable Income Assessable Income = Ordinary Income + Statutory Income But not exempt income or non-assessable non-exempt (NANE) S6-1(2) (4) Ordinary Income (S6-5) + Statutory Income (S6-10) but not exempt income (S6-15) Division 8 Deductions S8-1 : General Deductions ; S8-5 : Specific Deductions Income Tax Rates : Individuals who are Australian Residents

3 Residents S6-5(2) & S6-10(4) All ordinary income and statutory income of an Australian Resident taxpayer derived directly or indirectly from all sources, whether in or out of Australia, during the income year Foreign Residents S6-5(3) & S6-10(5) All ordinary income and statutory income of a foreign resident taxpayer derived directly or indirectly from all Australian sources during the income year and any other amounts specifically included. Differences : 1. Foreign residents do not get the benefit of the tax-free threshold on any Australian sourced income 2. Tax payable on the first bracket of income is at a higher rate. 3. Foreign residents do not have access to have personal tax offsets 4. Foreign residents are not liable for the Medicare levy. Taxpayer can be residence for more than one country and determine on a year by year basis. TP can be only residence part of the year and another part as a foreign residence. Events may be examined after year end to determine residency status. Status in migration law not conclusive of residency status. Australian Resident means a person who is a resident of Australia for the purposes of the ITAA (S995-1) Residence of Australia Individuals S6(1) of ITAA 1936 state that "resident or resident of Australia" means: (a) a person, other than a company, who resides in Australia and includes a person: (i) whose domicile is in Australia, unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia; (ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that the person's usual place of abode is outside Australia and that the person does not intend to take up residence in Australia; or

4 (iii) who is: (A) a member of the superannuation scheme established by deed under the Superannuation Act 1990 ; or (B) an eligible employee for the purposes of the Superannuation Act 1976 ; or (C) the spouse, or a child under 16, of a person covered by sub-subparagraph (A) or (B); and (b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. Satisfy 4 test which is one common law test and three statutory tests : Residence according to ordinary concepts (Common Law Test) Consideration of where a person resides. Macquarie Dictionary : Dwell permanently or for a considerable time;; have one s abode for it time Short Oxford English Dictionary : Dwell permanently or for a considerable time to have one s settled or usual abode, to live in or at particular place Ruling TR 98/17 Person residing in Australia : Levene v IRC: Retired; sold his house and stay in hotels. Obtain medical advice in UK IRC v Lysaght: Attend board meetings, always broad but back one week per month Joachim v FCT: Qualified master mariner work in vessels but family and home in Aus Ruling TR98/17 Factors : Physical presence in Australia - Spending some time in Australia. If the person is a visitor, the frequency, regularity and duration of visits - IRC v Lysaght The purpose of visits to Australia and abroad

5 The maintenance of a place of abode in Australia for the taxpayer s use - Home available for use The person s family, business and social ties - Levene v IRC The person s nationality Social and Living arrangements A period of 6 months is considerable time for deciding whether an individual resides in Australia. *See behaviour of TP based on the above factors Domicile Test Statutory Test S6(1)(a)(i) Domicile Act 1982 A person is a resident of Australia if his or her domicile is in Australia, unless the Commissioner is satisfied that the person has a permanent place of abode outside Australia. Applied to outgoing individuals where that person moves overseas but does not change his or her domicile. Jurisdiction with which a person has permanent legal ties. Domicile of origin (Father s permanent home) Domicile of choice S10 of Domicile Act 1982 provides that intention of a person is to make his home indefinitely in that country in order to acquire a domicile of choice in a country. EG: Permanent Residency, NOT STUDENT OR WORKING VISA Determination : Question of fact based on individual circumstances Ruling IT2650 take into account various factors : Intended and actual length of the TP stay in overseas country Intention of TP to stay in overseas country only temporarily and then move on to another country or to return to Australia at some definite point in time TP establish a home outside Australia (House or other shelter) Residence or place of abode exist in Australia or has been abandoned because of overseas absence Duration and continuity of TP presence in overseas country

6 Durability of association of the person has with a particular place in Australia eg: Maintaining bank account, informing Centrelink, family ties Ruling IT2650 state that rule of thumb, a period of two years of longer will be considered to be a substantial period for the purpose of a TP stay in another country. 183 Days Test S6(1)(a)(ii) TP will be treated as a resident if the TP has been here for 183 days or more unless Commission that the person s usual place of abode is outside Australia and person does not intend to take up residence in Australia. As 98/17, if individuals are not residing in Australia under ordinary concepts, their usual place of abode is outside Australia (Follow ordinary residents test rule) but if TP intends to take up residence in Australia then, TP is resident. 2 limbs of the test : 1) More stay more than 183 days, continuously or intermittently 2) TP has a usual place of abode outside Australia and he or she did not intent to take up residence in Australia (Commissioner must be satisfied) Superannuation Test S6(1)(a)(iii) Applies to Commonwealth superannuation fund members and their families. Relevant to individuals who generally reside in Australia but leave temporarily and are not actually in Australia during income year. Include an inactive member where taxpayer on leave without pay (Baker v FCT) Temporary Residents Individuals Div 768R ITAA 1997:Does not pay tax on foreign income but only Australian income TP is a temporary residents if :- a) Hold a temporary visa granted under the Migration Act 1958 b) They are not Australian residents within the meaning of the Social Security Act1991 c) Their spouse is not an Australian resident within meaning of the Social Security Act

7 Even satisfy residency test but if TP is temporary resident, then pay tax only on Australia income. Exceptions : Income is earned from employment performed overseas for short periods is taxed Capital gain or loss disregarded if disposal of assets no connection with Australia. Interest paid by a temporary resident to a foreign resident is exempt from withholding tax and the record-keeping obligations for controlled foreign companies and foreign investment funds are partly removed. Residence of Australia Companies S6(1)(b) Company is a resident of Australia where it is incorporated in Australia, where it carries on business in Australia and has either central management and control in Australia or its voting power controlled by shareholders who are residents of Australia. Must satisfy 3 tests : Place of Incorporation test A company incorporated in Australia is automatically is a resident of Australia regardless of any other factors. (CA2001) Central Management and Control Test Relevant for companies not incorporated in Australia 2 limbs to be satisfied Company must be carrying on business in Australia Central management and control in Australia to be an Australian resident for tax purposes Malayan Shipping; Koitaki Para Rubber Estates (Daytoday) TR2004/15 Companies undertakes more passive activities to produce income, it carries on business where the decision in respect of those activities (investment of assets) are made. Not the operational activities Voting Control Test / Controlling Shareholders Test 2 Limbs to this test : Company carry on business in Australia