1. Residency, source and derivation

2. Key concepts Residency Derivation Source

3. «What can Australia tax? »
RESIDENCY AND SOURCE
Importance:
Determine Australia's jurisdiction to tax a person's income.
Who can be taxed?
What is taxed?
Example:
Marie, a French citizen, who lives in Paris, receives:
Salary from her accountancy job in Paris; and
Rent from an investment property she owns in Melbourne.
Ask yourself:
«What can Australia tax? »

4. «When is the payment derived by Acme
DERIVATION
Why is ‘derivation’ important?
It determines in what year a person’s income is to be
brought to account for tax purposes.
Example:
Acme Pty Ltd sells a customer a machine on 1 May
for $100,000. Payment is to be made in 30 days but
the customer does not pay until 1 July (the start of
the next financial year).
Ask yourself:
«When is the payment derived by Acme
for tax purposes? »

5. RESIDENCY: residents v non-residents
Different treatment for residents and non-
residents.
For example:
1) [KEY DIFFERENCE]: Residents are taxed on income from all sources; non-residents only on income with a source in Australia.
Tax rates vary.
Non-residents do not pay the Medicare levy.
Special withholding tax rates for non- residents.

6. RESIDENCY: residents v non-residents
The key difference:
Section 6-5(2):
Australian resident’s assessable income includes ordinary income derived directly or indirectly from all sources.
Section 6-5(3):
Non-resident’s assessable income includes ordinary income derived directly or indirectly from Australian sources.

7. Residency test: individuals

8. Residency test: individuals – primary/common law test
The person must ‘reside’ in Australia.
Will ‘reside’ where the person:
dwells permanently or for a considerable time; or
has their settled or usual place of abode.
In determining this issue the Australian courts take a number of factors into account. None of these is decisive, but collectively build up a ‘picture’ of a person’s residency.

9. ‘RESIDE’ : individuals – common law test - factors to consider
Physical presence of the person in Australia for some part of the year
The nationality of the person
The person’s history of residence and movements
The person’s mode of life
If the person is a visitor to Australia, the frequency, regularity, duration and purpose of the visit(s)
Where a person visits for more than two years they will be seen as a resident: TR 98/17
If a person is outside Australia for part of the year, the length and purpose of the absence.
The person’s family and business ties in Australia.
Whether the person maintains a place of abode in Australia or elsewhere.

10. Residency test: individuals – statutory tests
If individual is not a resident under the
primary/common law test, they may be a
resident under the statutory tests.
The main statutory tests are:
The domicile test
The 183 day test

11. Residency test: individuals – statutory tests (domicile)
Statutory ‘domicile test’:
Domicile is (prima facie) proof of residence UNLESS Commissioner is satisfied that the person’s permanent place of abode is outside Australia.
‘Domicile’ - the place the person regards as their home (even if they do not live there).
Can be domicile of origin or of choice.
Under s 10 of the Domicile Act in order to acquire a domicile of choice in a country, the person must have the intention to make their home “indefinitely” in that country.

12. Residency test: individuals – statutory tests (domicile)
‘Domicile test’ - the exception:
UNLESS the person has a “permanent place of abode outside Australia”
Permanent does not mean ‘forever’
FCT v Applegate
IT 2650

13. Residency test: individuals –statutory tests (183 day test)
Statutory ‘183 day test’:
Must be physically in Australia for at least 183 days
Will be a resident UNLESS Commissioner is satisfied that
the person’s usual place of abode is outside Australia
AND
(b) they have no intention of taking up residence in Australia

14. Residency test: companies
FIRST QUESTION:
<<<Is the company incorporated in
Australia?>>>
If ‘YES’: it is a resident of Australia for tax purposes.
If ‘NO’: go to the second question.

15. Residency test: companies
SECOND QUESTION:
[If the company is not incorporated in Australia (that is, the answer to the first question is ‘no’)]
ASK:
«Does the company carry on business in Australia? »
If it does not, it is NOT a resident.
If it does it WILL be a resident if EITHER:
(a) Its central management and control is in Australia; OR
(b) Its voting power is controlled by Australian residents.

16. Residency test: companies
Incorporated in Australia?
Yes No
A resident Carries on business
in Australia?
Yes No
Control or voting power in Not a resident
Australia?
A resident Not a resident

17. Residency – ATO guide
The ATO has a site dedicated to explaining the meaning of resident. ontent/64131.htm

18. Residency – other issues
Double taxation
Dual residency
Temporary residence

19. Residency: double taxation
Our system of taxing income from all sources can lead to the possibility of double taxation.
Ask yourself:
«How can this occur
and (importantly) how can it be
prevented?»

20. Residency: double taxation
Double taxation can occur where:
A resident receives foreign sourced income which is taxed in the country of source
A non-resident with Australian sourced income is also taxed on that income in their country of residence

21. Residency: double taxation
What can be done to prevent it?
Effect is nullified by:
(A) Foreign tax credit system
(B) Double tax agreements (DTA)
(C) Specific exemptions

22. Residency: double taxation
(A) Foreign tax credit system
Where an Australian resident pays foreign tax on non-Australian sourced income, the resident receives in Australia a credit for the foreign tax paid.

23. Residency: double taxation
(B) Double tax agreements
Taxing rights over certain classes of income are reserved exclusively for the country of residence.
All other income can also be taxed by the country of source; but if also taxed by the country of residence, the latter must give a tax credit for the tax paid in the source country.

24. Residency: double taxation
Example of a DTA:
Clause 19: Australia/Germany DTA
“Remuneration which a professor or teacher who is resident of a Contracting State and who visits the other Contracting State for a period not exceeding 2 years for the purposes of [study/research/teaching] at a [uni/college/school] receives shall not be taxed in that other State”.
Ask yourself:
«What is clause 19 doing?»

25. Residency: double taxation
(C) Specific exemptions
See, for example, s 23AG ITAA which (subject to certain conditions) exempts from Australian tax the foreign employment income of an Australian resident individual who was engaged in certain foreign service for a period of not less than 91 days.

26. Residency test: dual residency
<<<Can a taxpayer be a resident of
more than one country?>>>
YES. In such cases relief from double taxation is normally found in a DTA. Most DTA have tie-breaker rules for these situations (eg: for individuals – it is the place where they have their permanent home; if that doesn’t decide, it is where they have closer personal or economic relations)
If no DTA applies, the foreign tax credit system may
provide relief.

27. Residency : temporary residency
Temporary resident – basically a person
who holds a temporary visa and is not a
resident under the Social Security Act
1991 and does not have a resident
spouse: [s ITAA 1997]
Generally they are taxed on the same basis as
non-residents: [see s ITAA
1997].

28. SOURCE OF INCOME Importance of source:
Basis of government’s right to tax based on residency.
2) Income sourced in Australia can be taxed by government.
Remember:
(a) s 6-5 ITAA 1997
(b) Double Tax Agreements

29. Source of income: how is it determined?
(1) No general definition of source in the ITAA.
(2) Specific direction given for particular types of income.
For example:
(a) S.6C ITAA 1936: income in the form of royalty payments which are an outgoing of an Australian business– deemed to be sourced in Australia.
(b) DTAs have own source rules.

30. Source of income: how is it determined?
Source is a question of fact
As was noted by the court in Nathan v FCT :
‘…the ascertainment of the actual source
of a given income is a practical, hard matter of fact.’

31. Source of income: how is it determined?
Principles for determining source:
(1) Where income is derived solely from the acts of the taxpayer:
Source is where the acts are performed.
(2) Where income arises from the possession of property :
Source is where the property is situated

32. Source of income: how is it determined?
(3) Where the taxpayer’s act involves the performance of a contract:
Must consider:
(a) Place of performance
(b) Place of payment
(c) Where the contract was entered into
Ask yourself:
«What happens if these are all in a
different country?»
Must balance the factors according to importance.

33. Source – types of income
Wages and salaries income – generally where the services are performed
Business income – generally where the goods are sold or where the business is transacted
Interest income – usually the place where the loan agreement is entered into and the money is lent
Dividend income – generally the place where the profits of the company that pays the dividends are made
Property income – usually where the land is located
Note: these are a guide only. It very much depends on the facts of the case (see, for example, FCT v French and FCT v Mitchum) and legislation (see, for example, s 6C ITAA 1936).

34. Derivation of income: why is it important?
1) S.6-5 ITAA 1997 brings to account income ‘derived’ by the taxpayer.
2) It is a timing concept – it determines in which year the taxpayer should bring particular income to account for tax purposes.

35. Derivation of income: When does it occur?
Depends on the tax accounting method adopted by the taxpayer
Note:
(a) There are two choices.
(b) Derivation differs for each choice.

36. Derivation: which method should be used?
Taxpayer must choose the method which:
‘is calculated to give a substantially
correct reflex of the taxpayer’s true
income’.
per: Dixon J in C of T (SA) v The Executor Trustee and Agency Co of South Australia (Carden’s case)

37. Derivation: tax accounting methods

38. Derivation: cash receipts method
Occurs by the movement of cash or its equivalent to the control of the taxpayer.
Cash or equivalent must be received by the taxpayer.
The receipt may be ‘actual’ or ‘constructive’.

39. Derivation: cash receipts method
Actual receipt
Physical receipt – the payment has been
physically received.
Constructive receipt
Two types:
Payment credited to the taxpayer without restriction.
Receipt under s. 6-5(4) or s. 6-10(3) ITAA

40. Derivation: who uses cash receipts method?
Normally used by employees and professionals whose income is derived from the personal provision of skill and knowledge.
Applies to investment income.

41. Derivation: earnings/accruals method
Derivation occurs when the income is ‘earned’ (which can occur before payment is received).
The income is earned when the taxpayer has the legal right to receive payment.
This depends on the contractual. arrangement between the taxpayer and the payer, the common law and any statutory provisions.

42. Derivation: who uses the earnings/accruals method?
1) Used for business income involving trading or manufacturing.
2) Used by professionals whose activity constitutes the running of a business.

43. Derivation: changing methods
Taxpayer is allowed to change tax accounting method and it may be necessary if the taxpayer’s income earning activities change.
Cannot be changed merely to obtain a tax advantage.
See: Henderson v FCT

44. Derivation: pre-payments
Pre-payments for goods or services are not normally income until the goods or services (or parts of them) have been supplied.
Until then the money has not been ‘earned’.
Possibility of need to refund the money also suggests it is not derived income.
Books of account should reflect ‘unearned’ nature of the pre-payment.
See: Arthur Murray (NSW) Pty Ltd v FCT

45. Derivation: work-in-progress
The value of work-in-progress need not
be brought to account unless the
contract pursuant to which the work
was done allows for progress payments.

46. Derivation: time-to-pay
Under the earnings/accruals method, income is derived when the account is issued (not when the payment is received).

47. Derivation: deductions for prompt payment
If it is a virtual certainty based on past experience that the discount for prompt payment will be received by the customer, the trader need only account for the discounted amount.
If, contrary to expectations, the discount is not claimed, the extra amount must be returned as additional income.