Foundation of Taxation Law

Question: Discuss about the Foundation of Taxation Law. Answer: Introduction The main aim is to determine the tax liability for Stephanie, her husband Ronald and the company which Stephanie has founded namely Rogan Advertising. In this regard, it is imperative to consider the core functions that are entrusted to both Stephanie and Ronald which would need to be analysed in wake of the relevant provisions of ITAA 1997. Based on the given case facts, it is apparent that sizable amount of revenues for the company is derived from a Brazil based contract for which both Stephanie and Ron had to transfer to Brazil for a significant amount of time. Core issue Tax residency of shareholders The first issue in this case is to determine the tax residency of both Stephanie and Ron. This is significant since for Australian tax residents income obtained from both domestic and foreign source is taxed unlike for foreign tax residents for whom only the income derived from Australia contributes to assessable income. In regards to determining the tax residency of these two individuals, the various tests highlighted in the TR 98/17 assume relevancy. There are four main tests in this regard (Barkoczy, 2015). Domicile Test To pass this test, the concerned taxpayer needs to be compliant with the following two conditions. The taxpayer in accordance with Domicile Act 1982 must continue to have a domicile of Australia. The permanent abode of the concerned person must not shift from Australia to any foreign location. With regards to determination to permanent abode location, IT 2650 highlights the following factors to be considered (Gilders et.al, 2014) The deviation of the actual stay abroad from the expected stay and the precise reason for the same. Intention of the taxpayer with regards to settling in abroad. Indulgence in any action such as buying house etc. which indicates that permanent residence has shifted to a foreign location. Resides Test In this test, based on court verdicts and the rulings of the tax tribunals, certain factors are considered to determine the tax residency status of visitors i.e. those who do not have an Australian domicile. The factors considered include the nature of personal and professional relationships in Australia, intention and main reason to visit Australia and also the social arrangements in place by the taxpayer during his/her stay (Woellner, 2015). 183 Day Test This test is used by those visitors those who are not tourists. There are two essential conditions to be adhered to for passing this test. Firstly, the given taxpayer needs to stay for a minimum period of 183 days in Australia. Secondly, the taxpayer must intend to settle in Australia going forward and must make a reasonable effort for the same. Failure to adhere to even one of the conditions mentioned above would lead to test not being passed (Sadie et. al., 2015). Superannuation Test This test is used only by Australian government officers serving outside Australia, Tax residency is determined on the basis of contribution to the designated superannuation fund with indifference to all other factors discussed above (Coleman, 2011) In wake of the above tests and the given facts , the tax residency status for Stephanie and Roger needs to be determined for FY2016 and FY2017. Out of the tests highlighted above, the relevant test in Stephanies case would be Domicile Test. This is because both Stephanie and Roger hail from Australia and therefore would have an Australian domicile. Now the key issue to be determined is whether the fact that shifting of couple to Brazil actually amounts to change in permanent abode. In this regard, the following facts are relevant. The couple leaves for Brazil on June 26, 2015 for advertisement consignment and expects to come back only in October November 2016. The couple lease their house in Australia for the time they are away in Brazil. The couple expects to come back to Australia at the end of the project and expect to find that the business has grown with the company having host of clients. However, the business would not grow significantly in terms of client till Stephanie is back. A joint bank account has been opened by the couple in Brazil in which their salary is credited while the rent from the house lease continues to be paid into the joint account held in Australia. In accordance with IT 2650, an expected stay of less than two years is expected to be transitory while greater than two years in considered to be permanent. The expected duration of the stay for the couple is expected to be around 1.5 years. Further, the house in Australia has been given for lease and not sold. Besides, the bank account in Australia is operational for the whole duration where the rent payment is received. Also, the compensation for the lectures is credited into the Australian account. Besides, the professional ties are maintained with Australia as the shareholders expect the business to grow when they come back. Thus, intention to return to Australia after the consignment gets over is apparent (Deutsch et. al,, 2015) However the following information is not provided which should be given to reach a definitive decision. The actual return date for the couple and the reason for extension if any. Whether the couple invested in any asset in Brazil or bought a house there which served as their permanent residence. It is assumed that the couple actually return as per the intended date and also do not purchase any house in Brazil and merely lease a place for residence. Under this scenario, it can be assumed that the couple would be regarded as tax residents of Australia for both FY2016 and FY2017. In light of this, the assessable income of each of the shareholders and the company needs to be determined (CCH, 2011). Stephanie The assessable income calculation for FY2016 is as shown below. Yearly salary from Rogan Advertising = $ 80,000 The above would be regarded as ordinary income in accordance with Section 6(5) of ITAA 1997 since it is derived from employment/business since she is a tax resident and hence employment income from foreign sources would be assessable. Assuming that Stephanie has 50% share in the house, 50% the rent payments would be ordinary income. Rent receipts = (450/2)*52 = $ 11,700 The time period for the lectures is not given, but assuming that these lectures commenced and ended in FY2016 only, hence the proceeds derived on this behalf would also be termed as income from personal exertion since her stint for lectures is related to her work experience as a advertiser. Assessable income from Monash University = $ 24,000 Besides, it known that any income of the firm after deducting the expenses would be paid as franked dividends but the details about the revenue and expenses of the company is not given, it is assumed that the company does not make any profits and breaks even for both FY2016 and FY2017. Hence, contribution from unfranked dividends = $ 0 No franking credit is available on these. Further, there would be interest on the bank account that is maintained in Australia and also Brazil but due to paucity of data, it is assumed to be zero for both FY2016 and FY2017. Total assessable income for FY2016= 80000 + 11700 + 24000 = $ 115,700 Total assessable income for FY2017 = Employment income + Rent income (depending upon the exact date of arrival) + Unfranked dividends from the company (assumed to be zero) Assuming that the couple arrive back to their home by on October 31, 2016, then the rent would be received for 17 weeks. Hence, assessable income for FY2017 = 80000 + 17*(450/2) = $ 83,825 Roger The assessable income for Roger would essentially constitute of the following taking into consideration his tax status as Australia for both years under consideration. Employment Income from Rogan Advertisement ($ 80,000 pa) Rent income depending upon the share in the house (Assumed 50% so $ 225 per week) Interest on the account in Australia (Assumed to be zero) Interest on the joint account in Brazil (Assumed to be zero) Unfranked dividends to the extent of 50% of the net profits of the company (Assumed to be zero as information not provided on revenue and expenses) All the above would be ordinary income as per Section 6(5) of ITAA 1997, Hence, assessable income in FY2016 = 80000 + (450/2)*52 = $ 91,700 Assessable income in FY2017 = 80000 + 17*(450/2) = $ 83,825 Rogan Advertising Since both the shareholders of the company are Australian residents for the purpose of tax and also otherwise, hence the company is Australian. Owing to this, the company would be able to claim various deductions in the revenue realised to arrive at the assessable income for each of the years i.e. FY2016 and FY2017. Information Required The following information is required. Exact return date of the couple Interest income earned on Australian bank account and also account in Brazil Financial statements of the company to determine the unfranked dividends payable to both Stephanie and Roger. Ownership stake of both individuals in house in Australia Exact date of the lecture for Monash University in Brazil. Residential arrangements in Brazil and whether any fixed asset has been procured or not. Involvement in management in Roger Advertising while couple is in Brazil. 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