LAWS20060 Taxation Law of Australia Assessment Answer

Taxation Law Assignment

Assignment Task

QUESTION 1

Juliette is a famous English dancer who is contracted by a private theatre management company based in the United States of America to come out to Australia to choreograph the dancing routines for a new stage musical based on the Harry Potter books. The contract is for 2 years from 15 March 2015 through to 15 March 2017. The contract is signed in England with payment of AUD$70,000 going into a Swiss bank account on 15 July 2015. Further payments of AUD$70,000 will go into the bank account every 6 months until the contract is complete.

Juliette flies into Sydney on 1 February 2015 with the intention of spending some time looking around the country while she is waiting for her job to begin. At this time Juliette gives up the lease on her flat in London and sells some of her furniture. Other items of furniture consist of valuable antique pieces, which she keeps in storage to use on her return. On arrival in Australia Juliette embarks on a bus trip around the country, which is planned to last for 2 months. However, on 28 February 2015 Juliette finds out her mother is seriously ill and she is required to fly back to England to see her in hospital. Juliette stays at her mother’s house until her mother is well enough to look after herself and returns to Australia to fulfill her contract on 1 May 2015.

As the contract will be fulfilled in Sydney Juliette leases a flat in Sydney and purchases furniture to go with it. As the year passes Juliette finds that she is deeply in love with the lead male dancer, Romeo, and they talk about getting married. As Romeo grew up in Sydney and wants to stay there Juliette buys a house for them to live in together in August 2015 and they marry on 1 September 2015. Juliette can’t believe her luck as she has always thought she might like to live in Australia permanently.

Sadly, her good luck came to an end when she received a call that her mother had once again become ill and she had to return to England to look after her on 15 October 2015. With a heavy heart Juliette said goodbye to Romeo and returned to England hoping that her mother’s condition would pick up quickly so that she could return to her husband and the country she had grown to love. However, Juliette’s mother required 24 hour care and insisted that Juliette was the one who looked after her, so Juliette had to stay on in England to fulfill her mother’s wishes. To make the arrangement easier for Juliette her mother paid her AUD$1,000 per month to cover her mobile phone bills to Romeo, even though she lived in her mother’s house without paying rent. Throughout this time Juliette still received her AUD$70,000 every 6 months as she was able to transmit her choreography notes to Romeo who then passed them onto the assistant choreographer and the show went on without her.

Unfortunately, Juliette’s mother passed away on 10 April 2016 and Juliette returned to Australia on 15 April 2016 to seek comfort in the arms of husband Romeo and distract her mind with work.

REQUIRED (Q1):

Advise Juliette as to whether she will be a resident of Australia for income tax purposes for the 2014/15 income year AND the 2015/16 income year. Please address each income year separately. Please also address each test of residency.

QUESTION 2

George had a relative who had lived in Sydney but who died in October 1995. On the death of the relative George inherited his Sydney house.

On inheriting the house George decided to let the property, and appointed ‘Honest Chris’ Real Estate’ managed by local real estate baron Christopher Skate, as property manager. The property had been rented from the time it was inherited.

Repairs were carried out in December 2015, including:

The new items were all purchased on 1 December 2015.

George uses the prime cost method for decline in value for the rental property. The cost and effective lives of the assets are:

Rent received for the current income year totals $13,900. Management commission paid to the agent amounts to 5% of this.

REQUIRED (Q2):

1. Prepare a statement setting out the taxable income that will arise from the rental property.
2. Prepare a discussion explaining each component of the rental property statement prepared in Q2a). This discussion should clearly explain the inclusion/exclusion of each element of the rental property statement above

Introduction

The main purpose of this assignment is to shed light on the various provisions of the Income Tax Act of Australia in regards to the residential status of the individuals coming to Australia for various purposes. In this scenario we would specifically analyze the residential status in case of employees or professionals coming to the country on a contract. In addition to the same the various provisions and the residential status tests have been discussed in the first part of the report. The second part of the report deals with the issues related to the rental income and the expenses that can be claimed by the individuals.

Question 1

If a person is resident according to the 1936 Act he is considered to be a resident for the purpose of 995-1 of the act. The primary condition which needs to be considered in this case is if the person resides in Australia according to the ordinary meaning of resides. Till the time the ordinary meaning of the word resides is fulfilled the other conditions according to this section is not required to be taken into account for determining the residential status of the person (ATO, 2016). The Australian Income Tax Act does not provide for a meaning of the word resides and hence one has to refer to the meaning of the same from the dictionary. The behaviour of the individual needs to be considered in regards to the below mentioned points:

1. Intention or purpose of the visit/presence
2. Employment/business and family ties
3. Location and maintenance of the assets of the individual
4. Living and social arrangements

Based on the circumstances of the case importance is given to the factors and no one particular factor is only considered as the deciding factor. Generally according to the Commisioner’s view of the law, a period of six months is considered to be appropriate for the purpose of residing according to the tax law. Even though in general terms a period of six months is considered to be fit for the purpose of deciding upon the residential status of a person there are situations where the individual portray residential characteristics even though the period of stay has been less than 6 months. In contrast a person has been decided to be a non-resident even though the period of stay has been more than 6 months (Protocol amending convention with Australia regarding double taxation and prevention of fiscal evasion, 2002). In addition to the same for the purpose of deciding upon the residential status of a person in Australia the commissioner considers the below mentioned tests:

• Residency according to the ordinary concepts test
• The domicile and the permanent place of abode test
• The 183 days test
• The Commonwealth Superannuation Fund Test

According to the subsection 6(1) of the act if a person becomes a resident on conducting the first test the other three tests mentioned in the list above are not required to be conducted for deciding upon the residential status of the person. The domicile test and the superannuation test is basically aimed to determine the residential status of Australian National who have gone abroad or in other words are not living in Australia for the current year. In addition to the above when the above tests can not be applied or relied upon due to the subjective nature of the same the 183 days test is applied (Hewson, 2014). The intention of the person is also important for considering whether he or she is resident under the act or not. It is also important to consider the maintenance and the location of the assets of the individual. In the case of The Commissioners of Inland Revenue v. F L Brown (1926) 11 TC 292, it was held by the court that the individual since had been residing outside UK for a period of 9 months in a year and had sold his house he was not a resident for the purpose of tax. The test of time is also an important factor in deciding the residential status of the person. Even though a person who has arrived in April to stay till April of next year may be considered to be a resident for the current year even though the person has resided only for a period of only 3 months on the grounds that the behaviour for residing in Australia have been demonstrated.

Considering the fact that Juliette arrived in Australia in the month of February 2015 and was not residing for a span of 6 months, although she left Australia to see her mother she ended the lease on her apartment in England and sold off her furniture. She even forwarded the choreography notes to ensure that the program went on. For meeting the commitments of the contract she was paid the amount/fees agreed in her contract. Due to her mother’s illness she had to constantly travel between UK and Australia and also spent a considerable amount of time in UK but her behaviour i.e. marrying Romeo an Australian National, leasing a home in Sydney and closing the lease on her UK home indicates the fact that she intended on residing in Australia and hence would be considered to be a resident for both the years (TR98/17) (ATO, 2016).

Question 2

Statement of taxable income arising out of the rental property

The cost of repairs can be claimed as an expense to the point that the same has been incurred for the purpose of restoring the property in terms of its efficiency but where the same has been used to enhance the efficiency of the property it cannot be claimed as an expense. In other words the cost of improvement incurred by the individual can’t be claimed as an expense (Eccleston, 2013). The cost of improvement generally includes the below mentioned things:

1. Provision of something new
2. Increases the expected life of the asset or increases the income producing ability of the same
3. Brings about a change in the characteristic of the asset
4. More than trying to restoring the normal functionality of the asset under question

Deductions can be claimed for the expenses incurred as capital works. The below mentioned expenses are categories of capital works:

1. Cost of constructing a building
2. Cost incurred in altering a building
3. Cost of improving the surrounding of the property

In light of the above provisions the various items have been discussed below:

Replacing the damaged fibro roof with longer lasting colorbond: The replacement of the damaged fibro roof with longer lasting colorbond will not be allowable as the same is not of the same type and increases the life or the efficiency of the asset. This in turn would be treated as a capital works expense which can later be claimed as an expense over the life of the asset by George.

New furniture: New furniture and fittings don’t qualify as repairs and maintenance as an old item or a part of the building has not been repaired and hence George would not be able to claim expenses for the purchase of new furniture and fixture. However the same can be claimed as a capital works deduction over the life of the asset (Eccleston, 2013).

Commission of the agency: The body corporate fees and charges can be claimed as an expense during the time the property was rented out and hence in this scenario George would be able to claim the expenses paid as commission charges to the Real Estate Management Company (TD 93/73).

Cost of capital work: The cost of such improvements and constructions can be claimed as an expense by the individual in the form of depreciation. Generally the rate of depreciation in this case is 2.5% which is to be claimed over the next 40 years after the completion of the building or the construction. However an organization is free to choose any other method such as WDV method or the Prime Cost Method which assumes that the value of the asset depreciates or depletes uniformly over the useful life of the same (Kenny, n.d.). Taking into account the same the depreciation George would be eligible to claim has been indicated below:

Replacement of the door: Fixing of a door is not a repair and maintenance charge and is deemed to be of a capital nature and hence the same would not be allowable as a deduction under the repairs and maintenance head.

Conclusion

The provisions above throw light on the various provisions of the act in regards to the determination of the residential status and the exceptions therein. The paper also focused on the expenses which can not be claimed as an expense for the purpose of determination of rental income and the process in which the capital works expenses should be dealt with.