lOMoARcPSD|1520210
Tax Law exam notes
General Tax Law points to note:
Australia uses ‘self-assessment system’ – TP must work out own tax payable.
TP lodges income tax return → ATO issues ‘Notice of Assessment’ that creates liability to pay extra tax/receipt refund → Amending
assessments (issued by TP or ATO, picked up by an audit. If simple return, 2 year time frame after Notice of Assessment to amend, if
complex return, 4 years) → Objections and appeals (onus on TP to show tax is lower than what is shown in amended assessment).
Tax Rulings:
Tax rulings are an important source of guidance. Are not law; merely ATO’s view of how the law applies. Tax rulings are binding on the
ATO but not on the TP. Private Ruling – only the TP to whom the ruling is issued may rely on it. Tax Rulings may also be Product
based, Public or Class based (i.e. to all shareholders in a firm).
*NOTE: * next to a term in the legislation means it is defined in s 995-1 ITAA 1997.
Tax Formulae
𝑇𝑎𝑥 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 = (𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 × 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒) − 𝑇𝑎𝑥 𝑂𝑓𝑓𝑠𝑒𝑡𝑠 : s 4-10(3)
𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐴𝑠𝑠𝑒𝑠𝑠𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐷𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠 : s 4-15
(AI) Assessable Income s 6-1 includes:
(OI) Ordinary income: s 6-5(2)
(SI) Statutory income: s 6-10(4)
Residents: AI includes OI & SI derived directly or indirectly from ALL sources whether in or out of Australia: s 6-5(2) & s 6-10(4)
Foreign residents: AI includes OI & SI derived directly or indirectly from all AUSTRALIAN sources s 6-5(3) and any other amounts
specifically included s 6-10(5).
Assessable Income excludes:
Amounts that are not OI or SI s 6-15(1) exempt income s 6-15(2) or non-assessable, non-exempt income s 6-15(3) ≠ AI.
*NOTE: entities that are exempt no matter what kind of OI or SI they have (e.g. charities/education/science/health): s 11-5
Deductions equals
General deductions: s 8-1
Specific deductions: s 8-5 *NOTE: consider this first; if expense doesn’t fall in this then consider general deduction
Jurisdiction to Tax
Resident: a person resident of Australia for tax purposes of ITAA 1936 s 995-1. Foreign resident: a person who is not a resident s 995-1.
4 residency tests; need to satisfy only 1 to be a resident. If don’t satisfy any → foreign resident. Decided on year-to-year basis. Can be
resident for only part of the year. Can look at events after year-end to decide whether TP is resident: Applegate (1979). Can be tax
resident of 2 countries at same time → look to tax treaties. Status under migration law NOT determinative for tax purposes.
ORDINARY RESIDENCY TEST:
TP is a resident if s/he is a person “who resides in Australia”: s 6(1) ITAA 1936 – the definition of “reside”. Includes international students.
Question of fact – don’t reconcile cases because different people decide differently based on facts.
Levene (1928): to “reside” is to dwell permanently or for a considerable period of time in a particular place. Court held that 4 or 5
months in a year qualifies as a considerable period of time, TP “resided” in the UK until leased Monte Carlo flat.
Joachim (2002): TP and family migrated to Australia but TP worked for 316 days of the year outside Australia. Held to be resident,
because TP had ties to Australia (maintained a home for family in Australia) and he showed an intention to call Australia home.
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Tax Law exam notes
Lysaght (1928): TP “resided” in the UK because “in the ordinary course of life” he returned to the UK for one week every month
throughout the tax year (frequency & regularity of visits, ties to UK => resident).
TR 98/17 states that international students are Australian tax residents, and suggests a number of factors to consider:
Physical presence in Australia (if yes → more likely resident). *Covered by 183 day test.
Frequency, regularity and duration of visits (if more regular, frequent &/or longer duration → more likely resident)
Purpose of the visits to Australia and abroad (if family → more likely resident, if work → not determinative)
Maintenance of a place of abode in Australia during absences (if yes → more likely resident): Joachim (2002)
o *NOTE: if furnish a house/apartment in Australia to TP’s tastes → more likely place of abode.
Family, business and social ties (if to Australia → more likely resident)
o *NOTE: this can include the maintenance of assets in Australia (e.g. bank account)
Nationality (not determinative, but if Australian citizen → more likely resident)
DOMICILE TEST
Australian resident includes a person whose domicile is in Australia unless the Commissioner is satisfied the TP has a
‘permanent place of abode overseas’: s 6(1)(a)(i)
2 types of domicile:
1) Domicile of origin: born in Australia, Australian citizen
2) Domicile of choice: migrate to Australia, permanent resident or naturalised citizen
*NOTE: use test for Australian residents who are leaving for another country. Test is irrelevant if domicile is not Australia.
Permanent place of abode:
TP went to Vanuatu for 1.5 years, then returned to Sydney. TP had a ‘permanent’ home/presence/place of abode outside Australia
and is not a resident. Permanent is not forever, takes its meaning from context – may be transitory/temporary: Applegate (1979).
A fixed 3 year period overseas with a house there is enough to have a permanent place of abode outside of Australia and for TP
to not be a resident: Jenkins (1982).
Factors to consider when determining “permanent place of abode” IT 2650:
Intended and actual PURPOSE of stay in foreign country
Duration & continuity of TP’s presence in overseas country. > 2 years is enough for TP to not be Aust resident: IT 2650
Establishment of a home outside Australia (not just temporary accommodation)
o *NOTE: doesn’t matter if this home is provided by the employer
Residence or place of abode in Australia
Duration of association with Australia (maintenance of bank accounts, education of children, family ties, notifying govt
departments of intention to leave Australia).
183 DAY TEST
TP will be treated as a resident if in Australia for 183 days or more unless Commissioner is satisfied that:
The person’s USUAL place of abode is outside Australia, AND
o “usual place of abode” = where TP resides => look to ORT: TR 98/17
The person does NOT intend to take up residence in Australia: s 6(1)(a)(ii)
If test is satisfied, TP treated as resident for whole of income year: Executors of the Estate of Subrahmanyam (2002). Groves (2011)
suggests TP was resident for part of income year; however, this is AAT case – lower hierarchy.
The 183 day test is an objective test, based on physical presence in Australia. Used for those coming to Australia.
SUPERANNUATION TEST
Members (mostly public servants) of certain Commonwealth funds are deemed to be Australian residents: s 6(1)(a)(iii)
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Tax Law exam notes
TEMPORARY RESIDENT
A person who
Holds a temporary visa granted under the Migration Act 1958, AND
Along with his/her spouse is not an Australian resident within the meaning of the Social Security Act 1991: Subdiv 768-R
Temporary residents are treated as foreign residents for tax purposes even though they satisfy residency tests. Only taxed in Australia on
Australian sourced income at resident’s rates.
Jurisdiction to tax – Companies
3 tests, must meet ≥ 1 for company to be AUS resident (BUT, if not incorporated in AUS & not carrying on business in AUS → not resident):
(1) PLACE OF INCORPORATION TEST
A company incorporated in Australia is an Australian tax resident. ALL other factors & tests are irrelevant: Koitaki (1940)
(2) CENTRAL MANAGEMENT & CONTROL TEST
Company must be:
(1) Carrying on business in Australia, AND
(2) Have its central management and control in Australia
To be an Australian resident for tax purposes.
These 2 separate requirements can be met by the same facts: Malayan Shipping (1946). Only relevant for companies not incorporated in
Australia. A test of fact: TR 2004/15.
(3) VOTING CONTROL TEST
2 separate requirements
(1) Company is carrying on business in Australia, AND
(2) Voting power is controlled by Australian shareholders.
a. Majority of votes in a general meeting: Kolotex (1975)
b. Limited to registered shareholders (not beneficial owners): Patcorp (1976)
Source of Income
What “a practical man would regard as a real source of income” and the ascertainment of the real source of income is “a practical, hard
matter of fact”: Nathan (1918).
Factors to consider:
Location of property used in generating income
Place of performance of any work/services
Place of negotiation, execution and performance of contracts
Place of making/receipts of payment
GENERAL SOURCE RULES
Income from business:
For sale of trading stock (firm goods), source is where business activities are carried out: Kirk (1900), Murray (1929)
Can be apportioned over different jurisdictions
Income from sale of land → source is where the land is located: Rhodesia Metals, Thorpe Nominees.
Income from services:
Source is the place where contract is made: Cliffs International (1935)
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Tax Law exam notes
Income from personal services:
Source is where services are performed: French (1957) [even if spend 18 days spent in country], Efstathakis (1979). Exception: Mitchum
(1965), TP can provide services ANYWHERE → source NOT where service is provided; check other factors (where contract made).
Interest income:
Source is where loan contract is made and where funds are advanced: Spotless Services (1993), Philips Gloeilampenfabrieken (1955).
Dividends income:
Any distribution/amount credited by company to any of its shareholders: s 6(1) ITAA 1936. Source is the source of profits from which the
dividend is paid: s 44 ITAA 1936
If dividend flows through a chain of companies, the source is the previous company in the chain: Esquire Nominees
Royalties:
Source is the location of the property (e.g. rent from a house in Italy → source = Italy). *NOTE: s 6C ITAA 1936 – for foreign residents
Capital gains (from sale of property):
Australian sourced if ‘Taxable Australian Property’ as defined in s 855-15, which includes
Sale of Australian land or buildings(Taxable Australian Property), OR
Sale of shares in companies where main the assets are Australian land or buildings
DOUBLE TAXATION
May occur where:
Concurrent exercise of taxing rights (2 countries tax an individual’s income)
Residents of multiple countries at the same time
Income sourced in more than 1 country
Tax treaties (bilateral agreements OECD/UN, allocate taxing rights between countries) give relief from double taxation
Australian law:
Relief is provided in 2 forms:
(1) Exemptions
a. For individuals
i. Foreign source employment income is exempt where (a) the individual has been engaged in foreign services
for ≥ 91 days continuously AND (b) the income is not exempt from tax in the foreign jurisdiction: s 23AG
ITAA 1936
b. For companies
i. Foreign branch income and capital gains: s 23AH
ii. Dividends on “participation interests” (i.e. non-portfolio dividends – e.g. Company A owns ≥ 10% of
Company B)
(2) Foreign income tax offsets
a. Provides TPs with a dollar for dollar reduction in tax payable.
b. Maximum offset available = $1000 OR difference between Australian tax payable on taxable income and Australian
tax payable on taxable income excluding any foreign source income and related deductions
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Tax Law exam notes
General Tax Law points to note:
Australia uses ‘self-assessment system’ – TP must work out own tax payable.
TP lodges income tax return → ATO issues ‘Notice of Assessment’ that creates liability to pay extra tax/receipt refund → Amending
assessments (issued by TP or ATO, picked up by an audit. If simple return, 2 year time frame after Notice of Assessment to amend, if
complex return, 4 years) → Objections and appeals (onus on TP to show tax is lower than what is shown in amended assessment).
Tax Rulings:
Tax rulings are an important source of guidance. Are not law; merely ATO’s view of how the law applies. Tax rulings are binding on the
ATO but not on the TP. Private Ruling – only the TP to whom the ruling is issued may rely on it. Tax Rulings may also be Product
based, Public or Class based (i.e. to all shareholders in a firm).
*NOTE: * next to a term in the legislation means it is defined in s 995-1 ITAA 1997.
Tax Formulae
𝑇𝑎𝑥 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 = (𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 × 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒) − 𝑇𝑎𝑥 𝑂𝑓𝑓𝑠𝑒𝑡𝑠 : s 4-10(3)
𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐴𝑠𝑠𝑒𝑠𝑠𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐷𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠 : s 4-15
(AI) Assessable Income s 6-1 includes:
(OI) Ordinary income: s 6-5(2)
(SI) Statutory income: s 6-10(4)
Residents: AI includes OI & SI derived directly or indirectly from ALL sources whether in or out of Australia: s 6-5(2) & s 6-10(4)
Foreign residents: AI includes OI & SI derived directly or indirectly from all AUSTRALIAN sources s 6-5(3) and any other amounts
specifically included s 6-10(5).
Assessable Income excludes:
Amounts that are not OI or SI s 6-15(1) exempt income s 6-15(2) or non-assessable, non-exempt income s 6-15(3) ≠ AI.
*NOTE: entities that are exempt no matter what kind of OI or SI they have (e.g. charities/education/science/health): s 11-5
Deductions equals
General deductions: s 8-1
Specific deductions: s 8-5 *NOTE: consider this first; if expense doesn’t fall in this then consider general deduction
Jurisdiction to Tax
Resident: a person resident of Australia for tax purposes of ITAA 1936 s 995-1. Foreign resident: a person who is not a resident s 995-1.
4 residency tests; need to satisfy only 1 to be a resident. If don’t satisfy any → foreign resident. Decided on year-to-year basis. Can be
resident for only part of the year. Can look at events after year-end to decide whether TP is resident: Applegate (1979). Can be tax
resident of 2 countries at same time → look to tax treaties. Status under migration law NOT determinative for tax purposes.
ORDINARY RESIDENCY TEST:
TP is a resident if s/he is a person “who resides in Australia”: s 6(1) ITAA 1936 – the definition of “reside”. Includes international students.
Question of fact – don’t reconcile cases because different people decide differently based on facts.
Levene (1928): to “reside” is to dwell permanently or for a considerable period of time in a particular place. Court held that 4 or 5
months in a year qualifies as a considerable period of time, TP “resided” in the UK until leased Monte Carlo flat.
Joachim (2002): TP and family migrated to Australia but TP worked for 316 days of the year outside Australia. Held to be resident,
because TP had ties to Australia (maintained a home for family in Australia) and he showed an intention to call Australia home.
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Tax Law exam notes
Lysaght (1928): TP “resided” in the UK because “in the ordinary course of life” he returned to the UK for one week every month
throughout the tax year (frequency & regularity of visits, ties to UK => resident).
TR 98/17 states that international students are Australian tax residents, and suggests a number of factors to consider:
Physical presence in Australia (if yes → more likely resident). *Covered by 183 day test.
Frequency, regularity and duration of visits (if more regular, frequent &/or longer duration → more likely resident)
Purpose of the visits to Australia and abroad (if family → more likely resident, if work → not determinative)
Maintenance of a place of abode in Australia during absences (if yes → more likely resident): Joachim (2002)
o *NOTE: if furnish a house/apartment in Australia to TP’s tastes → more likely place of abode.
Family, business and social ties (if to Australia → more likely resident)
o *NOTE: this can include the maintenance of assets in Australia (e.g. bank account)
Nationality (not determinative, but if Australian citizen → more likely resident)
DOMICILE TEST
Australian resident includes a person whose domicile is in Australia unless the Commissioner is satisfied the TP has a
‘permanent place of abode overseas’: s 6(1)(a)(i)
2 types of domicile:
1) Domicile of origin: born in Australia, Australian citizen
2) Domicile of choice: migrate to Australia, permanent resident or naturalised citizen
*NOTE: use test for Australian residents who are leaving for another country. Test is irrelevant if domicile is not Australia.
Permanent place of abode:
TP went to Vanuatu for 1.5 years, then returned to Sydney. TP had a ‘permanent’ home/presence/place of abode outside Australia
and is not a resident. Permanent is not forever, takes its meaning from context – may be transitory/temporary: Applegate (1979).
A fixed 3 year period overseas with a house there is enough to have a permanent place of abode outside of Australia and for TP
to not be a resident: Jenkins (1982).
Factors to consider when determining “permanent place of abode” IT 2650:
Intended and actual PURPOSE of stay in foreign country
Duration & continuity of TP’s presence in overseas country. > 2 years is enough for TP to not be Aust resident: IT 2650
Establishment of a home outside Australia (not just temporary accommodation)
o *NOTE: doesn’t matter if this home is provided by the employer
Residence or place of abode in Australia
Duration of association with Australia (maintenance of bank accounts, education of children, family ties, notifying govt
departments of intention to leave Australia).
183 DAY TEST
TP will be treated as a resident if in Australia for 183 days or more unless Commissioner is satisfied that:
The person’s USUAL place of abode is outside Australia, AND
o “usual place of abode” = where TP resides => look to ORT: TR 98/17
The person does NOT intend to take up residence in Australia: s 6(1)(a)(ii)
If test is satisfied, TP treated as resident for whole of income year: Executors of the Estate of Subrahmanyam (2002). Groves (2011)
suggests TP was resident for part of income year; however, this is AAT case – lower hierarchy.
The 183 day test is an objective test, based on physical presence in Australia. Used for those coming to Australia.
SUPERANNUATION TEST
Members (mostly public servants) of certain Commonwealth funds are deemed to be Australian residents: s 6(1)(a)(iii)
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Tax Law exam notes
TEMPORARY RESIDENT
A person who
Holds a temporary visa granted under the Migration Act 1958, AND
Along with his/her spouse is not an Australian resident within the meaning of the Social Security Act 1991: Subdiv 768-R
Temporary residents are treated as foreign residents for tax purposes even though they satisfy residency tests. Only taxed in Australia on
Australian sourced income at resident’s rates.
Jurisdiction to tax – Companies
3 tests, must meet ≥ 1 for company to be AUS resident (BUT, if not incorporated in AUS & not carrying on business in AUS → not resident):
(1) PLACE OF INCORPORATION TEST
A company incorporated in Australia is an Australian tax resident. ALL other factors & tests are irrelevant: Koitaki (1940)
(2) CENTRAL MANAGEMENT & CONTROL TEST
Company must be:
(1) Carrying on business in Australia, AND
(2) Have its central management and control in Australia
To be an Australian resident for tax purposes.
These 2 separate requirements can be met by the same facts: Malayan Shipping (1946). Only relevant for companies not incorporated in
Australia. A test of fact: TR 2004/15.
(3) VOTING CONTROL TEST
2 separate requirements
(1) Company is carrying on business in Australia, AND
(2) Voting power is controlled by Australian shareholders.
a. Majority of votes in a general meeting: Kolotex (1975)
b. Limited to registered shareholders (not beneficial owners): Patcorp (1976)
Source of Income
What “a practical man would regard as a real source of income” and the ascertainment of the real source of income is “a practical, hard
matter of fact”: Nathan (1918).
Factors to consider:
Location of property used in generating income
Place of performance of any work/services
Place of negotiation, execution and performance of contracts
Place of making/receipts of payment
GENERAL SOURCE RULES
Income from business:
For sale of trading stock (firm goods), source is where business activities are carried out: Kirk (1900), Murray (1929)
Can be apportioned over different jurisdictions
Income from sale of land → source is where the land is located: Rhodesia Metals, Thorpe Nominees.
Income from services:
Source is the place where contract is made: Cliffs International (1935)
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Tax Law exam notes
Income from personal services:
Source is where services are performed: French (1957) [even if spend 18 days spent in country], Efstathakis (1979). Exception: Mitchum
(1965), TP can provide services ANYWHERE → source NOT where service is provided; check other factors (where contract made).
Interest income:
Source is where loan contract is made and where funds are advanced: Spotless Services (1993), Philips Gloeilampenfabrieken (1955).
Dividends income:
Any distribution/amount credited by company to any of its shareholders: s 6(1) ITAA 1936. Source is the source of profits from which the
dividend is paid: s 44 ITAA 1936
If dividend flows through a chain of companies, the source is the previous company in the chain: Esquire Nominees
Royalties:
Source is the location of the property (e.g. rent from a house in Italy → source = Italy). *NOTE: s 6C ITAA 1936 – for foreign residents
Capital gains (from sale of property):
Australian sourced if ‘Taxable Australian Property’ as defined in s 855-15, which includes
Sale of Australian land or buildings(Taxable Australian Property), OR
Sale of shares in companies where main the assets are Australian land or buildings
DOUBLE TAXATION
May occur where:
Concurrent exercise of taxing rights (2 countries tax an individual’s income)
Residents of multiple countries at the same time
Income sourced in more than 1 country
Tax treaties (bilateral agreements OECD/UN, allocate taxing rights between countries) give relief from double taxation
Australian law:
Relief is provided in 2 forms:
(1) Exemptions
a. For individuals
i. Foreign source employment income is exempt where (a) the individual has been engaged in foreign services
for ≥ 91 days continuously AND (b) the income is not exempt from tax in the foreign jurisdiction: s 23AG
ITAA 1936
b. For companies
i. Foreign branch income and capital gains: s 23AH
ii. Dividends on “participation interests” (i.e. non-portfolio dividends – e.g. Company A owns ≥ 10% of
Company B)
(2) Foreign income tax offsets
a. Provides TPs with a dollar for dollar reduction in tax payable.
b. Maximum offset available = $1000 OR difference between Australian tax payable on taxable income and Australian
tax payable on taxable income excluding any foreign source income and related deductions
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