Apply the 4 tests in Section 6(1) Income Assessment Act (ITAA) 1936 whether the taxpayers (Heath and Hayley) are residents or non-residents of Australia for tax purposes in the income year ended 30 June 2015?
Whether Heath’s salary of $80,000 and Haley’s $3,000 wage incomes are assessable in the income year ended 30 June 2015?
Whether the dividends of $20,000 AUD received in October and $5,000 AUD received in March from investments in Canada and the $3,000 dividends earned in Australia be included in the family’s assessable income for income year ended 30 June 2015?
Whether the proceeds from selling the family land ($23,000) is assessable income or capital gains?
Whether the rent received in advance ($104,000) assessable in the income year ended 30 June 2015?
Ruling TR 98/17
The source of rental income is the place where the property is located.
From the case, it is important to first determine the resident status of Heath and Hayley as it is relevant for calculating their tax liability in Australia. Section 6-5 of the (Income Tax Act Act) ITAA 1997 provides that if you are an Australian resident, your assessable ordinary income is the income derived directly or indirectly from all sources, whether in or out of Australia during the income year.5 On the other hand, a foreign resident’s assessable income includes all ordinary income derived from all Australian sources and other ordinary income stated in s 6-5(3)(b).6 Section 6(1) ITAA 1936 provides 4 tests to consider the residency of an individual which are as follows:
The Common Law Test,
The Domicile Rule,
The 183 Day Rule, and
The Super Fund Rule.
Any individual who does not satisfy any of these rules may never be treated as a resident of Australia for tax purposes.7 Considering this case’s facts, Common Law Test, Domicile Test and the 183 day rule would need to be tested. The Holly family has satisfy the Common Law Test as they ‘reside’ in Australia according to the ordinary meaning of the word ‘reside’ given their circumstances and behaviours at the time which is similar to that discussed in TR98/17. For example, they have rent out their house in Montreal as Heath’s employer provides a house for them to live in for the duration of the contract. Hayley not only accompanies Heath but she works and manages to purchase commercial property located in Australia in which she already receives two years rent payment in advance. Heath and Hayley choose Australia as their domicile of choice and permanent place of abode. The Holly family chooses Australia as the place to live, sleep and call home as in the case of FCT v Applegate (1979) 9 ATR 899.8 They live and work at the same place and have been physically present in Australia continuously for over six months of the income year under consideration. Their behaviours since arriving in Australia has the degree of continuity, routine or habit that is consistent with residing in Australia. Thus there is an argument that Heath and Hayley are residents under the Common Law test, Domicile Test and the 183 day Test. However, when determining the tax liability of the Holly’s in Australia, they should refer to the Australia/Canada double tax agreement.
Heath and Haley as residents will include all Australian and Canadian sourced income in their assessable income since 1December 20149. The salary and wage earned while working in Australia will have an Australian source10. Therefore, Heath will include his $80,000 salary plus Hayley’s $3,000 wage earned in Australia in their assessable income. In addition, the dividend of $5,000 from investment in Canada will have a Canadian source. Similarly, the dividend from invest in Australia of $3,000 will have an Australian source. All dividends received after 1 December 2015 which totals up to $8,000 whether from Canadian and Australian sources will be