Law Of Double Taxation Conventions

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Law Of Double Taxation Conventions

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Law Of Double Taxation Conventions

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Question:
Discuss about the Law of Double Taxation Conventions.

Answer:
Introduction:

The present case study is concerned with the issue of determination of residential status of Jenny who worked as an accountant and had recently shifted to Australia for the purpose of providing advice to the large volume of former residents of Hong Kong on setting up the business in Melbourne. As evident from the case study, it is found that Jenny initially intended to stay for three months by travelling across the cities. Following the end of three months, Jenny complied to stay for more period, on being asked by the employer to take up the position in Sydney for an extended nine months. According to the “Taxation ruling of TR 98/17”, it lay down that an individual entering Australia for a period of more than six months as workers or employee with pre-arranged contracts of employment would be treated as the Australian resident (Lang, 2014). To determine the residential status of Jenny below stated test are conducted;

Resides test
Domicile test
183 days test

As held in the case of “FC of T v. Applegate (1979)” residential status of an individual becomes the most vital aspect in determining the liability to impose tax on the Australian income (Miller & Oats, 2016). In order to determine the residential status of the Jenny it is necessary to consider the definition of “section 995-1 of the ITAA 1936” where an individual is considered as the Australian resident. One of the primary test of determining an individual residential test is resides test (Robin 2017). If an individual resides in Australia in respect of the ordinary meaning of the word, then no other form of test is applied in determining the residential status of the individual. As evident from the current case of Jenny, it can be stated that she is cannot be considered as an Australian resident under the resides test since she did not resided in Australia in respect of the ordinary meaning of the word “Resides”.
The period of physical presence though forms important criteria in determining the residential status. When the behaviour of the consistent with the objective of residing in Australia is illustrated over a considerable period of time an individual is treated the Australian resident from the time the behaviour commences (Blakelock & King, 2017). Additionally, if an individual enters to Australia with the intention of residing for a period less than six for a short term employment contract but the stay is extended in the later events to more than six months then they are regarded as the Australian resident from the time they arrived in Australia.
As held in the case of “Miesegaes v. Commissioners of Inland Revenue (1957)” individuals entering in Australia in order to take up the pre-arranged employment opportunities or educational course may be residing in Australia if the stay is consistent with residing in Australia (Anderson et al., 2016). As evident from the current scenario of Jenny, it can be stated that she will be regarded as an Australian resident in terms of the period of stay since her initial intention of stay was for only three months. However, on accepting an employment contract of nine months demonstrated the behaviour that is consistent with residing in Australia.
As stated in the “Taxation ruling of IT 2650”, an individual whose domicile is in Australia or has been in Australia constantly for a period of more than six months either intermittently or in breaks will be treated as Australian residents (Tran-Nam & Walpole, 2016). In respect of the present study of Jenny Domicile test is applied to determine the residential status of her stay in Australia. In ascertaining an individual domicile in respect of the definition “resident” under “subsection 6 (1)” it is vital to determine an individual intention of stay to the country and make their home indefinitely. According to the rule of common law, an individual acquires the place of birth as the domicile of their origin (Coleman & Sadiq, 2013). Nevertheless, the rule of common law is also subjected to certain exceptions where an individual is allowed to make their domicile of their own choice or place of abode in another nation.
As held in the case of “Henderson v. Henderson (1965)” the intention of the person is required to be direction of making their indeterminately (Harris et al., 2013). In respect of the present case study of Jenny, it can be stated that the she bought a leased apartment in Sydney. Therefore, this primarily meets the criteria of subsection 6 (1) in acquiring the place of abode in accordance with her own choice of residing in Australia.
As defined under “section 6 (1) of the taxation rulings 2650” while ascertaining the place of abode it is vital to take account of the intention of the individual as to where an individual undertakes the decision of making their home (Kenny, 2013). As noticed from the present scenario of Jenny it can be stated that she has been present in Australia for constantly for a period of more than half of the income year since her arrival on 25th April 2016 and will be considered as the Australian resident since she complies with the criteria of domicile test.
The 183 days test defines the necessary order in order to deviate the difficulties that occasionally originates in establishing the satisfaction that an individual is Australian resident. The test is generally applied under circumstances when an individual presence in Australia has been for more than half of the income year (Kenny et al., 2017). As evident from the current situation of Jenny, it can be stated that she has been present in Australia for more than six months constantly and leased a house in Sydney so that she can live. The present case clearly identifies the intention of Jenny of taking up the domicile in Australia and clearly meets the criterion of 183 days. Hence, on taking into the considerations the above defined test it can be stated that Jenny will be considered as the Australia resident from the time when she arrived in Australia.
As defined by the Australian taxation office an individual getting lump sum payment from the employer is generally not considered as the capital gains therefore these lump sum possess more likely the nature of nature of ordinary income (Keyzer et al., 2015). The Australian taxation office regard lump sum in the form of inducement for the individuals to enter in to the agreement of employment. Therefore, it is ascertained that the receipt of lump sum is fundamentally connected with the provision of the employment.

As an alternative, it can be asserted that the receipt of lump sum is viewed as the profit or gain from the isolated transition of the course of entering into the agreement of employment contract (Morgan et al., 2013). As evident from the current case study of Jenny, it can be stated that the lump sum amount that is received by her would be treated as the inducement of entering into the agreement of the employment. Therefore, it is assumed that the lump sum that is received by Jenny is fundamentally connected to the provision of the service of the employment. As an alternative, an assertion can be bought forward that the lump sum payment received by Jenny is in the form of profit from the isolated transaction and in the course of entering into the employment contract.
The mere fact that the payment is considered in this respect as the one off lump sum payment and it is principally considered for the terms of the employment (Nethercott et al., 2014). Therefore, the lump sum received by Jenny is not having the characteristics of the capital receipt. The payment received by Jenny is considered as the assessable income since it is an income under the ordinary concept. Additionally the sum that is received by Jenny is in having the connection with employment. As defined under the “section 6-5 of the ITAA 1997” an amount will be treated as the taxable income given the fact that the income is in ordinary concepts. As held in the case of “Federal Commissioner of Taxation v. Harris (1980)” an amount will be considered as the ordinary income given that the payment received forms the part of the employment, service or any business (Woellner, 2013).
Additionally, it also considers the form and character of the payments in the hands of the recipients or whether such payment is lump sum or periodically. It also considers the motive of the person making such payment. As evident from the current scenario of Jenny it can be stated that motive of the person, making payment of lump sum was to encourage her join Television network. The motive of the payer and the purpose of the individual in pursuing his or her activity must be determined whether the lump sum payment are assessable under the ordinary concepts as the income (Woellner et al., 2014). It can be argued in the present context of Jenny that the payment received by her is are not for regular expenditure nor they are treated as the reward for an activity. They are in the form of encouragement of joining the Television Network. Therefore, the amount that is received by Jenny would constitute income in ordinary sense and such income would be included in the taxable statement that will be liable for taxation.

Statement of Taxable Income of Jenny

For the year ended 2016

Particulars

Reference

Amount ($)

Assessable Income

Type

Gross Salary

Section 6-5 of ITAA 97

100000

Receipt of Lump sum Payment

Section 6-5 of ITAA 97

400000

Total Assessable Income

500000

Allowable Deductions

Nil

Total Taxable Income

500000

Tax On taxable Income

198232

Medicare Levy

10000

Total Tax Payable

208232.00

Reference List:
Anderson, C., Dickfos, J., & Brown, C. (2016). The Australian Taxation Office-what role does it play in anti-phoenix activity?. INSOLVENCY LAW JOURNAL, 24(2), 127-140.
Blakelock, S., & King, P. (2017). Taxation law: The advance of ATO data matching. Proctor, The, 37(6), 18.
Coleman, C., & Sadiq, K. Principles of taxation law 2013.
Harris, J., Graw, S., Gilders, F., Kenny, P., & Van der Waarden, N. 2013 Theory and law in the regulation of business.
Kenny, P. (2013). Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.
Kenny, P., Blissenden, M., & Villios, S. Australian tax 2017.
Keyzer, P., Goff, C., & Fisher, A. 2015 Principles of Australian constitutional law. Chatswood: LexisNexis Butterworths.
Krever, R. (2013). Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Lang, M. (2014). Introduction to the law of double taxation conventions. Linde Verlag GmbH.
Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.
Morgan, A., Mortimer, C., & Pinto, D. (2013). A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.
Nethercott, L., Devos, K., & Gonzaga, L. (2014) Australian taxation study manual.
ROBIN, H. (2017). AUSTRALIAN TAXATION LAW 2017. OXFORD University Press.
Tran-Nam, B., & Walpole, M. (2016). Tax disputes, litigation costs and access to tax justice. eJournal of Tax Research, 14(2), 319.
Woellner, R. (2013). Australian taxation law (2012). North Ryde [N.S.W.]: CCH Australia.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. Australian taxation law 2014.

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