Taxation in Australia

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Question 1

As John’s tax accountant, I would inform him that he has certain rights that allow him to dispute the ATO’s decision. He will have to lodge his grievances mainly basing and referring to common law and statutory provisional rights. In order to exercise his rights, John would need to take the first step in challenging the decision by the lodgement of an objection under s175A ITAA36 (Woellner, 2013).

John would also need to ensure that the objection is on an approved form which encompasses all the reasons of his grievances according to s14ZU(a) to (c) TAA (Woellner, 2013). The objection must be consistent and precise because it will be the legal reference evidence that John would use. The objection will be submitted and actioned within a particular timeframe according to s14ZU TAA. The grounds stated in the objection submitted to the ATO would later on form the foundation of the taxpayers claim that the assessment was incorrect as depicted in the case of Szajntop v Gerber.

The rule underlying s14ZZK(a) and 14ZZO(a) TAA is that the information provided in the objection letter should form the basis of the objection. One cannot simply pursue a different objection than the one put forward initially. So it is of paramount importance to prepare the initial objection inclusive of all possible matters arising and defences on which John’s reasoning might ultimately rest on. Even though there is a possibility to amend one’s objection, it should not be forgotten that it is extremely difficult to do so. Addition of any false or misleading statements in the objection could constitute a criminal offence which is punishable and may result in fines or a jail term (Barkoczy, 2013).

In the event that an objection is unsuccessful, the taxpayer has the option to either: 1) put forward the matter to the ATT with limited possible rights of further review by the Federal Court and then by special leave to the High Court or, 2) appeal to the Federal Court, with further appeal to the Full Federal Court and then by special leave to High Court (Woellner, 2013). The onus of proving that the tax assessment was incorrect lies with the taxpayer under s14ZZK(b)(i) and 14ZZO(b)(i), when presenting their case to the court or ATT. The timeframes for challenging the ATO’s assessment varies from 2 years after the notice of assessment is sent to John or 4 years for individuals with complex tax affairs, superannuation or companies’ etc.

Question 2

  1. Taxable Income

Gross Assessable Income 158 000

Allowable Deductions (25 000)

Taxable Income 133 000

Gross Tax Payable

$17 547 + [($133 000 - $80 000) x 37%] = 37 157

Prime Tax Assessed:

+ Medicare levy (1.5% x $133 000) 1 995

Gross Tax Payable 39 152

Net Tax Payable/Refund Entitlement

Gross tax payable 39 152

Minus PAYG tax already withheld 23 000

Net tax payable 16 152

  1. Taxable Income

Gross Assessable Income 158 000

Allowable Deductions (25 000)

Taxable Income 133 000

Gross Tax Payable

$17 547 + [($133 000 - $80 000) x 37%] = 37 157

Prime Tax Assessed:

+ Medicare levy (1.5% x $133 000) 1 995

+ Medicare levy surcharge (1% x 133 000) 1 330

Gross Tax Payable 40 482

Net Tax Payable/Refund Entitlement

Gross tax payable 40 482

Minus Tax Offset 650

Minus PAYG tax already withheld 23 000

Net tax payable 16 832

  1. Taxable Income

Gross Assessable Income 158 000

Allowable Deductions (25 000)

Taxable Income 133 000

Non-resident taxable income ($133 000 x 6/12) 66 500

Resident taxable income ($133 000 x 6/12) 66 500

Gross Tax Payable Non Resident

$66 500 x 32.5% = 21 612.50

Gross Tax Payable Resident

$3 572 + [($66 500 - $37 000) x 32.5%] = 13 159.50

Prime Tax Assessed:

+ Medicare levy (1.5% x $66 500) 997.50

Gross Tax Payable 14 157

Net Tax Payable/Refund Entitlement

Gross tax payable non-resident 21 612.50

Gross tax payable resident 14 157

Minus PAYG tax already withheld 23 000

Net tax payable 12 769.50

Question 3

In Australia, taxpayers are classified as either Australian resident or non-resident for tax purposes. The initial step when preparing a tax return is to determine whether one is an Australian resident or a foreign resident before the determination of their tax starts. This could be achieved by conducting the common law test or the domicile test. The factors to consider when deciding on residents status could include actual presence in Australia, the number of times you visit as well as the duration of the visits, the length of time you would stay overseas, maintenance of your Australian house etc. The source of income is another aspect that needs to be considered because this could make a vast difference for residents and non-resident categories.

According to section 6(1) ITAA1936, an Australian resident is any person who resides in Australia. There is however certain aspects that need to be taken into account before one can be considered a resident of Australia for tax purposes. The aspects include a person’s physical presence in Australia for the financial year as well as the frequency of visits to Australia. If you are only able to visit Australia two times a year, as prescribed in the remuneration package, this might not be sufficient and appropriate additional evidence to warrant your residency status as Australian is required. In a case where one might own a property in Australia, which they rent out during periods of absence, whilst working and living overseas, the fact that a person has another property in Indonesia makes them a non-resident. Another reason why they are considered as a non-resident is the fact that, they will have lesser family ties in Australia, as their whole family is moving with them to Indonesia (Woellner, 2013). A perfect example of this would be the Applegate v FCT case.

The domicile test could be used to determine a person’s residential status. A resident could be defined as an individual whose domicile is in Australia; however the commissioner could have a different view to this if a person has another permanent place of residency overseas, according to section 6(1) ITAA1936. As your Country of birth is Australia and the fact that you lived your whole life in Australia, this could entitle you to domicile by birth however there are certain issues that hinder this possibility. The length of time spent in Indonesia could prove to be an issue when it comes to your residency status. The fact that you have a permanent place and that your family is moving to live in Indonesia, shows the decreased intention to return to Australia. A person could argue that even though they have not sold their house yet, by merely renting it out, this could also be seen as a form of abandonment.

A case that could be applied to this scenario is the FCT v Jenkins case (1982). In this case, it was ruled that the taxpayer was in fact a non-resident due to the fact that the individual owned a permanent place of residence in Vanuatu. He was therefore exempted from paying Australian tax on income obtained in Vanuatu, despite that he owned a residential property that he was renting out and maintained a bank account in Australia. When reviewing the residency status of individuals, the commissioner issues a public ruling which lists the following points which are, the amount of time spent overseas, as well as the signs that you were going to return to Australia. However, the commissioner might view you as a resident according to the Jenkins case if you were to stay in Indonesia for less than 2 years. In saying that, one could also refute this assumption on which the ruling is based on showing that during the financial year there was never an intention to return to Australia (Krever, 2013). One could consider the 183 days rule or the superannuation fund test, but all these are not applicable to this situation.

Foreign residential income is not assessed for Medicare levy purposes. Non-residents all the same are also not eligible for the tax free threshold and offsets such as the low income tax offset. From July 2012 to February 2013, you will still be considered as a resident of Australia, before moving to Indonesia. This means in the 2013 financial year you will be a resident as well as a non-resident. According to section 6-5(3) and s6-10(5) ITAA1997, ordinary and statutory income is only considered when preparing a tax return for a non-resident (Barkoczy, 2013).

Income earned through salary from Indonesia, even though it is paid into an Australian bank account will still be considered as foreign sourced income and will therefore not be taxed in Australia. The Australian Taxation Office only considers where the income was sourced from or where the services or duties were executed. A similar case to this is FCT v French (1957). In this case an artist was paid to perform in New Zealand, and the source of income was from that performance in that country, therefore the income earned would be treated as foreign income (Krever, 2013). For the airline tickets and accommodation provided by your employer, it will not be considered as assessable income. Your employer on the other hand will be liable for fringe benefit tax for these benefits that they provided.

The income earned from renting out your house will be considered as Australian sourced income, as well as the amount of interest earned by you from your local bank account. According to section 128B ITAA1936, interest earned in Australian bank accounts should have tax withheld. If you fail to establish your non-residential status whilst working in Indonesia, according to s770-10 ITAA1997 you will not be eligible for a foreign tax offset, and you will be taxed on all your income earned worldwide at Australian taxation rates.

Question 4

I would explain to my client that according to s263 ITAA36, I am obligated to provide full and free access to the Commissioner or any authorised person by him to all building, places, books, documents and other papers for any use and may make copies of any such document(Woellner, 2013).

I could consider using legal professional privilege, however this would be a bit of a challenge as I am neither a lawyer nor client therefore I wouldn’t be protected by this privilege. Instead I could use administrative privilege, these are not at par with legal professional privilege which is held with higher regard and enforceability. The Australian Taxation Office approach to professional accountant is different, they use administrative privilege guidelines which entitle them to view books of original entry when conducting an audit. Access to restricted source documents and non-source documents will only be pursued in unique situations and with the written express authority from the Deputy Commissioner (Woellner, 2013).

References

BARKOCZY, S. 2013. Core Tax Legislation & Study Guide, CCH Australia Limited.

KREVER, R. 2013. Australian Taxation Law Cases, Thomson Reuters.

WOELLNER, R. H., BARKOCZY,S.,MURPHY,S.,EVANS,C.,PINTO,D., 2013. Australian Tax Law, CCH Australia Limited.

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