Residency, Source & derived Flashcards
Residency and source of income
- A taxpayer who is an Australian resident is generally assessed on ordinary and statutory income from worldwide sourcesITAA97 s.6-5(2), 6-10(4)
- Non-residents are generally assessed on Australian sourced incomeS.6-5(3), s.6-10(5)
Principles of Taxation Ch 4.10
Residency - implications (residents)
Residents
•Pay tax on income from all sources
•Tax free threshold applies
•Subject to Medicare levy
•Some exemptions on tax on certain income derived from foreign employment
•Overseas source income entitlement to credit for foreign tax paid
•Entitled to personal tax offsets
Principles Ch4.20
Residency - implications (non-residence)
Non Residents
•No tax free threshold
•Only taxed on Australian sourced income
•Not subject to Medicare levy
Residency of individuals
Definition ITAA36 s. 6(1)
Primary test
a person who resides in Australia
or satisfies one of the following:
- a person whose domicile is Australia unless their permanent place of abode is outside Australia
- Been in Australia for more than 183 days unless their usual place of abode is not in Australia and they do not intend to take up residency here
- Commonwealth superannuation fund test (for certain Commonwealth government employees and their dependents)
Principles of Taxation Ch 4.50
Residence of companies
A company is a resident if it: 1. Is incorporated in Australia, or 2. Carries on business in Australia and: either has its central management and control in Australia or its voting power is controlled by Australian residents ITAA36 s6(1) Principles of Taxation Ch 4.170 -220
Source of income
•Residents assessed on all income from all sources in or out of Australia
•Non-residents assessed on income which has a source in Australia
ITAA97 s.6-5(2), s.6-5(3) & s.6-10(5)
Principles of Taxation Ch 4.230 - 280
Derivation of income
Derived, when?
Constructive receipt overrides the cash or accruals approach:
“You are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct”
s.6-5(4), s.6-10(3) ITAA97
Income is taxed in year it is derived – cash or accruals ?when income is derived depends on:
•Type of income
•Nature of income earning activities
Principles of Taxation Ch 16.20 - 30
Derivation of income
Accrual basis:
•Earnings basis
•income derived when taxpayer has the right to receive the income
•Usually after full performance of services and an invoice has been issued ITAA97s.6-5
Cash basis
•income derived when the cash is actually received
There is nothing in the legislation indicating which method to use.
Generally the ATO public ruling TR 98/1 is used as a guide
Principles of Taxation Ch 16.40
Derivation of income
ATO ruling TR98/1 suggests the following:
•Personal services income –cash basis
•Trading activities – generally accrual basis
•Passive interest, dividends, rent – cash basis
•Interest received as a financial institution or providing credit as part a business - accrual basis
Derivation of income (cases)
Income of a professional firm
Henderson v FCT (1970)
•Partners deriving income jointly from a business
•Professional employees performing principal work
•Held accrual basis appropriate method due to size of the practice (295 employees)
FCT v Firstenberg(1976)
•Taxpayer was a solicitor operating as a sole practitioner with one administrative employee.
•Did not pursue bad debtors. Accounts receivable did not reflect what is actually derived.
•Held cash basis more appropriate as all income derived was from his skill as a practitioner.
Derivation of income (Prepaid Income)
Arthur Murray (NSW) P/L v FCT (1965)
•Provided dancing lessons to public
•Used accruals for business income
•Taxpayer accepted prepayments and gave discount to encourage this
•Prepayments held in suspense account and transferred to income as lessons were given
•Refunds were allowed in practice
Held: Prepaid income not derived until the services were performed.
