Principles of Taxation Law 2024

Answers to Questions

CHAPTER 4 – RESIDENCE AND SOURCE

Question 4.1

What is the income tax payable for an Australian resident individual with taxable income for
the 2023-2024 income tax year of $120,000?

Answer

Using the 2023-24 income tax rates table for Australian resident individuals, tax would
be determined as follows:

$5,092 plus 32.5c for each $1 over $45,000

or

$5,092 + ($75,000 x 0.325) = $29,467

Question 4.2

What difference does it make to Question 4.1 if the taxpayer is a foreign resident?

Answer

Using the 2023-24 income tax rates table for foreign resident individuals, tax would
be determined as follows:

32.5c for each $1 from 0 to $120,000

or

$120,000 x 0.325 = $39,000

Question 4.3

Fred, an executive of a British corporation specialising in management consultancy, comes to

Australia to set up a branch of his company. Although the length of his stay is not certain, he
leases a residence in Melbourne for 12 months. His wife accompanies him on the trip but his
teenage sons, having just commenced college, stay in London. Fred rents out the family home.
Apart from the absence of his children, Fred’s daily behaviour is relatively similar to his
behaviour before entering Australia. As well as the rent on the UK property, Fred earns
interest from investments he has in France. Because of ill health Fred returns to the UK 11
months after arriving in Australia. Discuss residency and source issues.

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Answer

Refer to Ruling TR 2023/1.

The first issue here is to determine whether Fred is a resident of Australia for tax
purposes.

The relevant rules are the residency tests in s 6(1) of ITAA 1936.

Applying the tests to Fred’s situation:

 Ordinary concepts test

Fred will be a resident under this test if he is taken to “reside” in Australia during the
relevant period. There is no single test for determining whether Fred “resides” in
Australia and it is necessary to look at all relevant facts and a number of factors to
determine whether Fred resides in Australia. These factors have been identified by
the Australian Taxation Office in TR 2023/1.

The factors that would support Fred being an Australian resident include his physical
presence in Australia, his wife accompanying him on the trip and the maintenance
of a home in Australia. However, it could also be argued that Fred is not a resident
of Australia as he has maintained his home in London and is only renting it out while
he is away; his children are in London and he maintains investments overseas.

On balance, it is likely that, following cases such as IRC v Lysaght [1928] AC 234 and
Levene v IRC [1928] AC 217, Fred would be considered a resident of Australia for tax
purposes as he “resides” here during the relevant period.

 183-day rule

Regardless of whether Fred is considered to reside in Australia or not, he will

definitely be a resident for the relevant year as he satisfies the 183-day rule. He has
been in Australia for more than 183 days and although he doesn’t appear to want to
take up residence in Australia, his usual place of abode is in Australia.

 Domicile test and superannuation test

These tests are not relevant to Fred on the facts.

In conclusion, it is likely that Fred will be a resident of Australia for tax purposes as he
resides here and has been in Australia for more than 183 days. As a resident, he will be
taxed on his income from all sources including the rent from the UK property and
interest from his investments in France. Any double taxation issues may be resolved by
the Australia–France DTA or Fred may have to claim a foreign income tax offset for tax
paid overseas.

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Question 4.4

Jenny is an accountant who works in Hong Kong. She is single and lives in Hong Kong with her
parents. Until April 2023 her work does not involve travel. At that time she accepts an offer from
her employer to travel temporarily to Australia to provide business advice to large numbers of
former Hong Kong residents setting up businesses in Melbourne, Sydney and Brisbane. Jenny
enters Australia on 25 April 2023. She intends to spend three months travelling between the
three cities, staying in various motels. Her employer asks her towards the end of her three
months to take up a position in Sydney for a further nine months. In early July, she leases a
serviced executive apartment for nine months near her workplace in Sydney. The apartment is
her home base during her stay here. She freights more clothing and some personal effects to
Australia. Her parents visit her on two occasions. Although based in Sydney, her commitments
require some limited travel. On average, Jenny travels at least once a week to meet clients
outside Sydney. Is Jenny a resident of Australia for tax purposes?

Answer

The first issue here is to determine whether Jenny is a resident of Australia for tax purposes.
It is necessary to determine her residency in each year separately. The relevant rules are the
residency tests in s 6(1) of ITAA 1936.

Applying the tests to Jenny’s situation:

Year 1

 Ordinary concepts test

Jenny will be a resident under this test if she is taken to “reside” in Australia during
the relevant period. There is no single test for determining whether Jenny “resides”
in Australia and it is necessary to look at all relevant facts and a number of factors
to determine whether Jenny resides in Australia. These factors have been identified
by the Australian Taxation Office in TR 2023/1.

The factor that would support Jenny being a resident is that she is physically present
in Australia from 25 April. However, she does not have a home in Australia and is
only living in motels during this period and does not demonstrate any of the
attributes of someone who resides in Australia, as identified by the ATO.

On balance, it is likely that, following cases such as IRC v Lysaght [1928] AC 234 and
Levene v IRC [1928] AC 217, Jenny would not be considered a resident of Australia
for tax purposes as she does not “reside” here during the relevant period.

 183-day rule

Jenny will not be a resident of Australia under this rule as she has not been in
Australia for more than 183 days.

 Domicile test and superannuation test

These tests are not relevant to Jenny on the facts.

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 In conclusion, it is likely that Jenny is not a resident of Australia in Year 1 as she does
not satisfy any of the tests for residency.

Year 2

 Ordinary concepts test

It is now more likely that Jenny will be considered to “reside” in Australia as she
has leased an apartment in Sydney and brought her clothing and other personal
effects to Australia. Although she still travels out of Sydney once a week, it would
appear that Jenny is still in Australia during this time.

 183-day rule

Jenny will also be considered a resident under this test as she is in Australia for
more than 183 days and her usual place of abode is in Australia.

 Domicile test and superannuation test

These tests are not relevant to Jenny on the facts.

In conclusion, it is likely that Jenny is a resident of Australia in Year 2 as she satisfies

the ordinary concepts test and the 183-day rule.

Question 4.5

Ajay is a student from India who comes to Australia to study for a four-year bachelor degree
in business. Ajay lives in rental accommodation near the university with fellow students and
works part-time at the university social club as a barman. After six months, he has to withdraw
from his studies and return to India because his father is ill. Is Ajay considered a resident of
Australia?

Answer

 Students should answer this question in a similar style to the other two, by going
through the relevant tests.

In this case, Ajay’s routine of study and continuing accommodation on campus

establishes a pattern of habitual behaviour over the six months. His employment adds
support to the conclusion that he is residing here.

It is likely that Ajay is a resident of Australia for tax purposes.

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Question 4.6

After Misha finishes her Bachelor of Commerce degree she travels to the UK to work as an
accountant for three years. During that time she rents a flat and makes many friends. Her UK
salary is paid into a UK bank account. At the end of the three-year period she has saved enough
money to travel. Misha then spends a year travelling around Europe and a year travelling
around North America. At the end of the five years she returns to Australia. Discuss the
residency of Misha.

Answer

The first issue here is to determine whether Misha is a resident of Australia for tax
purposes.

The relevant rules are the residency tests in s 6(1) of ITAA 1936.

Applying the tests to Misha’s situation:

 Ordinary concepts test

From the facts, it would appear that Misha does not “reside” in Australia during
the relevant period as she does not demonstrate any of the factors that would
point towards her residing in Australia.

 Domicile test

From the facts, we can assume that Misha’s domicile is Australia and, as such,
she is automatically a resident of Australia under the domicile test unless she has
a permanent place of abode overseas. During the period that Misha rents a flat
in the UK, she clearly has a permanent place of abode overseas and will not be
treated as a resident of Australia for tax purposes under the domicile test.
However, for the two years when she is travelling in Europe and North America,
she would not have a permanent place of abode overseas and will be a resident
of Australia under the domicile test. While the 2019 decision of the Full Federal
Court in Harding is authority that a permanent place of abode outside Australia
need not be a particular property overseas but can be constituted by
permanently residing in a town or country, it is likely that Misha’s travel around
Europe and North America is sufficiently different from the facts in Harding that
Misha would still be considered an Australian resident during this time under the
domicile test.

 183-day rule and Superannuation test

Not relevant on the facts.

In conclusion, Misha would not be a resident of Australia for the three years when
she has a flat in UK but would be a resident for the two years when she is travelling.

Question 4.7

The Big Bang Company was set up by Ed, an Australian resident. It is incorporated in Singapore
and has two directors who are resident in Singapore and who hold board meetings in
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Singapore. Each director has two shares in the Big Bang Company, which they hold on trust
for Ed. The Big Bang Company owns real property, all of which is outside Australia, and makes
its profits from commercial property leases on a large scale. Ed does not attend the board
meetings in Singapore; however, the constitution of the Big Bang Company provides that the
decisions of the directors are only effective if Ed concurs with them. The directors carry on all
operational activities, such as collecting rent, paying commission, finding tenants, making
minor repairs and maintaining the buildings. Is there any possible scenario in which the Big
Bang Company could be considered a resident of Australia for tax purposes?

Answer

It is necessary to consider whether the Big Bang Company satisfies the second test of
residency. To satisfy this test it is necessary to establish two criteria. The first is whether the
Big Bang Company carries on business in Australia. The second is whether the Big Bang
Company has its central management and control in Australia. Following Bywater Investments
Limited & Ors v Commissioner of Taxation [2016] HCA 45, the result will depend on a question
of fact and degree, and as such, in relation to this question, it will depend on the types of
decisions and activities that Ed undertakes.

The Tax Ruling TR 2018/5 (effective from 15 March 2017) stipulates the four relevant matters
in determining whether a company meets the two criteria:

1. Does the company carry on business in Australia?

2. What does central management and control mean?
3. Who exercises central management and control?
4. Where is central management and control exercised?

Students may interpret the facts of the question differently. There are four factual possibilities
(which have originated from TR 2004/15 (now withdrawn)):

 Possibility 1: The level of control that Ed exercises is so minor that he is not making
high-level management decisions and his activities are so insubstantial that he is not
participating in the business of the company. Such activities might include
contacting the directors irregularly for an update on the business without interfering
in their decisions or checking property prices and rents in the area without giving
directions to the company. The Big Bang Company is not a resident of Australia as it
is not carrying on business in Australia, nor is its central management and control in
Australia.

 Possibility 2: Both the directors and Ed exercise a degree of control over the high-
level decisions of the company so that central management and control is exercised
in both places. Such high-level decisions might include directions that the company
only concentrate on commercial leases, the rents be increased by 20% across the
board or that major refurbishments take place. The activities that constitute the
business of the company, such as the actual investment decisions, the execution of
leases, finding tenants, collection of rent, paying commission, making minor repairs
and maintaining the buildings, are only carried out offshore. Despite being carried
out offshore, following Bywater Investments and TR 2018/5, it follows that the
central management and control of a business is factually part of carrying on that
business. On this basis, The Big Bang Company is a resident of Australia as its central
management and control is located in both Australia and Singapore.

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  Possibility 3: Ed solely exercises the power to make high-level decisions regarding
the company's leases, funding, leasing policies, strategies etc, but does not
participate in the management of the company, such as the actual investment
decisions, the execution of leases, finding tenants, the collection of rents, paying
commission, making minor repairs and maintaining the buildings. Following Bywater
Investments and TR 2018/5, The Big Bang Company is a resident of Australia as its
central management and control is solely located in Australia, with the carrying on
of Big Bang’s business factually being part of Ed exercising central management and
control.

 Possibility 4: Ed makes all high-level decisions regarding the company's leases,

funding, leasing policies, strategies and investment decisions, as well as managing
the Big Bang Company’s day-to-day activities. Ed makes the key investment
decisions in Australia and the associated activities are conducted in Australia (eg the
payment of all expenditure, vetting of all tenants and the detailed monitoring of
rental payments via the internet). The directors step aside from making any
decisions in respect of the company. In Bywater Investments, the court disregarded
the role of those directors who were formally appointed but did not play any real
role in the affairs of the company (TR 2018/5, para 17). Even though Ed is not an
appointed director of The Big Bang Company, in substance, he is still exercising
central management and control as he is able to direct the directors. On this basis,
The Big Bang Company is a resident of Australia as it is carrying on business in
Australia and its central management and control is located in Australia.

Question 4.8

Peter is an accountant for an international accountancy firm based in Vanuatu. He has

investments in Vanuatu comprising of his own home, a rental property, shares in local
companies and cash deposits in high interest bearing bank accounts. On 1 February 2024,
Peter was transferred to the firm’s Brisbane office on a temporary three-month secondment.
The purpose of the secondment was to establish networks with existing Australian clients that
have indicated the possibility of investing in Vanuatu. During the secondment period, Peter
remained an employee of the Vanuatu office and his salary was paid into his Vanuatu bank
account. While Peter’s intention was to return to Vanuatu at the conclusion of his
secondment, he sought and was successfully offered a permanent position in Brisbane. In
early June 2024, he became an employee of the Brisbane office. His relocation involved
purchasing an apartment in the Brisbane suburb of Ascot, renting out his own home in
Vanuatu and transferring a sum of cash to a high interest bearing bank account in an
Australian bank. Discuss residency and source issues.

Answer

The first issue here is to determine whether Peter is a resident of Australia for tax
purposes. It is necessary to determine his residency for two separate periods:

 From 1 February 2024 to 30 April 2024, being his initial secondment period; and
 From early June 2024, when he relocates to Australia.

The relevant rules are the residency tests in s 6(1) of ITAA 1936.

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 Applying the tests to Peter’s situation:

 Ordinary concepts test

From the facts, it would appear that Peter does not “reside” in Australia during
his three-month secondment period. During this period, he does not
demonstrate any factors suggesting a residence in Australia. Of note, the facts
state that Peter’s secondment was only temporary and he had an intention to
return to Vanuatu at the end of his secondment.

However, from early June 2024, the facts suggest that Peter will satisfy the
ordinary concepts test. He accepted a permanent position in Brisbane,
purchased an apartment in Brisbane and has a high interest bearing bank account
in Australia.

 Domicile test, 183-day rule and superannuation test

Not relevant on the facts.

In conclusion, Peter would not be a resident of Australia during the secondment

period, but would be a resident from the time he enters Australia in early June 2024.

The second issue here is to determine whether Peter will be subject to income tax in
Australia on income derived in either period.

Sections 6-5 and 6-10 ITAA 1997 provide that a resident of Australia is taxed on
ordinary and statutory income from all sources, while a foreign resident is taxed only
on ordinary income and statutory income sourced in Australia.

Applying the tests to Peter’s situation:

Based on the above, Peter will be:

 A foreign resident from 1 February 2024 to 30 April 2024 – taxed only on

Australian source income.
 A resident of Australia from early June 2024 – taxed on income from all sources.

1 February 2024 to 30 April 2024

Peter derives a salary from working/providing services in Australia. Despite payment

being made into his Vanuatu bank account, the source of Peter’s salary is generally
taken to be the place of the performance of services: FCT v French (1957) and FCT v
Efstathakis (1979). It is therefore assessable in Australia as ordinary income.

From early June 2024

Peter will be subject to tax on income from all sources, which in this case, includes the
rent earned from renting out his own home in Vanuatu.

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Question 4.9

Your client was born in Sydney and lived in Australia until 1 July of the current tax year. At that
stage, he accepted a voluntary redundancy with Qantas. A year earlier he had separated from
his wife of 20 years. A few months later he started a relationship with a resident of Singapore.
Upon accepting the redundancy, he began travelling overseas to perform aircraft mechanic
services at various locations within Asia. Under his contract of employment with Boeing, the
taxpayer was provided with either hotel or short-term apartment accommodation at each
location he attended for work purposes.

During the current income year, the taxpayer provided services in Hong Kong, Spain, Greece,
Thailand and Indonesia. The longest time he stayed at any one place was 45 days in a serviced
apartment in Indonesia. The taxpayer visited his two teenage children and his parents in
Australia on two occasions for a total of 30 days and visited his new partner in Singapore on
four occasions for a total of 50 days. During the tax year what had been the family home in
Sydney was sold to complete a divorce settlement. While he no longer had any place in
Australia in respect of which he could call his own, he also did not have ownership or leasehold
in any dwelling outside Australia. Nor did he apply for a long-term visa or residency status
anywhere outside Australia.

Advise your client whether he is a resident of Australia in the current tax year for income tax
purposes. (Your answer should assume the taxpayer was able to travel normally and without
COVID- 19 restrictions during this time.)

Answer

This question is based on the facts in Handsley v FCT [2019] AATA 917 which applied the Full
Federal Court’s decision in Harding v FCT [2019] FCAFC 29. See case study 4.6 for a discussion
and analysis of Harding and [22.45] for further discussion of Handsley.

In Handsley, the taxpayer lived in multiple overseas locations but because his longest stay in
any one of those particular countries was just 43 days, this was insufficient to come within the
broader interpretation of permanent place of abode adopted in Harding. In other words, he
had failed to establish himself in any one location.

Question 4.10

Bridget and her husband are moving from London to Australia permanently under an
employer-sponsored arrangement. Bridget and her husband have a joint bank account in
London which they leave open for the purposes of the rent coming from their home which
they hold onto. They rent out what was the family home and the money is deposited into the
London bank account. The London bank account also earns interest.

Bridget and her husband pay tax in the UK on both the rental property income and interest
income. Their UK accountant has advised them that they will not have to pay tax on the
income in Australia because it is sourced in the UK.

Bridget and her husband come to you to confirm whether this advice is correct. Advise your
clients.

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Answer

This question requires a consideration of both residence and source. If Bridget and her
husband are foreign residents for Australian tax purposes, they will only be taxed on income
sourced in Australia. If, however, they are Australian residents as defined in s 6(1) ITAA 1936,
they will be taxed on their worldwide income (see Div 6, ITAA 1997). Given Bridget and her
husband are moving to Australia permanently, they will be considered Australian residents
under the residence according to ordinary concepts test (See TR 2023/1).

Australian residents must include all foreign sourced income in their Australian tax return. As
the property is located in London, the income derived from that property will be sourced in
London. However, as previously stated, because Bridget and her husband have moved to
Australia permanently, they will be considered Australian residents. Therefore, any rental or
lease payments for the London property must be declared as income in an Australian tax
return. This income is the full amount of rent and associated payments received or entitled to
be received when a taxpayer rents out their property. It doesn't matter whether it's paid to
the taxpayer or their agent.

Question 4.11

Mary is a citizen of the United States. She came to Australia in 2023 on a working holiday and
stayed for 10 months. Mary had grown up in the family home in the United States and still
had a room to return to. She had no prior association with Australia until she arrived in
September 2023. At that stage, she spent nearly four months in Brisbane moving between six
different houses. She then spent a month travelling from Brisbane to Canberra via six different
locations. From late January 2024 to late May 2024, Mary then lived in Melbourne staying at
six different houses. After returning to Brisbane for a short period of time, she travelled to
Sydney and then departed Australia on 23 June 2024. During her time in Australia, she had
two different periods of employment, one in Brisbane for three months and another in
Melbourne for a period of three months.

Mary claims she is a resident of Australia for her time here, so she should pay tax at the
residency rate. Advise Mary. What difference would it make if she was not on a working
holiday visa? (Hint: see Stockton v FCT [2019] FCA 1679.)

Answer

It seems that Mary will not be a resident for Australian income tax purposes. In coming to this
conclusion, the two residency tests of ordinary concepts test and 183-day test will need to be
considered. Concluding that she is not a resident under the ordinary concepts test and looking
at the overall circumstances the taxpayer the court is likely to say she is a ‘paradigm unsettled
itinerant during her time in Australia’. While the Court under the ordinary concepts test will
consider her living arrangements in Australia, it will consider her residency in the United
States. Under the 183-day test, the taxpayer’s usual place of abode will be outside Australia.

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