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PACC6006 Taxation Law- Income from Property

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Question

Peter Jones is a British architect making a name for himself in the field of repurposing industrial buildings for residential purposes. In June 2017, Peter was approached by Smith Constructions who were wishing to release a new range of designer apartments in Australia.  The company was very keen to employ Peter to design this range and has therefore offered Peter a one off payment of $100,000 to move to Australia and join Smith Constructions.  Peter accepted the offer. On 1 July 2017, Peter Jones, who was born in and resided in England up until that date, arrived in Australia to take up full time employment as a designer with the company.   The one off inducement payment of $100,000 was paid to him on 15 July 2017.  His employment contract was for 12 months, with an option to renew at the end of that term.   

Peter is a single parent with two children. The two children will not travel with him to Australia but stay with their grandparents (Peter’s parents).  Peter decided to retain the house he owns in England, and rent a house in Australia until such time as his employment contract was extended. Peter intends to stay in Australia if possible.

On the 23rd September 2017 Peter is transferred to the company’s office in New Zealand to assist with a special project.  The project is for approximately 9 months and he returns to the Sydney office permanently on the 12 June 2018.

On moving to Australia, Peter rented out his house in London for $2,000AUD a month.  On 7 July, Peter received a Statement of Income and Expenditure from his real estate agent which showed that as 30 June 2018, the rental income was $28,000AUD including $2,000AUD related to the month of July 2018. The Statement of Income and Expenditure included allowable deductions totalling $15,000AUD. As part of his employment contract, the company agreed to pay Peter a relocation allowance of $5,000 to cover the costs of removal or storage of his household effects on moving to Australia. The company also agreed to pay Peter allowance on the costs of his home telephone account. The allowance is paid on a monthly basis, calculated at an estimated rate of $100 per month.  As at 30 June 2018, the total amount paid on the telephone allowance was $1,200.

When Peter moved to Australia, he was most excited to learn of the OzLotto lottery.  Over the years, Peter developed a ‘system’ which he believed would enable him to win the Lotto jackpot.  His system was based on a discussion that he had with a clairvoyant, who told his that his lucky numbers would be the birth of his children, and it involved rotating the numbers of his children’s birthdays so that a new set of numbers of generated.  He documents his system each week to keep track of the numbers she has used. On 13 May 2018, Peter is ecstatic when his system finally succeeds in selecting the first division numbers, and as a result, he wins $1 million AUD.

Unsure of what to do with his money, Peter seeks advice from a solicitor who specialises in taxation law for advice on a suitable corporate structure that will provide the best means for managing this money and ensuring that his children are financially protected in future.  His solicitor advised there were two fairly standard, commercially accepted options that Peter could choose from.  The structures are similar, however, one of these structures generally results in a lower tax liability and for this Peter chose this option.  He paid the solicitor $2,000AUD for this advice and drafting of the relevant documents. He has not set up the relevant structure yet and does not intend to do so until August 2018.

Peter’s salary for the year was $100,000AUD. 75% of this salary was earned while working in New Zealand.  In addition to the above, Peter incurred the following expenses during the year: 

  • $2500 in registration fees for a conference on Australian designs that was offered by an industry specialist;  
  • $1500 course fees for a “Certificate in Australian Design”, offered by the Australian Institute of Architects.
  • A gift of $100 cash, paid to the Royal Brisbane Hospital;  
  • $50 to subscribe to the magazine “Australian Architecture”;  
  • $1500 to the Southern Cricket Club.  The club’s activities are only related to the development of youth cricketers in the community.
  • $1500 to Hunter Sports Club.  Hunter Sports is a sports conglomerate that makes substantial amounts of money from poker machines, entertainment and property development. They are registered as a deductible gift recipient on the Australian Business Register.

1. In the form of a professional correspondence you are required to advise Peter Jones of his taxation residency status.
2. Assuming he is an Australian resident for taxation purposes calculate his taxable income for the income tax year ending 30 June 2018. (Justify all decisions to include or not include income/deductions etc)

Answer

Introduction – Identification of the Problem

Peter Jones an eminent architect of England who has been approached by Smith Construction to be a part of their venture in Australia. Although Mr Jones accepted the offer and relocated to Australia on 1st July and received subsequently the payment for inducement and relocation bit had to once again shift his base to New Zealand by 23rd September 2017. He returned only on 12th June 2018. Residential Status became a major issue for Mr Jones since he shifted to Australia and then headed to New Zealand within a short period of time. Further his residential status will determine whether the money received from rent in England and salary for working in New Zealand will be assesses for the purpose of taxation. If he fails to be a citizen of the country then he needs to pay only for the amount he earned within the geographical boundary of Australia. Similarly there were few allowances which were offered, the nature of which needs to be determined from the point of taxation to see whether those will be assessed. Similarly the nature of donations needs to be reviewed to calculate the amount of deductions earned. He also wishes to use the money he earned through lottery for securing the future of his children.

Comprehensive Discussion 

Assessable Income

The income assessed included both statutory and ordinary income. ("Income Tax Assessment Act 1997 - SECT 6.1", 2017)

Residential Status

If Peter Jones is a citizen of Australia, then all the income earned both within and outside the geographical boundary of Australia is assessable. Similarly if Peter Jones is not a citizen of Australia, then the assessable will only be the one which is earned within the geographical boundary of Australia. ("Income Tax Assessment Act 1997 - SECT 6.5", 2017)

  • On the basis of definition  ("Income Tax Assessment Act 1936 - SECT 6", 2017)
  • A person who lives in Australia
  • A person who resides in Australia, unless it is possible to convince the commissioner that his domicile is not within the geographical boundary of Australia.
  • A person living in Australia  for half of the income year continuously unless it is possible to convince the commissioner that he does not reside in Australia and has no  intention of settling down in Australia
  • Those person who through Superannuation Act has become eligible
  • Renting of one’s own house and being physically present whether for business or family ties indicate that Peter Jones is a resident of Australia. Case Study: Levene Vs IRC. ("Levene v Inland Revenue Commissioners: HL 1928", 2017)
  • However Peter Jones has not been in Australia for 183 days as he had to shift to New Zealand between 23rdSeptember 2017 and 11th June 2018.
  • Therefore Peter Jones cannot be an Australian citizen for this income year and only the income earned within the boundary of the country will be chargeable.

Income from Property

Rental income of the House Property is not a part of the assessment income since Peter was outside the geographical boundary of Australia for more than 183 days. So any income earned outside the country would not be assessed in this income year. ("Income Tax Assessment Act 1997 - SECT 6.5", 2017)

Income from Salary

Salary and Wages: 25% of $ 100000 AUD or $ 25000 AUD is considered because the rest 75% is paid for working in New Zealand. ("Income Tax Assessment Act 1997 - SECT 6.5", 2017)

Lump Sum Payment to join the Company

This lump sum payment of fees for joining the company can be treated as ordinary income assuming it to be advance payment made for services which would be performed in the future.

Looking it at from a different perspective it can be regarded as a payment which is of a capital in nature since it is being paid to meet the additional cost of living which will be incurred on leaving England and relocating to Australia. (Boggs, 2017)

Allowances: Income or Fringe Benefit

Telephone Allowance - $ 1200

Firstly we need to determine whether it is an assessable income or the amount paid is a fringe benefit which is used for reimbursement of the expenses.

If we consider this as a fringe benefit it cannot be considered as a part of assessable income as now it can neither be assessable nor exempt.  ("Income Tax Assessment Act 1936 - SECT 23L", 2017) It may be noted that in order to be a fringe benefit it should be a reimbursement for the amount actually utilized by the person. However in case of allowance the amount is paid before the expenses are actually incurred.

In the light of the above discussion it is better to consider it as an ordinary income. ("Income Tax Assessment Act 1997 - SECT 15.2", 2017)

Expenses for Relocation: $ 5000

The following things need to be verified before we conclude whether it is a fringe benefit or not. Whether there is a benefit or not, which is provided during the assessment year? Whether it is paid by an employer to an employee in connection with reasons regarding employment?  ("Fringe Benefits Tax Assessment Act 1986 - SECT 136", 2017). Although the expenses for relocation meet the above criteria but Section 58B of FBTA Act 1986 clearly disqualifies it as a fringe benefit. ("Fringe Benefits Tax Assessment Act 1986 - SECT 58B", 2017). Hence this is explicitly being considered as an income according to Section 15.2 of ITA Act 1997. ("Income Tax Assessment Act  1997 - SECT 15.2", 2017)

Windfall Gains

The money received through Oz Lotto can never be considered as an income as it is categorized under windfall gains. While Peter has established a system for the process but it does not provide sufficient ground for classifying the act of Peter as an established act of gambling business.  The case doesn’t allow Peter to seek exemption under Section 25.5 of ITA Act 1997 ("Income Tax Assessment Act 1997 - SECT 25.5", 2017) as it is not an expense of non capital nature as defined in issues regarding Income Tax

Allowable Deductions

Deductions are only admissible to the extent when it has the ability to produce assessable income and are not a part of the exempted list of Section 8-1 of ITA Act 1997.  ("Income Tax Assessment Act 1997 - SECT 8.1", 2017)

Registration fees of $2500 given by an industry specialist for an Australian Design Conference. Continuing Education can be portrayed as an activity to increase assessable income through the process of acquiring skills relevant to the profession. It must be noted that Section 82A of the Income Tax Act 1997 does not consider conference as a method of education. ("Income Tax Assessment Act 1936 - SECT 82A", 2017)

Australian Institute of Architect offered $1500 for pursuing a course on Certificate in Australian Design:

Section 82A of the ITA Act 1997 explicitly permits exemption for knowledge gained from an institute which can help in acquiring skills relevant to the profession but should not exceed the threshold limit of $250. ("Income Tax Assessment Act 1936 - SECT 82A", 2017)

Royal Brisbane Hospital was paid $100 as a gift in cash:

Since it is a public hospital any contribution above $2 is deductible.

Subscription of Australian Architecture magazine through payment of $50:

It is not possible to get the entire amount deductible as there is an element of private nature in it. However a reasonable amount can be apportioned in the light of the verdict of Lenten Vs Commissioner of Taxation ("Australian Taxation Office - Lenten Vs FC of T", 2017) where it was mentioned that purchase of newspaper should be an allowable deduction for a teacher so long it has a connection with the employment,

Southern Cricket Club promoting cricket was paid $1500 as donation

This club is an organization which is mandated to receive donation under the Income Tax Assessment Act 1997 (Subdivision 30-B, s30-90) and hence any contribution made to this said organization is deductible in the hand of the donor. ("Income Tax Assessment Act 1997 - SECT 30.17", 2017)

Hunter Sports Club was paid $1500 as donation

The above deduction is not allowed as it is of a private nature since concrete reason for the contribution has not been mentioned ("Income Tax Assessment Act  1997 - SECT 8.1", 2017)

Application of the discussion

Total Assessable Income:

Salary: $25000 + Payment for inducement: $100000 + Allowance for Telephone: $1200 + Allowance for relocation: $5000 = $131200

Total Allowable Deductions:

Conference: $2500 + Royal Brisbane Hospital: $100 + Certificate in Australian Design: $250 + Southern Cricket Club: $1500 = $4350 (Plus a portion of subscription to architecture magazine)

Conclusion

Peter Jones is not a citizen of Australia because he was not present for 183 days in the last assessment year although he had rented his original home in England to settle in Australia for the moment. Since he is not a citizen of Australia he will not be required to pay income tax on the amount earned outside the geographical boundary of Australia. Accordingly he will exempted from paying tax to the Australian Government on the amount he has earned from renting his house in England as well as the salary he received  for working in New Zealand. He will continue to be assessed for his remaining salary, allowance for telephone, relocation and inducement expenses. So far as the deductions are concerned although Hunter Sports Club is registered with Australian Business Register the reason for the donation is not mentioned. Therefore it was not possible to get the deduction. Rests of the payments made have been eligible for deductions within the prescribed limit wherever applicable.

Reference

Australian Taxation Office - Lenten Vs FC of T. (2017). law.ato.gov.au. Retrieved 22 April 2017, from https://law.ato.gov.au/atolaw/view.htm?DocID=LIT/ICD/2007/0415/00001

Boggs, S. (2017). Inducement payments. Lexology. Retrieved 24 April 2017, from https://www.lexology.com/library/detail.aspx?g=f1ad1983-1098-4c99-b2f8-f611e78f40ab

Income Tax Assessment Act 1997 - SECT 6.1. (2017). Austlii.edu.au. Retrieved 26 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.1.html

Income Tax Assessment Act 1997 - SECT 6.5. (2017). Austlii.edu.au. Retrieved 25 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html

Income Tax Assessment Act 1936 - SECT 6. (2017). Austlii.edu.au. Retrieved 27 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s6.html

Income Tax Assessment Act 1997 - SECT 6.5. (2017). Austlii.edu.au. Retrieved 25 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html

Income Tax Assessment Act 1936 - SECT 23L. (2017). Austlii.edu.au. Retrieved 27 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s23l.html

Income Tax Assessment Act 1997 - SECT 15.2. (2017). Austlii.edu.au. Retrieved 23 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s15.2.html

Income Tax Assessment Act 1997 - SECT 25.5. (2017). Austlii.edu.au. Retrieved 24 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s25.5.html

Income Tax Assessment Act 1936 - SECT 82A. (2017). Austlii.edu.au. Retrieved 27 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s82a.html

Income Tax Assessment Act 1997 - SECT 30.17. (2017). austlii.edu.au. Retrieved 22 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s30.17.html

Fringe Benefits Tax Assessment Act 1986 - SECT 136. (2017). Austlii.edu.au. Retrieved 23 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s136.html

Fringe Benefits Tax Assessment Act 1986  1986 - SECT 58B. (2017). Austlii.edu.au. Retrieved 23 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s58b.html

Levene v Inland Revenue Commissioners: HL 1928. (2017). swarb.co.uk. Retrieved 24 April 2017, from https://swarb.co.uk/levene-v-inland-revenue-commissioners-hl-1928/

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