Background

The most common principles of the ordinary and the statutory income is that it is considered in the taxpayer’s assessable earnings. The ordinary earnings under “sec 6-5, ITAA 1997” are held assessable for tax when the taxpayer successfully establishes the nexus with the payment received for services. But in terms of statutory income it is not so necessary. Assessing the nature of receipts for the receivers and taking into the account the motive of the person that is making the payment is also considered important. The ordinary earnings of the taxpayer under the “sec 6-5, ITAA 1997” is mainly influenced by the taxpayer’s residence, derivation of income, sources of income and exempted income (Martins et al. 2017). While “section 6-10” explains regarding the statutory income. In majority of the situations income may require additional calculations prior to being considered as the taxable earnings.

On the other hand, countries are only permitted to impose tax on the income where is sufficient amount of nexus either with the residence or sources amid the income/taxpayer and the country. Usually the tax residents of the countries on the worldwide basis and the non-residents on the source basis. An individual that is residing in Australia, means that the resident taxpayers are considered taxable for all of their earnings that is derived from all the sources, no matter from where the income has it source (Woellner et al. 2016). On the other hand, the non-residents are only considered taxable on their income that is derived from the sources situated in Australia. While the individuals will be considered as the tax residents without being the civil residents. This is because the tax residency is mainly evaluated through economic and social criteria instead of visa position. The present study will be assessing the tax residency position of Mr Lewis along with the tax liability of the receipts that is received during the year for income tax purpose.

There is no such statutory definition of source under the ITAA. At first it is important to ascertain if the taxpayer is considered as resident or not. On finding that the taxpayer is resident, then ascertaining source is not usually considered as the problem. This is because residents are commonly taxed on their income from all their sources (Smith et al. 2015). Upon noticing that the taxpayer is not the resident of Australia, then it is very much obligatory to ascertain the source of income. The significance of determining the sources of income for the taxation purpose is very much considered fundamental in levying tax. The sources of income are considered central in getting relief from the double taxation. There is hardly any kind of central specific guidelines to set up the income sources. The source of an item is treated factual and it is determined separately in every cases.  

Residency

Employment income that is in the form of salary and wages generally involves the factors such as the place where the services and duties are carried out. The case of “FC of T v French (1957)” involved the Australian resident that was working as the engineer in the Australian company which is conducting its business both in Australia and New Zealand (Burns et al. 2017). The law court in its verdict held that the source of income involved where the work was carried out. As a result, the income was earned from the sources that were out of Australia. The sources of income generally involve the place where the service are contracted and the places of payment are treated to be very less noteworthy factors in ascertaining the source.

As understood here Mark was employed in Luxury Liner. The employment income that was earned by Mark included salary and wages that was earned by him from his employment contract. Mark signed the employment contract in Hong Kong whereas the company Luxury Liner is incorporated in Bermuda (Yuen 2019). Referring to the decision of law court in “FC of T v French (1957)” it can be stated that Mr Lewis employment income is sourced outside Australia in Hong Kong. The reason for this is that the contract for employment was signed by Lewis in Hong Kong.

The rules given in the Double Taxation Agreement might impose restriction on the ability of the ATO to levy taxes on the particular form of income which might allocate the rights of imposing tax on the particular nation. Under the system of exemption there are certain types of foreign sourced income that is simply excluded from the domestic taxation. The examples of this included the foreign sourced corporate earnings. Furthermore, “section 23AG ITAA 1936” explains that the employment income that is earned from the overseas rendering of services by the Australian occupants in foreign are usually provided exemption (Wales 2017). As stated under the “Div 770 ITAA 1997” Australia has authority of wholly taxing the foreign sourced employment income, but also provides the taxpayer with the tax offset for any sort of overseas tax paid on the foreign sourced income.

Referring to above explanation, income that is earned by Lewis from employment should be treated as foreign sourced income. Lewis carried out the services as Australian dweller while working in overseas. In regard to the double taxation agreement of Australia with Hong Kong, an exemption will be granted to Mr Lewis under “section 23AG ITAA 1936” for the employment income that is sourced in overseas (Barkoczy 2016). A foreign income tax offset is available to Lewis under “Div 770 ITAA 1997” for any taxes that is paid on the overseas employment income.

Source

Gains that a taxpayer earns from the trading transactions or anything that constitute the ordinary business activity of the taxpayer are treated as the ordinary income in nature. Gains which arises from carrying the business amounts to ordinary income under the “section 6-5, ITAA 1997”. As noted in the “TR 97/11” the characteristics of the business involves the business or commercial purpose such as the intention of engaging in the business (Freudenberg et al. 2017). It also includes the profit motive particularly the intention of deriving profits from the business. The common characteristics of business involves the repetition and regularity of the activities. Systematic activities, standards and methods represents business characteristics. The activities are of the similar type and conducted in the similar manner as that of the ordinary trade in line of the business are treated as having the characteristics of business. Furthermore, the scale and permanency although the size and scale are not considered determinative factor.

As noted in “FC of T v Thomas (1972)” the court of law stated that where any activities that are undertaken amounts to greater than recreational activity then it is termed as having business characteristics. While “section 36-10 (1-4) ITAA 1997”, the tax loss of a taxpayer in a specific income year is calculated by summing up the amount of taxpayer’s total deduction for the income year (Morgan et al. 2018). Later the tax loss is deducted from the assessable value of the taxpayer’s taxable income and the net exempted earnings during the year. The court of law has taken into the account wide variety of factors to determine whether the business activities is carried on by the taxpayer along with size of activities undertaken and whether the business that is conducted by the taxpayer are having any systematic or commercial nature.

Similarly, Mr Lewis has undertaken cattle breeding activities. Lewis on a constant basis is found to be maintaining the records of cow’s development as well. Denoting the explanation of “TR 97/11” the activities undertaken by Lewis amounts to business in nature. Citing “FC of T v Thomas (1972)” a commercial or business purpose is existent for the activities that is undertaken by Lewis (Robin and Barkoczy 2019). Lewis also has the profit making motive from his cattle breeding business and also involves systematic methods.

A small profit before tax of $50,000 was reported by Lewis. The profits earned by Lewis from his cattle breeding business will be treated as gains which is chargeable as ordinary income within “sec 6-5, ITAA 1997”. While the tax loss that is suffered by Lewis from the previous three years must be excluded by Lewis under “section 36-10 ITAA 1997”.

Conclusion: 

As evident from the above given analysis, the employment income which Lewis has earned from his work in Luxury Liner has its source in Hong Kong. In other words, the employment earned by Lewis has been sourced out of Australia. As a result of this, Lewis will be able to get exemption from paying tax in Australia under “sec 23AG of the ITAA 1997”. In addition to this, Lewis is also found to be carrying on the business of cattle breeding and also reported the profit of $50,000. The cattle breeding activities of Lewis is having the commercial approach and intent. The proceeds earned will be treated as normal ordinary income under “sec 6-5, ITAA 1997” and will be included in the assessable earnings of Lewis for tax purpose.

References: 

Barkoczy, Stephen. “Foundations of taxation law 2016.” OUP Catalogue (2016).

Burns, Andrew. “Mid market focus: Tax considerations when doing business offshore.” Taxation in Australia 51, no. 10 (2017): 535.

Freudenberg, Brett, Toni Chardon, Mark Brimble, and Melissa Belle Isle. “Tax literacy of Australian small businesses.” J. Austl. Tax’n 19 (2017): 21.

Martins, Patricia, and Daniel Smedley. “ATO provides a.” Taxation in Australia 52, no. 5 (2017): 266.

Morgan, Annette, and Donovan Castelyn. “Taxation Education in Secondary Schools.” J. Australasian Tax Tchrs. Ass’n 13 (2018): 307.

ROBIN & BARKOCZY WOELLNER (STEPHEN & MURPHY, SHIRLEY ET AL.). Australian Taxation Law Select 2019: Legislation and Commentary. OXFORD University Press, 2019.

Smith, Julie P. “Australian state income taxation: A historical perspective.” Austl. Tax F. 30 (2015): 679.

Wales, New South. “Taxation In Australia| March 2017 452.” (2017).

Woellner, Robin, Stephen Barkoczy, Shirley Murphy, Chris Evans, and Dale Pinto. “Australian Taxation Law 2016.” OUP Catalogue (2016).

Yuen, Kelvin. “Navigating the trust loss provisions maze.” Taxation in Australia 53, no. 9 (2019): 490.