The paper "Australian Income Tax System" is a great example of an assignment on finance and accounting. The Australian tax system is undoubtedly among the very remarkable systems across the globe. This is basically because of the residency aspect in its taxation system that makes a clear cut distinction of residents and non-residents of Australia. In the given case of Mr. White, the law on taxation for Australian residents outlines four test procedures to determine whether one qualifies for taxation purposes as a resident. Therefore, Australia’ s tax authority is centered on the residence of the taxpayer and their source of revenue.
These standards find application in Section 6-5 of the Income Tax Assessment Act 1997 (“ ITAA 1997” ) (Maisto, 2009). This act provides that the quantifiable income of a taxpayer shall comprise: the gross earnings resulting directly or indirectly from all sources within or out of Australia for the resident taxpayer; and the gross income resulting directly or indirectly from all sources in Australia for non- resident taxpayers (Comasters Law Firm and Notary Public 2000). The purpose of this particular law on taxation is to convey into the measurable revenue of resident taxpayers their wide-reaching returns, and for non-resident taxpayers only their Australian sourced revenues.
For that reason, it is essential when determining tax responsibility in deciding on matters regarding residence. According to Australian law, part 995-1 of the ITAA 1997 presents that the connotation of an Australian resident is explained in part 6(1) of the ITAA 1936 (Maisto, 2009). This is the part that offers the tests of residence for persons. They are principally vital for migrants to establish their residency status for taxpaying purposes. The four pertinent tests of residence for persons are: a person is considered as a resident if he/she has been in Australia for further than one half of the year of revenue; that is more than 183 days.
Secondly, a person is an Australian resident if his/her accustomed place of residence is in Australia and he/she keeps up ownership of a home in Australia for the duration of the absence. Thirdly, a person is regarded as an Australian resident if he/she has an Australian domicile, except it is held that the person’ s stable place of dwelling is outside Australia and the fourth test is the institution of an appropriate superannuation fund in Australia. In regard to Mr.
White’ s case, it appears that he fails the first residence test because he hardly stayed in Australia for more than 183 days in order to be eligible for residence tax purposes. In essence, Mr. White stayed only for about 62 days. However, Mr. White’ s case is in line with the second residency test regarding house ownership. On arrival, Mr. White and his wife bought a house in Sydney and he departed to Singapore for a period of seven months for purposes of making sure his business dealings in Australia are streamlined.
The period he would be in Singapore he still maintained his house ownership in Australia since his wife continued to stay there. The third and fourth residence tests also apply to Mr. White’ s case. In this regard, therefore, Mr. White is considered an Australian resident and therefore is liable for resident taxation purposes. According to Maisto (2009), when one test of residency applies to an individual, all the other tests that do not apply are assumed to be minority tests. According to the Australian tax office, when an individual temporarily goes overseas and fails to set up a permanent home in another country then he/she may be treated as an Australian resident for tax purposes (Maisto, 2009).
This is exactly what Mr. White’ s case represents; that is, his stay in Singapore would be on a temporary basis and the fact that he bought a house in Sydney signified that his Singapore home would be a temporary one as he would later return permanently to Australia. In light of these establishments, Mr.
White would be expected to file a tax return to the Australian tax authority for the year 2011/2012 on income generated from both Australian sources and those in Singapore or any other part of the world. One would argue that revenues from within Australia would be negligible or non- existence hence he should be considered a nonresident. However, Mr. White took the initiative of getting registration with relevant professional bodies in Australia. According to some laws regarding certain registration in Australia, one would be required to confirm the willingness to take up Australian residency status for tax purposes.
It is on this basis that strongly confirms Mr. Australian residency status particularly for the reasons for taxation. According to the opinion of Maisto (2009), keeping bank accounts, paying private health insurance in Australia, and frequently visiting Australia for holidays, all signify an objective to go back to Australia and mean that you are a resident. In the most logical sense, Mr. White would be making numerous trips to Australia to visit his wife and he also opened a bank account at the Commonwealth Bank of Australia. Question two; Advise Fletch about the Extent to which he is entitled to Deductions in Respect of his Interest Expenditure.
Would you Answer be Different if he had Leased the Property to his Brother at a 50% Discount? Discuss Negative gearing involves borrowing to finance the purchase of an asset, the return on which does not cover the payment of interest on the borrowed funds (Prince, 2011). In Australia where negative gearing is legal for property assets particularly residential investment, the investor can offset ongoing losses against taxable income.
Assuming that property taxes rise over time, and that capital gains are taxed less heavily than income the owner can eventually realize a profit, despite making losses in the meantime. The case of Mr. Fletch is very alarming considering the growth of interest expenditure three times past the projected amount of rent he would receive from tenants. However, according to the rules of tax deductions as regards cases of negative gearing, interest on a venture loan for an income-generating intention is entirely deductible, irrespective of the fact that the income falls short of the interest.
Any deficit ends up offsetting proceeds from other sources, such as the salary earnings of the investor. According to Prince (2011), negative gearing related investments always poses a challenge to tax authorities particularly in countries where negative gearing is legalized. The challenge comes about in respect to the fact that interest is always more than the projected income hence tax deductions would be based on an unforeseen amount of funds. If interest deficit is seen as mounting up in Mr.
Fletch investment then the deduction implies it is compounding before-tax, and the result of taxation is the lower rate capital gains tax. Additionally, deductions on depreciation and capital works will pay off for non-cash costs of wear and tear or other continued descent (Prince, 2011). Nevertheless, if the rates permitted to Mr. Fletch go beyond real life then the surplus of the deduction lets Mr. Fletch the taxpayer efficiently suspend tax liabilities and this will be the advantage Mr.
fletch will enjoy. Therefore, based on the above aspects of deductions regarding negative gearing, in Mr. Fletch’ s case, he will be deducted on his wages and salaries to offset the part of the shortfall and tax breaks will only be allowable on future capital gains or losses (Prince, 2011). In the event that Mr. Fletch leased the property to his brother, the situation would have been completely different. This is because; the property would begin to realize interest gains after a certain time of its purchase. In fact, it would cease from being termed negatively geared but instead it would be termed positively geared.
It is positively geared because interest earning on the leased property begins early and would certainly go beyond the interest expenditure needed for the property. According to ID 2006/297, the extent of deductions for this case will be limited to income from leased fee and the projected interest to be earned from the property during the lease period (Prince, 2011). There would be no need to explore Mr. Fletch's other income sources for the purpose of offsetting the shortfall amount because there would be no shortfall in the first instance.
In this case, as well, the tax breaks would be very limited almost none, because according to TR 2000/2 of the Income-tax act, all gains on capital are taxable with the relevant rate depending on the number of gains realized (Prince, 2011). In investment terms, positive gearing means the rent Mr. Fletch receives-cash flow-covers all his rental expenses-cash outflow. This means apart from any initial funds Mr. Fletch may have contributed, his brother the lease is effectively financing the balance of the purchase price on his behalf.
The bonus here is that if the property is appreciating in value while the investor (Mr. Fletch) is paying off the loan, he will receive a cash inflow without using his own money to service the loan repayments and this is a plus capital growth that according to the law on property taxation is not taxable until the property is sold (Prince, 2011). The 50 percent discount may have a small effect on the rate of interest earned from the leased property.
Nonetheless, there is still no chance that income earned from the leased property would be less than the interest expenses.
Comasters Law Firm and Notary Public 2000, Australian Taxation (Residence Rules). Retrieved from: http://www.comasters.com.au/Comasters_Articles/Australian_Taxation_%28residence_rules%29%2008.11.07.pdf
Maisto, GM 2009, Residence of Companies under Tax Treaties and EC Law, IBFD: Netherlands
Jimmy B. Prince 2011, Property and Taxation: A Practical Guide to Saving Tax on Your Property Investments, Wright Books: Melbourne.