Taxation law

"Whether or not Hannah was a resident of Australia for the year ending June 2019".

Law

Advising residential status is the matter of tax residency so that it can be determined how much an individual owes as a part of their taxation and to which country (Oats, 2012). In the present case, Hannah is a designer who left Australia on 20 February 2018 and moved back to Australia in August 2019. This situation implies that for the years July 2018 to June 2019, Hannah was not residing in Australia, but this does not imply her non-residency. According to the Australian Taxation Office, governed by the Australian Government, it is an authority that is responsible for determining the tax residency of people of Australia and charging them with appropriate taxation against their incomes and gains. It must be noted that the Australian Taxation Office (ATO) has different statues than the Department of Home Affairs, which implies an individual can be an Australian resident for taxation purposes even without being an Australian citizen. This case is based on the issue of advising the residential status of Hannah so that she can pay appropriate taxes for the year ending on 31^st June 2019.

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According to ATO, an individual can be either an Australian resident for tax purposes, a temporary resident, or a foreign resident. There are various tests that must be completed for determining an individual's residency in Australia. All these three types of residents have different features, which makes every individual pay appropriate tax in some residency against the gains (Residency for tax purposes, 2019).

In the case of Australian residents for tax purposes, these are the individuals who satisfy the requirements of any residency tests. Such a person has to disclose all incomes and gains earned in Australia and worldwide, even if the individual has paid tax in a foreign country. Few exemptions are given to such residents to evade their overlapping tax. If an individual is an Australian resident for tax purposes, then it is mandatory for them to file tax returns. 

Foreign residents are the second category of individual in the eyes of Australian taxation law. These are the residents who do not satisfy the requirements of any residency tests and are declared as foreigners, which do not require them to pay any taxation to the government of Australia (Martin and Rice, 2012). Even after enjoying the tax-free status in Australia, it is essential for such residents to declare their income that they have earned in Australia or the income that is derived due to Australia, including all the capital gains. All these incomes and gains are required to be declared in the tax return.

Temporary residents are the last category of residing individual in Australia. These individuals are the people who hold temporary visas to Australia and do not have citizenship of Australia. According to the Social Security Act 1991, if neither the individual nor the spouse holds Australian citizenship, then they are temporary residents. Being a temporary resident, an individual only has to declare their income earned or derived from Australia, including the income earned from the employment performed in overseas countries, while being a temporary resident of Australia (Social Security Act 1991, 2019). 

In order to analyse the residency status of an individual, it is important to consider residency tests. According to the ATO, there are a total of four residency tests, which provide evidence about whether a residing individual is temporary, foreign, or an Australian resident for taxation purposes. These four tests are the resides tests, the domicile test, the 183-day test, and the Commonwealth superannuation fund test.

Under the resides test, an individual is considered a resident of Australia if they reside in Australia permanently or for a considerable time. If an individual has a physical presence in Australia, has an intention attached to Australia, or has a family and business in Australia, then they will be considered an Australian citizen for taxation purposes. Any individual who has assets and property in the region of Australia or has living arrangements is considered an Australian resident.

Under the requirements of the domicile test, an individual can be said to be a resident of Australia for taxation purposes if they have a domicile in Australia. If an individual has a permanent home in Australia and that place is considered their permanent domicile by law (by origin or by choice), then they satisfy the requirements of these tests (Thuronyi and Brooks, 2016). 

Another test to check the residential status of an individual in Australia is the 183-day test. According to this test, if an individual spends over half a year in Australia, they will be considered an Australian resident. Other factors that need to be satisfied in these tests are that an individual must be present for 183 days in Australia. This test is exempt for people who already have taken residence in Australia and only applies to people who are arriving in Australia.

The Commonwealth superannuation fund test applies to the individuals who are employees of the Australian Government and contribute their part of the income to the Public Sector Superannuation Scheme. In such a case, an individual and their spouse and children (under the age of 16 years) are considered Australian residents (Superannuation Act 1976, 2019).

All the above tests and types of residency are given by the Australian taxation office, which only overlaps with the statutes such as the Social Security Act 1991 and the Superannuation Act 1976.

Application

There are three kinds of residency, which are analysed above and given by the Australian taxation office. In the given case, it is required to provide advice on the residency status of Hannah, who is a clothing designer and has not resided in Australia for even a day in the year ending June 2019. As per the classes of residency, Hannah can either be an Australian resident for taxation purposes, a temporary resident, or a foreign resident. To determine the residential status of Hannah, it is required to take all four residency tests.

The first test is the residency test; according to the requirements of this test, Hannah fulfils the ordinary meaning of residency in Australia as she has a source of income arising from Australia, also has living arrangements in Sydney, Australia, and also has employment ties with her Sydney store. Although Hannah was not physically present in Australia for the taxation year of 2019,. By fulfilling all these requirements, it is evident that Hannah is an Australian resident by taxation purposes (Delfabbro and King, 2012). 

Another test that can determine Hannah's residential status is the domicile test. The permanent home of Hannah, where she lives along with her husband and child, is in Sydney, Australia, which implies that Hannah satisfies all the requirements of this test and she is eligible for becoming an Australian resident for taxation purposes.

The 183-day test is another test that can determine the residential status of Hannah. The requirements of this test state that an individual must be present for 183 days' in Australia to be an Australian resident. Hannah moved to New York, US, on 20 February 2018 from Sydney, Australia, and came back in August 2019. This implies that Hannah was not present even for a day in the year 1^st July, 2018 to 31^st June 2019. Hannah does not fulfil the requirements of these tests, which implies she is not an Australian resident.

The Commonwealth Superannuation Fund Test is another test to check Hannah's residency in which an individual has to be a government employee of the Australian Government and must contribute to the funds, such as the Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS) (Saad, 2014). Hannah is a fashion designer and owns an office and designer store in Sydney, Australia, which implies she is not a government employee and does not contribute to any scheme mentioned above. As Hannah does not fulfil the requirements of this test, she cannot be considered an Australian resident under this test. 

Conclusion

By considering the requirements provided by the Australian taxation office and its application for the case of Hannah. It has been concluded that Hannah fulfils the requirements of two residency tests, which are the residence test and the domicile test. Under the three categories of residencies in Australia, Hannah is concluded to be an Australian resident for taxation purposes as she satisfies two residencies tests, and fulfilling even one test is enough to be an Australian resident.

With this conclusion that Hannah holds an Australian residency for taxation purposes, it is also advised to Hannah that she has to declare all her income, whether gained from Australia or overseas. Hannah is advised to declare her income gained from the design store in Sydney and in New York as well, even if she has paid tax to the US government. For the taxation paid to the US government, she can get a foreign income tax offset, which will reduce her taxation amount, which is needed to be paid to the Australian government. 

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Question 2

Issue

In this case, an individual named Ben has sold his going concern to partner with his wife in a coffee shop. Ben is a car dealership business owner who is making reliable profits but now is interested in being a partner in a coffee shop business with his wife. Ben accepted an offer and sold his on-going business for a total contract price amounting to $1410000, which included the transfer of possession of the card yard site, used cars, office equipment, and goodwill. Ben also receives an amount of $50,000 for the agreement clause, which stated that Ben will not establish similar businesses in the radius of 50 km for a period of at least three years. Apart from this capital gain of 1460000,. Ben also has few personal possession assets, which include his and his wife's own house amounting to $1300000, an investment property of $4200000, a share portfolio of $ 360000, and a superannuation fund currently amounting to $440000. Apart from this, Ben also has a secured loan against his investment property amounting to $ 1500,000. Due to valuable possessions and a capital gain in the year of 2019, the total taxable amount of Ben has severely increased. This case raised an issue for Ben, stating:

"Consequences which Ben has to face due to selling his on-going business and any possible concessions which he can use to reduce his tax liability"

Law

The case of Ben falls under the section of “Sale of a going concern,” which have separate laws and statutes which are required to be considered. It must be noted that sale of a going concern is considered as capital gains (Guj, 2012). According to Australian taxation office, a going concern is a business which is currently operating and making a profit. It is important to ascertain whether the business which has been sold is a matter of “Sale of going concern” or “financial supply”, as no GST (Goods and service tax) is needed to be paid for a sale of going concern. There are various consequences which an individual has to face while selling a going concern business. These consequences are related with the legislations and statutes stated as follows:

The first statute which is required to be concerned is GST (Goods and Services Tax) Regulations 2019. According to the GSTR 2002/5 of this statute, a sale of going concern is GST-free if the sale is for an appropriate consideration, recipient is registered and both the seller and buyer have mutually agreed upon the contract of sale. If any of these requirements are not satisfied, then the sale of the business can be called a financial supply. Financial supply is a business transaction which is not GST-free and all the parties involved has to pay their share of taxation (GST (Goods and Services Tax) Regulations 2019, 2019).

Another statute which must be considered is CGT (Capital gains tax) 1985. Under this legislation, every individual has to pay taxation against any capital gain which they have acquired, unless they are exempted by the law. Capital gain tax has to paid when the asset which has been sold was acquired after September 19, 1985. CGT liability must be considered while selling an asset (CGT (Capital gains tax) 1985, 2019).

Earnouts are another capital gain consequence which has to face while selling a going concern. According to Income Tax Assessment Act 1997 (ITAA 1997) of standard and reverse earnout arrangements. An earn-out arrangement is a situation when an individual has sold its profit-making assets and mutually agreed to enjoy a part of that profit in future. TR 2007/D10 of above-mentioned law states that in earn-out arrangements, individual is not eligible to enjoy any concessions as the assets is not an active asset (Income Tax Assessment Act 1997 (ITAA 1997) of standard and reverse earn-out arrangements, 2019).  

According to Subsection 104-10(1) of the ITAA 1997, If the buy and sell agreement is subject to a condition, then the consequence arises, whether the condition is precedent to the formation of the agreement or the condition is precedent to the performance of the contract. In the first case, if the condition is precedent, then the contract will not come into existence if the condition is not fulfilled. On the other hand, in the second case, where the condition is precedent to the performance, non-fulfillment of the condition will provide right to the parties to terminate the contract (Subsection 104-10(1) of the ITAA 1997, 2019).  

This legislation can be supported by Perri v. Coolangatta Investments Pty Ltd (1982) 149 CLR 537. In the case Coolangantta Investments Pty Ltd sold a property to Perri, stating the condition that Perri must sell one of his properties in Lilli Perri. Due to the non-performance of the condition by Perri, the court decided that it was a breach of contract.

A buy-and-sell agreement raises the consequences of legal proceedings if the conditions in the agreement are not fulfilled. These consequences are also the tax consequences of capital gains that an individual has to bear due to the non-performance of the condition.

Cap election is another consequence that is levied on individuals who are involved in the sale of going concerns (Macintosh, Foerster, and McDonald, 2015). An individual has to complete the cap election of capital gains tax if they have made contributions to the super fund in the taxation assessment year from the disposal of business assets. According to the Australian taxation office, the amount of the cap that needs to be completed is $115,000.

A rollover statement is also a consequence that is faced by individuals to provide information about their super fund to the taxation authority of Australia. This statement is exempt for the individuals who have made up the proceeds of the sale of certain small business assets.

The last consequence that an individual can face in the course of the sale of ongoing business is Division 7A. This consequence is faced by the individuals whose going concern business is a company, and the individual separates its private expenses and company expenses. Such individuals have to bear consequences in which their loans and debts are treated as dividends under Division 7A of Part III of the Income Tax Assessment Act 1936. Due to this, individuals have to calculate the distributable surplus of their company and its effect on amounts of dividend (Division 7A of Part III of the Income Tax Assessment Act 1936, 2019).

Apart from the above consequences, there are a few concessions as well that can be enjoyed by individuals who sell their on-going businesses. According to the Australian taxation office, there are four types of concessions that are provided against capital gains taxation. These concessions are:

15 years' exemption; in this case, if the business owner has owned any of its business assets for 15 years or more, then those assets will be exempted from capital gain taxation.

Another concession that can be available to individuals who have sold their on-going business with goodwill is 50% active asset reduction. In this case, if the business owner has owned a business asset and has not leased the assets, then the individual will be eligible for a 50% reduction in capital gain taxation.

Retirement exemption is also a concession that allows individuals to get relief from CGT if they sell active assets of their on-going business. Rollover is the last concession that can be enjoyed if an individual acquires a replacement asset for an existing asset.

Application

In the case of Ben, who has sold his car sales business, he has to pay high capital gain taxation against the amount received from the sale of his business. Various consequences are mentioned in the above law section, some of which apply to the situation of Ben, which are GST. The used car sales business of Ben was a registered business, and both parties mutually agreed with contract terms, which means this transaction is included in the sale of an on-going business, which makes it exempt from any GST liability.

Another consequence which Ben has to suffer is CGT. Ben has to pay appropriate capital gain taxation for the amount which is received by him against the sale of his business, i.e., $1460000. The consequences of earnouts, cap election, rollover statement, and Division 7A will not be suffered by Ben as his business is a sole proprietorship and not a company, and also Ben's car sales business does not expect to gain any profit from future gains of the business.

The consequence of the buy-and-sell agreement has to be suffered by Ben, as Ben has agreed with condition precedent to the performance of the contract that Ben will not establish similar businesses in the radius of 50 km for at least three years. In the case where Ben fails to fulfil this condition, then he has to suffer with consequence of termination of the contract (Burkhauser, Hahn, and Wilkins, 2015).

Along with these consequences, few concessions which Ben can acquire are 50% active asset reduction, rollover and retirement exemption based on the nature of each asset. Ben cannot enjoy the concession of 15 years' exemption as his business was started in March 2007 and sold in April 2019, which implies that Ben cannot have a 15-year-old business asset.

All the gains at which Ben has to pay the taxation to Australian government are sorted below:

Conclusion

By considering the above-analyzed laws and applications regarding the case of Ben, it is concluded that the taxation amount for the year 2019 will be severely increased for Ben due to his capital gain from the sale of his business. Along with his conclusion, advice to Ben is that he must better watch out for the consequences of capital gain taxation and buy and sell agreements, as he has to suffer from these consequences. With this, a few concessions against the capital gain tax are also advised to Ben that can be used by him, which are 50% active asset reduction, rollover, and retirement exemption.

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