Taxation: 1353707

Issues

The given situation is related to determining the taxation liability of Mr Mark Lewis. The first issue is related to determining his tax residence. It has been stated that he is employed in a luxury cruise and earning a salary of AUD $150000. However, the issue is that as a part of his work, he has to travel across the Mediterranean Sea and is also divorced. Due to this, his family consisting of his wife and daughter reside in Canada. Despite this, Mark continues to rent the farmhouse in which all belongings are his. When he is not working or visiting his children in Canada, Mark tends to spend his time in the shed located in the property. The time spent in the current year in Australia is 80 days. The next significant issue is to determine the source of income. As the cruise ship tends to travel across the Mediterranean, it becomes difficult to determine the source of income of Mr Mark. This is the place from which the income is considered to be earned. The luxury cruise company is incorporated in Cook Islands while the contract is signed in Hong Kong. However, the company which owns the cruise liner is located in Bermuda. Apart from working in the Cruise Liner, Mr Lewis is also involved in the activity of Cattle Breeding. As a part of conducting the activity, he is involved in reading about the same and attending relevant courses. Apart from it, there are also plans to expand the business by a significant extent. Despite initially making losses, the activity has turned out to be quietly profitable in the recent years.

Law

Section 6-5(2) and Section 6-10(4) of ITAA 1997 suggest that all Australian residents are required to pay taxes on the worldwide income generated by them. As a part of this legislation, any income which is earned by them in a financial year is assessable for taxation purposes. Section 6-5(3) along with Section 6-5(10) suggests that the foreign residents are required to pay taxes only on the income generated from Australian sources by them. The main aspects which are considered in determining the residency of an individual in Australia are contained in the provisions of Section 6-5(1) of ITAA 1936. This section details four sections which are relevant in determining the tax liability of an individual under scrutiny for their residence in Australia. They are namely the Ordinary Concepts test, the 183 day test, the Domicile and the Place of Abode Test and the Superannuation and Commonwealth Superannuation test. Of all these, the 183 days test is relatively simple. It states that if a person lives in Australia for more than 183 days in a given financial year, they will be considered as Australian residents for the purpose of taxation. The Ordinary concepts test states that a person who is considered to be an Australian resident under the ordinary meaning are Australian residents. These mostly includes people who are born and live in Australia. The Superannuation test states that if an individual is a member of a Superannuation fund under the guidelines of the Superannuation Act 1990, they are considered to be Australian residents. The most complex test is that of the Domicile and Place of Abode Test. Australian citizens who are away for a major part of a year tend to become liable for the Domicile Test. As per the guidelines of this test, if an individual not staying in Australia maintains a domicile in Australia, then they are a resident for taxation purposes. The important guidelines of the same are stated in TR 98/17. Other important cases include that of Applegate (1979) and Jenkins (1982). Applegate states that the residence of the individual should be determined annually. Jenkins states that the residence of the individual outside Australia need not be permanent. The intention of the taxpayer is the most important aspect. If the intention of the individual is to not continue their residence within Australia for the period for which they are not living in Australia, then they would not be considered to be taxable. Some other relevant factors in this test include the nature and purpose of visits to Australia, frequency of the visits and the duration of visits. Maintaining a residence within Australia is also an important factor. The source of income is the place from which the income is considered to be generated. The main issue considered in determining the source of income is the geographical location of the place where the services are taking place. As stated in the case of Nathan, this is a matter of fact. However, in services such as cruise ship, it is extremely difficult to determine the location where the services have been provided. The case of Picton Finance and United Aircraft state that the place of the business for whom the services are being provided is considered to be the place of providing services. The next issue is related to the exemptions available to Mr Mark Lewis. Another important guideline is that of s 23 AG (1) of ITAA 1936. According to this section, any individual who provides foreign services for a period of more than 91 days is exempt from the payment of taxes in Australia. The case of Chaudhri v. FCT (2001) 109 FCR 416; (2001) 47 ATR 126; (2001) ATC 4212 suggests that the income generated from working in a cruise ship is not the income generated from a particular foreign territory. Hence, it is not taxable in Australia. However, it has also been stated that the tax in this regard is charged under the country in which the actual company exists. Any taxes paid there are allowed as a withholding tax from the tax assessable in Australia. The income generated from a business is covered under ordinary income earned by an individual under s6-5 of ITAA 1997. Section 995-1 of ITAA 1997 states that an individual is involved in the process of generating income from a business of primary production if they develop and breed animals for the purpose of selling them. Even if the profits are not generated by them, they are considered to be conducting a business if there is a nexus between the income generated and the activity conducted. The important cases in this regard are that of Martin v FCT and Evans v FCT. As stated in Martin, the consensus regarding whether a business is being conducted or not is determined on the basis of the overall impression obtained from the activity. Even if profits are not generated, activities such as plans related to business expansion, conducting studies related to the business and remaining updated by acquiring skills are all considered as a part of conducting the business activity.

Application and Conclusion

On the basis of the above law, it can be stated that Mark Lewis does not have any intention to reside outside Australia when he is not working. Even though he is visiting Canada, he is doing so only as a visitor. The maintenance of the farmland and the property in Australia suggest that he wants to remain in Australia. The cattle rearing business is also an indicator of the same. Hence, as the activities indicate that Mr Lewis is maintaining his place of abode in Australia, he can be considered as an Australian resident for taxation purposes. The income is considered to be earned at the place where the company for whom the services are provided is located. Hence, the source of income of Mark Lewis in this regard is considered to be Bermuda. As the income from Cruise Ship is not categorised under foreign income, no tax can be charged on it in Australia. Any tax which is paid in the foreign country is exempted as a part of the withholding tax of the individual. Hence, the income cannot be taxed in the hands of Mark Lewis and is exempted. The tax is also exempted as a part of the withholding tax. Despite not earning sufficient profits, he is actively involved in generating information and in the development of the business during the particular financial year. Hence, Mr Mark Lewis can be said to be involved in the business of cattle rearing during the particular financial year. The profit of $50000 earned by him is assessable for the purpose of taxation during the given financial year. Similarly, any losses incurred are also exempted for the purpose of taxation.

Bibliography

Income Tax Assessment Act 1997 . (2020). Retrieved 1 July 2020, from https://www.legislation.gov.au/Details/C2017C00336

INCOME TAX ASSESSMENT ACT 1936 . (2020). Retrieved 1 July 2020, from http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/