Business Taxation Assignment

Question 1: Residency for tax purpose Relevant Issue: Are royalties that are: 1) from granting of copyright derived by a non-resident (Singapore resident) and; 2) sourced in Australia assessable income under ITAA1997 and ITAA1936? Law References: 1 .Income Tax Assessment Act 1936: Subsection 6(C) 2. Income Tax Assessment Act 1997: Section 6-5 Section 6-10 Section 15-20 Subsection 995-1(1) 3. International Tax Agreements Act 1953 Subsection 4(1) Subsection 17A (4) Section 7 Schedule 5 Schedule 5 Articles 10(3) Schedule 5 Article 16A Schedule 5A Schedule 5A Article 10(1) 4. Taxation Ruling IT2660 5. ATO ID 2006/282 6. ATO NO 2007/4030 7. [2.290] in Principles of Taxation Law
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Application: My client is clearly a non-resident in this case, as he does not reside in Australia in the ordinary sense of the word, he is writing books in Singapore, and he does not fall within any of the three specific statutory inclusions to the definition of “Resident”. As a non-resident, my client will only be taxed on income from Australian sources under s6-5(3) or s6-10(5) of ITAA 19972. Although s23AG of ITAA 19972, which refers to some exemptions of income earned overseas, is not relevant here because it only applies to residents, we still have to address an important issue- whether the income was sourced in Australia or overseas.
My client is a writer who owns the copyright over the book which was published in Australia under a contract, and received payments based on numbers of units of books sold. Thus the amount paid for Australian use of book copyright will definitely fall within the definition of “royalty” by Section 6(1) ITAA 19361 “an amount paid or credited…whether is periodical or not…as consideration for (a) the use of…any copyright, patent… ”. Generally, a royalty is ordinary income under s6-5 2 , otherwise Section 15-20 of ITAA 1997 2 provides that the amount received as ordinary meaning of “royalty” is included in assessable income as statutory income. The main test under the common law principle to decide the source of royalties is depending on the location of the industrial or intellectual property from which the royalty flows. However, where a royalty is outgoing (paid by an Australian business to a foreign entity, i.e. this case), s6C of ITAA 19361 deems the royalty to have an Australian source7. Note that my client would not receive any credit for the Singapore tax paid because the foreign tax credit system only applies to residents and to foreign source income.
The applicable tax treaty between Australia and Singapore (The Singapore agreement)
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should also be considered provided in the International Tax Agreement Act 1953(Agreement Act)3. Section 7 of the Agreement Act authorizes the Singapore Agreement force of law in Australia and provided by Article 10(2) of the Singapore Agreement, ? 4 the Australian tax on royalties derived by a Singapore resident who is beneficially entitled to the royalties shall not exceed 10 percent of the gross amount of the royalties.? However, as both Singapore agreement and Agreement Act (Schedules 5 and 5A) highlight the necessity of determining whether the excluded royalty paid to taxpayer is taxable in Australia, article 10(3) of Singapore Agreement 3 has a much narrower definition of the term „royalties? that „payments or credit, whether periodical or not and however described or computed, to the extent to which they are received as consideration for (a) the use of, or the right to use, any (i) copyright (other than literacy, dramatic, musical or artistic copyright)…?3 Therefore, as in this case, my client?s a literacy copyright payment will be excluded by this more restricted scope of “royalty” under article 10(3) of Singapore Agreement, rather than included by s6(1) of the ITAA19361. Consequently, provided by Subsection 17A(4) of Agreements Act, the relevant provisions dealing with liability for withholding tax will not apply to the Singapore Agreement excluded royalties but contained in ITAA19361. Conclusion:
With regard to my client, a Singapore and non-resident of Australia for income tax purposes, who is a writer owning the copyright over the book and derived income from Australia, his “royalties” defined by subsection 6(1) of the ITAA 19361 and paragraph 10 of IT2660 is included in assessable income under section 15-20 of the ITAA 1997. Considering that he would not receive any credit for Singapore tax paid, the full amount of $25,000 will form part of the client?s assessable income in Australia for current tax year.
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Question 2: Assessable Income Issue: Are the regular payments received by the referee from QRL Officials Association (QRLO)for officiating at weekend are assessable income or not? Law References: Class Ruling 8.CR 2007/24(ATO) 9.Income Tax Act 1997: Section 6-5 Section 6-10 Section 15-2 10. FCT v S tone Application: Since my client only received one kind of payments from QRLD without any reimbursement for any travel costs or other expenses, the only regular payments with a total of $3000 for officiating at weekend fixtures in current tax year need to be discussed about assessability here. s6-1(1) of ITAA 19979 provides that assessable income consists of ordinary income and statutory income. No matter whether the client is an Australian resident or not, that $3000 is an amount of money derived from providing service in Australia, thereby, resident or not will not distribute a difference to determine whether the payments are assessable income.
On one hand, the payments are not ordinary income defined under s6-5 of ITAA19979. Article 31 of CR 2007/24(ATO) shows the principles the courts have established in
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determining whether an amount is ordinary income: „ ???what receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as a statute dictates otherwise; b) whether the payment received is income depends upon a close examination of all relevant circumstances; and c) whether the payment received is income is an objective test. „8 As given in this case, although the client received regular payments, which may be considered as a characteristic of ordinary income, he is more likely to be recognized as carrying on a hobby or a pastime rather than those professional sportspersons who are carrying on a business for income producing, because he officiated only at weekend, like one or twice a week, and his year receiving from this activity is only $3000, neither likely to be salaries for professionals who usually receive regular and large payments for sporting activities, nor a significant amount outstanding enough to prove that the client has turned his sporting ability to account for money with payments of commercial nature as FCT v S tone9. Another indicator may be no reimbursement for travel expenses and the match fee ranged from $20-200, is not intended to, nor do they usually, cover expenses, because the stated purpose of payments from the not-for- profit association QRLO are aimed to encourage members to participate local sport activities rather than profit driven. Therefore, the payments my clients received during pursuit of pastime or hobby is not assessable income in ordinary concept.
On the other hand, the payments are not statutory income defined under s6-10 of ITAA1997 1 . S15-2 provides a list of statutory income provisions and includes the reference to s15-2: „your assessable income includes the value to you of all allowances, gratuities, compensations, benefits, bonuses and premiums provided to you in respect of,
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or…any employment of or services rendered by you …?8 However, league referees are not regarded as employees, nor the payments received „in respect of? services rendered. Thereby, the payments are not assessable under s15-2. Conclusion: The payments with $3000 received by referee from QRL as a personal pursuit of pastime or hobby are not assessable income under either section 6-5 or section 6-10 of ITAA 1997.
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Question 3: Derivation of income Issue: How to determine the timing of professional fee being derived if the work is terminated prematurely on an accruals basis? Law References: 10. Section 6-5(4) ITAA1997 11. Taxation Ruling TR 93/11 12. BHP Billition Petroleum v FCT Application: In this case, my client is a solicitor who conducts a small practice and use assessable income on an accrual basis, and had a legal remedy (quantum meruit) to recover monies for work already done. Section 6-5(4)1997 ITAA10 provided a basic method to determine when income is derived: „In working out whether you have derived an amount of ordinary income, and (if so)when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.? Taxation Ruling TR 93/1111 provides a detailed consideration of fees “derived” under s25(1)(Income according to ordinary concepts) of ITAA19361 by professional persons whose income is assessable on an accruals basis. According to article (a)-6 of the Ruling, „if the professional work is terminated prematurely(i.e. because of the dismissal or resignation of the professional person), he or she may derive the fee income(being the amount of the quantum meruit claim) in the income year in which the professional work ended early.? 11
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This case is quite similar to the example 4 illustrated by TR93/1111 , my client is a professional person whose income is assessable on an accruals basis. In September 2007, she had a contract (contracts or agreements for professional work take many forms. They can be either in writing or not) with the other party to do the legal work for consideration of fee $8000 plus disbursements, due on completion of the work. Thus, under this contract, a recoverable debt may be created when the work is wholly completed. If this happened, the fee income is derived in the income year when work is wholly completed. However, in November 2007, the other party broke the contract and terminated the work prematurely, while my client got a quantum meruit to recover monies for work already done in August 2008, therefore, in theses circumstances, she is considered to derived the fee income ( the quantum meruit claim) in 1 July 2007-30 June 2008 taxation year in which her work ended in fact. It is a little confusing with case BHP Billition Petroleum v FCT 12 where it is held that the amount of income is derived when the dispute has been resolved, so in this case, the taxation year would be 1 July 2007-30 June 2008 during which the amount of $2500 remedy was settled by court. However, if considering carefully, you will find the BHP case is quite different due to the fact that it is the amount of money of good sold that is subject to a dispute, while our client in this question who provides professional services does not really have a dispute with amount of money for consideration, so it should not let remedy time which settled amount problem determine when income is derived. In certain sense, we can say in fact our client is having a “dispute” of when the work should be terminated so that the tax year of derivation of income should depend on the moment when work is agreed to end by both, namely when our client was refused to be paid. Conclusion:
In conclusion, the taxation year in which my client derives the fee income from a quantum meruit is the taxation year between 1 July, 2007-30 June 2008, during which her service is terminated.