Introduction
To ensure that people and businesses pay their fair share of tax, the Australian Taxation Office (ATO) is in charge. The ATO is required to be able to precisely determine the resident status of corporations formed abroad to do this. Applying this residency test has proven challenging due to the current law for assessing a company’s resident status specified in the Income Tax Assessment Act (ITAA). Companies are now allowed to select the country where they are regarded as tax residents and can take advantage of the centralized control and management test.
The Board of Taxation has proposed amending the ITAA to address these problems, including introducing a “central economic interests” test to determine a company’s residency status and more guidance on determining residency when central control and management are divided among several nations. To address the problems with the current law for assessing the resident situation of an organization incorporated overseas, this paper will examine the five deductions that the ATO has prohibited and the proposed modifications to the ITAA. This essay will analyze the deductions and the suggested changes to show that four of Christine’s five claimed deductions are valid deductions and that the suggested changes are likely to solve the problems with the current law and make it simpler to figure out the residency status of an overseas-incorporated company.
Question 1.
The ATO has rejected the following five deductions: 23,500 dollars in repairs; 1,860 dollars in travel expenditures; five thousand dollars in interest; 6,214 dollars in motor vehicle expenses; and 500 dollars in donations to the Red Cross Society.
Repairs:
Repair expenses for a rental property may be deducted under specific circumstances per Section 25-10 of the Income Tax Assessment Act of 1997 (Cth). These expenses must be paid to keep the property in its present state or return it to its previous state; they are optional to raise its value or profitability. In Christine’s situation, the $18,200 spent on repainting three of her four rental houses and acquiring an additional air conditioner for one would be regarded as repairs and so deductible (Murphy, 2019). The expense of the air conditioner must be distributed over its ten-year useful life, in any case. The 5,300 dollars in expenses left over would be deemed upgrades, which Section 25-10 deems as non-deductibles.
Travel Costs:
The Income Tax Assessment Act of 1997 (Cth), Section 8-1, states that travel expenses are typically deducted when calculating assessable income. If Christine’s $1,860 in travel expenses were incurred while generating assessable income, they would be deductible (Sakurai & Braithwaite, 2019). The travel expenses were incurred in Christine’s case because she needed to examine the investment properties, which were situated in Ballarat, Ringwood in Victoria, and the Gold Coast in Queensland. The travel expenses would therefore be deductible.
Interest:
Interest payments are generally deductible in determining assessable income under Section 8-1 of the Income Tax Assessment Act 1997 (Cth). That interest is deductible if Christine paid five thousand dollars in interest on the investment loans while obtaining or producing assessable income. In Christine’s case, the interest was incurred due to loans taken out to purchase investment properties. Therefore, the interest payments would be deductible.
Motor Vehicle Expenses:
The Income Tax Assessment Act of 1997 (Cth)’s Section 28-25 states that motor vehicle expenses are often deducted when calculating assessable income. If Christine’s $6,214 in motor vehicle expenses were incurred while earning or generating assessable income, they are deductible. For instance, Christine’s job as an environmental inspector necessitates her travelling to numerous sites in rural Victoria. Therefore, the costs associated with the vehicle would be deductible. However, because the reported percentage of 100% was too high, the ATO disallowed the expenses. Christine must determine what portion of her auto expenses are tied to her job.
Donation to the Red Cross Society:
Donations are often deductible in calculating assessable income per Section 30-15 of the Income Tax Assessment Act 1997 (Cth). If Christine gave a deductible gift recipient 500 dollars of her donation to the Red Cross Society, it would be tax deductible. In Christine’s case, the Australian Red Cross Society received the donation, which qualifies as a deductible gift. The donation would therefore be tax deductible. The ATO, however, has refused to accept the donation since 250 dollars of the total was used to purchase a ticket for a gala dinner function at Melbourne Town Hall. Christine can only deduct the 250 dollars if she can show that the gala dinner function was associated with the Red Cross Society.
Four of Christine’s five claimed deductions that the ATO rejected are valid deductions. Suppose they were expended during acquiring or producing assessable income. In that case, the 23,500 dollars in repairs, 1,860 in travel expenses, 5,000 in interest, and 6,214 dollars in motor vehicle expenses are all allowed deductions. Likewise, the 500 dollars donation is allowable if given to a recipient who qualifies as a deductible gift. The 500 dollars’ donation is the only one that cannot be deducted because $250 was used to purchase a ticket for a gala dinner function at Melbourne Town Hall.
Question 2.
Part 1
The Income Tax Assessment Act (ITAA) governs determining a corporation formed abroad’s resident status and is founded on “central management and control.” This idea, often known as a “place of effective management” test, is used to identify the location of the most critical business choices inside an organization. According to the ITAA, a corporation is deemed an Australian resident if it conducts business there and has its core management and control there (Papavasiliou & Reaiche, 2020). However, the ITAA’s definition of central control and management needs to be clarified, making it challenging to apply this residency criterion. This situation has led to companies being able to choose the jurisdiction in which they are considered to be a tax resident and manipulate the central management and control test to their advantage.
The ITAA may also be construed differently, making determining a company’s resident status challenging. For instance, central leadership and oversight could be understood differently depending on the situation. It has made it challenging for businesses to determine their resident status and for the Australian Taxation Office (ATO) to determine the tax liability of businesses. It has also generated confusion regarding the application for the residency test. Furthermore, the ITAA offers no instructions on establishing a company’s resident status when central administration and control are distributed across several nations. It has allowed businesses to alter the test to their advantage and added to the challenges of determining residence status.
Part 2.
The Board of Taxation’s suggested amendments are meant to fix problems with the existing legislation and make it simpler to determine a company’s resident status if it was formed abroad. The suggested amendments include adding a “central economic interests” test to ascertain a company’s resident status and further information on how to do so when central control and management are divided among many nations (Anesa et al., 2019). A more accurate and consistent method of identifying a company’s resident status will be made possible by implementing a “central economic interests” test. This test will focus on where a company’s economic interests are based and will take into account factors such as the company’s place of incorporation, the place of its central management and control, the location of its economic activities, the location of its critical assets and personnel, and the place where it is paying taxes.
The modifications being considered will also give more instructions on evaluating a company’s resident status when central control and management are divided among many nations. As a result, it will be harder for businesses to cheat the test and more straightforward for the ATO to determine whether or not they owe taxes. The proposed revisions should address the problems with the existing legislation and make it simpler to assess the resident status of an overseas-incorporated corporation. It will guarantee that businesses are paying the appropriate taxes and limit their ability to do so.
Conclusion
Christine sought five deductions, but the ATO rejected five, yet, four are legitimate deductions. The existing legal framework for assessing a company’s resident status formed abroad is based on “central management and control.” This idea, often known as a “place of effective management” test, is used to identify the location of the most important business choices inside an organization. The Board of Taxation’s suggested amendments are meant to fix problems with the existing legislation and make it simpler to determine a company’s resident status if it was formed abroad. The proposed revisions are therefore expected to address the problems with the existing legislation and make it simpler to ascertain the resident status of an overseas-incorporated corporation. The revisions will guarantee that businesses pay their fair share of taxes and limit their ability to do so.
References
Anesa, M., Gillespie, N., Spee, A. P., & Sadiq, K. (2019). The legitimation of corporate tax minimization. Accounting, Organizations and Society, 75, 17-39.
Murphy, K. (2019). Moving towards a more effective model of regulatory enforcement in the Australian Taxation Office. Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The Australian National University.
Papavasiliou, S., & Reaiche, C. (2020). A Digital Systems Approach Across eGovernment Services: The Australian Taxation Office and The Health Environment. In Proceeding of the Fourteenth International Conference on Digital Society (pp. 34-39).
Sakurai, Y., & Braithwaite, V. (2019). Taxpayers’ perceptions of the ideal tax adviser: Playing safe or saving dollars? Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The Australian National University.
write