International Taxation: Residence, Source and Double Tax
Residence and source
Australia taxes residents on worldwide income and non-residents on Australian-source income. Key concepts: the residency tests (domicile, 183-day, Commonwealth superannuation, and the resides test), the source rules, and the foreign income exemption for temporary residents.
Double tax relief
Understand double tax agreements (DTAs), foreign income tax offsets (FITO), and the exemption for foreign branch profits. Know the controlled foreign company (CFC) rules and the transferor trust rules that attribute income to Australian residents.
Traps
A common trap is forgetting that a resident is taxed on foreign income even if tax is paid overseas, and that FITO is limited to the Australian tax on that income. Another is misapplying the 183-day test - the taxpayer must also not have a usual place of abode in Australia. Watch for withholding tax on dividends, interest and royalties paid to non-residents.
Worked example
A resident earns $50,000 Australian income and $10,000 foreign income on which $2,000 foreign tax was paid. Australian tax on the total is calculated, then a FITO of up to the Australian tax attributable to the foreign income is allowed. Rule of thumb: FITO cannot exceed the Australian tax on the foreign income.
Tax Planning, Anti-Avoidance and Ethics
Tax planning principles
Tax planning seeks to arrange affairs to minimise tax within the law. Key concepts: timing of income and deductions, income splitting, and the use of entities. Candidates must distinguish legitimate planning from avoidance and evasion.
Anti-avoidance rules
Understand Part IVA, the general anti-avoidance provision. The Commissioner must identify a scheme, a tax benefit, and a dominant purpose of obtaining a tax benefit. Know the specific anti-avoidance rules: thin capitalisation, transfer pricing, and the diverted profits tax. Understand the promoter penalty regime.
Ethics and professional obligations
Tax agents must comply with the Code of Professional Conduct, including honesty, integrity and independence. Know the obligations regarding false or misleading statements and the safe harbour provisions.
Traps
A common trap is assuming a transaction is legitimate simply because it is legal, or ignoring the dominant purpose test. Another is failing to recognise that Part IVA can apply to arrangements involving trusts and companies.
Rule of thumb
Ask whether the arrangement has a genuine commercial purpose beyond tax. If the dominant purpose is to obtain a tax benefit, Part IVA may apply and the Commissioner can cancel the benefit and impose penalties.