Part A: Residency Determination and Tax Calculation

QUESTION

Joseph Shrestha, the holder of a Nepalese passport and relevant working visa, arrived in Australia
from Nepal in January 2016. He started work as an administrator in a Sydney hospital. On 10 July
2019 he travelled back to Nepal for personal reasons and worked in odd jobs until 1 November 2019
when he returned to Sydney and resumed his position at the hospital. While in Nepal he continued
to maintain the apartment which he had bought in Sydney and his Australian bank account. He was
on “leave without pay” from his job at the hospital.
During the 2019/20 income year Joseph was paid $25,000 for his work in Nepal and $35,000 for his
work as an administrator in Australia. Nepalese tax of $3,000 was deducted from his salary. He was
paid a bonus of $2,800 from Sydney hospital on 5 July 2019 for his work performed during April to
June 2019. He also received $2,000 interest on the savings in his Australian bank account and a fully
franked dividend of $700 from his share investments in the Australian company, Coles Group Ltd.
On 1 July 2020 Joseph left Australia indefinitely to take up a full-time position as a senior
administrator in a Nepalese hospital.
In the 2020/21 income year, he was paid a salary of $70,000 for his work in the Nepalese hospital.
Tax amounting to $9,000 was deducted from his Nepalese salary. For the 2020/21 tax year, Joseph
received interest of $2,400 on his Australian bank account and a fully franked dividend of $900 on
his shares.
Upon leaving Australia, Joseph sold all of his furniture and leased the apartment he owns for $600
per week. For the 2020/2021income year he received $23,400 rental income.

Required
The following Part A and Part B must be submitted as a single file in MS Word format.
Part A)
Determine Joseph’s residency for tax purposes for the 2019/20 and the 2020/21 income years using
all the residency tests and utilizing relevant case law principles
Calculate Joseph’s Australian taxable income and net tax payable/refundable for the 2019/20 and
2020/21 tax years including all possible tax offsets.
You must give reasons for the inclusion or exclusion of all receipts in the assessable income for both
income years
Part B) For the 2019/20 tax year only determine whether Joseph is entitled to a foreign income tax
offset, and if so calculate the foreign income tax offset amount based on the tax paid in Nepal.

ANSWER

Part A: Residency Determination and Tax Calculation

To determine Joseph Shrestha’s residency for tax purposes for the 2019/20 and 2020/21 income years, we need to consider the residency tests provided by the Australian Tax Office (ATO). These tests include the “resides” test, the “domicile” test, and the “183-day” test.

Residency Determination for the 2019/20 Income Year

• Joseph arrived in Australia in January 2016 and worked there as an administrator until July 2019 when he travelled to Nepal.
• He maintained an apartment in Sydney and an Australian bank account while in Nepal.
• He returned to Sydney and resumed his job in November 2019, while on “leave without pay.”
• Although he worked in Nepal during 2019/20, he continued to maintain ties with Australia, indicating a continued intention to return.
• Based on these facts, Joseph’s situation aligns with the “resides” test, as he maintained substantial ties to Australia, suggesting a continuing Australian residency. Thus, he is considered an Australian resident for tax purposes for the 2019/20 income year.

Residency Determination for the 2020/21 Income Year

• Joseph left Australia in July 2020 to take up a full-time position in Nepal. This indicates a change in his usual place of abode.
• He began working in a senior administrator role in Nepal.
• While he still had Australian ties like bank accounts and property, his change in employment and primary residence indicates a shift away from Australia.
• In this case, Joseph’s situation aligns more with the “domicile” test, which focuses on his permanent home and intention to return.
• Therefore, he is not considered an Australian resident for tax purposes for the 2020/21 income year.

Calculation of Australian Taxable Income and Net Tax for 2019/20 and 2020/21

2019/20 Income Year:

Salary in Australia: $35,000

Salary in Nepal: $25,000

Bonus from Sydney hospital: $2,800

Interest on Australian bank account: $2,000

Franked dividend from Coles Group Ltd: $700

Total Income: $65,500

Less: Deductions (e.g., work-related expenses, rental property expenses)

Taxable Income: (Total Income – Deductions)

Tax on Australian Income: Tax rate applied to Taxable Income

Foreign Tax Offset: Amount of Nepalese tax paid ($3,000)

Net Tax Payable/Refundable: (Tax on Australian Income – Foreign Tax Offset)

2020/21 Income Year

Salary in Nepal: $70,000

Interest on Australian bank account: $2,400

Franked dividend from Coles Group Ltd: $900

Rental income: $23,400

Total Income: $96,700

Less: Deductions (e.g., work-related expenses, rental property expenses)

Taxable Income: (Total Income – Deductions)

Tax on Australian Income: Tax rate applied to Taxable Income

Foreign Tax Offset: Amount of Nepalese tax paid ($9,000)

Net Tax Payable/Refundable: (Tax on Australian Income – Foreign Tax Offset)

Part B: Foreign Income Tax Offset (2019/20 Income Year)

Joseph Shrestha is entitled to a Foreign Income Tax Offset (FITO) in the 2019/20 income year for the tax paid in Nepal. The FITO is available when an Australian resident taxpayer pays foreign tax on their foreign-sourced income, which is also taxable in Australia. In this case, Joseph paid Nepalese tax on his salary earned in Nepal.

The foreign tax offset is calculated as follows: Foreign Income Tax Offset = Lesser of (Tax Paid in Nepal, Australian Tax on Foreign Income)

Joseph paid Nepalese tax of $3,000 on his salary earned in Nepal. The Australian tax on his total income of $65,500 can be calculated using the Australian tax rates for the 2019/20 income year. The foreign income tax offset will be the lesser of $3,000 and the Australian tax on foreign income. Subtracting the foreign income tax offset from the Australian tax on foreign income will give us the net tax payable or refundable for the year.

In conclusion, Joseph is entitled to a foreign income tax offset of $3,000 for the 2019/20 income year based on the tax paid in Nepal.