Commissioner of Taxation v Pike [2020]

Introduction. 2

Case facts and legal issues. 2

Case judgement 4

Applicable law and legal concepts. 5

Residency tests. 6

Double taxation agreement 7

Analysis of the case and Judgement 7

Conclusion. 10

References. 11

 

Introduction

This report is a case analysis for the case “Commissioner of Taxation v Pike [2020] FCAFC 158”. In this report, a detailed analysis of the case will be done based on the case facts and the Judgement. Australian taxation laws will be referred to while analysing this case, such as the Income Tax Assessment Act 1936 or ITAA, 1936. This report will highlight the legal issues involved in the case and the case’s facts based on Australian law. The case judgement will also be discussed in detail. The legal concepts involved and applicable law will  referred to throughout the analysis. I will also give my reflections about the decisions given by the judges of the law. Secondary sources will  be directed to get more clarity about the legal issues involved and the decisions given by the judges. This report will help me to make a thoughtful analysis of the case facts which will improve my understanding of the taxation laws and rules(Federal Court Of Australia, 2019).

Case facts and legal issues

This case is between the taxation Commissioner of Australia and BRADLEY TITUS PIKE. The judges involved in this case are Davies, White and Steward JJ. The Judgement on this case was provided by them on 22 September 2020. The whole issue revolves around understanding the residential status of Mr Pike for taxation in Australia according to subsection 6(1) of ITAA,1936. This  case uses  a tiebreaker test to understand the double taxation agreement between the country Thailand and Australia to check if Mr Pike is eligible to pay tax on its income both in Australia and Thailand or only in one country.

In this case, Mr Pike is a person born and brought up in Zimbabwe. He got married to Ms Thornicroft and also got two sons born in Zimbabwe. Later in 2005,his wife got a work opportunity in Australia because his wife and sons went to Australia in 2005. After completing some formalities related to transferring  assets and employment contract, Mr Pike also joined his wife and son in Australia. From  2005 to 2014, both of them rented three houses, purchased household furniture and appliances, and also purchased vehicles for commuting within Australia. Mr Pike could not get employment in Australia because of which he grabbed an opportunity to work in Thailand for eight years. Within this time period, Mr Pike kept on travelling from Thailand to Australia, but most of the time was spent by him in Thailand because of work responsibilities. He also created a personal relationship with friends and kept on visiting theclubs for playing golf and other recreational activities on a regular basis while staying in Thailand. He got his salary bank account opened in Thailand and also live there in the rented apartments and bought household appliances and furniture.  In the year 2010, they bought land for their sons which they sold in 2013 without constructing the house. In this year, his wife and sons also got their Australian citizenship, and Mr Pike received the citizenship in 2014. From 2014 to 2016, Mr Pike kept on switching jobs in Tanzania and Dubai.Throughout the time of work in Thailand, Mr Pike filed income tax returns on the individual income earned by him in Thailand because he was getting salary in Thailand at the bank account opened in Thailand, but he never lodged any income tax returns in Australia within this time period.The legal issues involved in this case and identified by the judicial officers are:

  • To identify is Mr Pike is a resident of Australia according to subsection 6(1) of the Australian taxation law, ITAA 1936 or not from the year 2009 to 2016.
  • Apply a tiebreaker test according to the Art 4(3) to identify the existence of double taxation agreement between Australia and Thailand from the year 2009 to 2014.

Case judgement

The Judgement of the judges is based on the ordinary test, domicile test and the double taxation agreement between the Australian and Thailand. Taxation ruling TR 98/17 is applicable to Pike to test the residential status of Mr Pike in Australia for taxation purpose. The ordinary test considers the ordinary meaning of the resident or residing in Australia for the purpose of testing the residential status of the individual.

  • Judgement based on the ordinary test: According to the ordinary test, Mr Pike was the resident of Australia from the year 2009 to 2016, and it was held by the first judge to which every other judge agreed. The ordinary test is based on the fact that when Mr Pike visited Australia, his intention was to stay in Australia and whenever he arrives in Australia, he considers he has a home in Australia where his wife and sons reside. Mr Pike has always returned to Australia as a member of the family who has a house in Australia and not as a visitor(Australian Government, 2020).
  • Judgement based on Domicile test:According to the Domicile test, the judges concluded that Mr Pike was resident of Australia from April 2014, onwards. Domicile test is based on the domicile in Australia. Permanent abode place is decided under the domicile test. In this case, Mr Pike has kept on moving from Thailand to Australia till 2014 and most of the time was spent by him in Thailand because of which till 2014, he could not satisfy the condition of having domicile in Australia which is permanent within this time period.Domicile is decided by the origin, which means by birth, domicile by choice where the person has to have a permanent residence within the lawful limits in the country and domicile by the law. Mr Pike was not falling in any of the categories by the judges because of which domicile test could not be considered till 2014 for establishing the residential status of Mr Pike. Also, an important point which was considered by the judges in the case of Mr Pike was the citizenship status. He received the citizenship of Australia in 2014 and from this year onwards, he decided to have a permanent domicile in Australia(ATO, 2020).
  • Judgement based on DTA:For the Double taxation agreement rule (DTA), personal relations and economic relations are considered. Mr Pike had closer personal relations with his wife and sons who were residing in Australia, but he also built many relations in Thailand with his friends and colleagues in Thailand. Economic relationsare based in Thailand because he was working in Thailand. Also, DTA gives more relevance to the economic relationship than the personal relations and accordingly, he was held resident only for Thailand for the double taxation agreement purpose. Also, one common thing was, he neither had a permanent domicile in Australia nor in Thailand, and the only dominating aspect that was considered by the judges was related to the economic relations.

 

Applicable law and legal concepts

The law applicable in this case which was considered to apply the ordinary test and domicile test is Income Tax Assessment Act, 1936(ITAA, 1936), Income Tax Assessment Act, 1997 (ITAA,1997) and for checking the Double taxation agreement between the Australia and Thailand, Income Tax (international agreements) amendment bill 1989 is applicable. According to section 995-1 of the ITAA 1997 act defines the Australian resident as per ITAA, 1936. This is a treaty between both countries regarding double taxation to protect an individual from paying double taxation. This is an avoidance agreement for the double taxation between Thailand and Australia. The residency test is used to check if a person is eligible to pay tax in Australia on income earned or not. If a person resides in Australia permanently, that person has to pay tax on the income earned to the Australian government and is considered as resident of Australia for taxation purpose. Anyone who will be considered as resident of Australia for taxation purpose will have to pay tax to the Australian government. For the other individuals who keep on moving from one place to another, residency tests are used.

Residency tests

Section 6(1) of ITAA, 1936 discusses residency tests. Ordinary concept test, Domicile test, 183 tests, the commonwealth superannuation test. Ordinary concept test is based on the common law, and the other three tests are based on the statutory law. An individual who satisfies one or more test will be considered as resident of the country for taxation purpose.

  • Ordinary concept test:The ordinary concept test considers some factors in deciding the residential status of the individual. It takes into account the literal meaning of the residence to decide the residential status. Some factors that are considered in this case are the physical presence of the individual in Australia, the intention of the stay in Australia, Social arrangements, family and relations, business and employment agreements, etc. TR 98/17 is used in this case.
  • Domicile test:This considers the permanent residence in the form of the house in Australia. Anyone who has a permanent house in Australia will be considered as a resident as per the domicile test of the act. It can be by choice, by origin or by law. Intention and purpose of stay are also considered in the case of applying the domicile test for the people living in Australia by choice(Federal Register of Legislation, 1936).
  • 183-day test: According to this test, if one person stays in Australia for at least 183 days or more than this then the test is successful, and the person is considered the resident for the taxation purpose. The person need not remain in Australia continuously for this test, and the stay can be in breaks.
  • Commonwealth superannuation test:This is applicable to the government employees of Australia who are working for the Australian post outside the country or who are having CSS or PSS scheme.

 

Double taxation agreement

According to International Tax Agreements Act 1953, agreements between Australia and other countries take place from time to time to avoid the double taxation and to protect the Australian residents from paying taxes twice on the same income earned by them. The agreement to avoid double taxation with Thailand came into existence in the year 1989. This agreement was created to avoid double taxation and to prevent the text evasion. There are tiebreaker provisions involved in the case of DTA’s such as habitual Abode, Permanent home, Personal and economic relations while deciding if the person is avoided from double taxation or not(The Treasury, 2020).

 

Analysis of the case and Judgement

The thoughtful analysis of the case and the Judgement shows that the commissioner did not contend about some decisions made by the judges related to the case. The commissioner appealed in this case regarding the DTA in favour of Thailand on the basis of personal and economic relationships and for the domicile test. Even Mr Pike also appeal for the ordinary concept test and domiciled test. Both the appeals made by the commissioner and the cross-appeal made by Mr Pike was dismissed by the judges.

  • Analysis of Judgement regarding DTA: In my opinion, dismissing the Commissioner appeal about the double taxation agreement in which judges held that Mr Pike president of Thailand bases of the closer economic relationships is right because according to the taxation agreement between Thailand and Australia, the income has to be generally taxed in the recipient country where the person is providing professional services and receiving the income. Also, so this agreement gives more importance to the economic relationships than the personal relationships, and it was clear in the case of Mr Pike economic relationships were more closer to Thailand because this was the country where he was working and earning income.
  • 183 days rule: This rule is not applicable to Mr Pike because the data shows that from the year 2008 to 2017, Mr Pike has not spent 183 days in any of the years.

 

  • Analysis of Judgement regarding Ordinary concept test: The Judgement for the case of ordinary concept test where the judges held Mr Pike the President of Australia because Mr Pike had a family in Australia whom he was visiting from time to time from Thailand and also, he was treating the home of Australia as his own home and was not visiting as a guest. The intention is an important factor in this to consider because when MR. Pike came in Australia in the year 2005, and his intention was to reside in Australia because in Zimbabwe there was a slowdown and opportunities were not much. After coming to Australia, could not find any job because of which he has to move to Thailand for the professional purpose. They also bought a piece of land in Australia to built their house, but they sold this piece of land constructing the house within some time. Family is also an important factor to consider because, at this time, Mr Pike and his wife tried to settle in Australia and get a permanent residence for the purpose of their sons. All these factors are sufficient to dismiss the cross-appeal of Mr Pike on the ordinary concepts test.

In the case “Joachim v FCT (2002) 50 ATR 1072”, it is clear that a person who is visiting Australia to meet it is family and not visiting as a visitor will be considered as resident of Australia for taxation purpose according to the ordinary concept(Australian Govt., 2002).

 

  • Analysis of Judgement regarding domicile test: The Judgement related to the domicile test also seemed justified to me and dismissing the appeals and cross-appeals made by, and Mr Pike is a correct step by the judges. Mr Pike did not have a permanent resident in Australia throughout the year because he was having rented an apartment both in Australia and Thailand. In Australia, his wife and sons were residing and in Thailand, he was spending most of the time. His permanent domicile was not in Australia for these years because he was just visiting Australia on important occasions to catch up with his family. From the year 2014 onwards, he received his citizenship in Australia, which means he is a permanent resident of Australia and also, he left his job from Thailand.

The case “FCT v Applegate (1979)” can be referred to in the school. The taxpayer, in this case, was working in Vanuatu, and he also left Australia, where he was working as a scholar side with his wife without leaving any assets there. However, the intention of the employer was sent to Australia for which no specific time period was decided. The judges held that the taxpayer is not a resident of Australia because his permanent Abode is outside Australia(Australian Taxation Office, 2020).

 

Conclusion

The case analysis is based on checking the residential status according to section 6(1) of ITAA, 1936 and considering the double taxation treaties. The Judgement, in this case, held that Mr Pike is resident of Australia from the year 2008 to 2014 on the basis of ordinary concept test and after the year 2014, domicile test is outside applicable. It means he has to lodge an income tax return in Australia because he satisfied one of the residency tests. However, the double taxation agreement saved him from paying taxes twice on the same income.

 

References

ATO, 2020. Residency – the domicile test. [Online] Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Residency/Residency—the-domicile-test/.

Australian Government, 2020. Residency – the resides test. [Online] Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Residency/Residency—the-resides-test/.

Australian Govt., 2002. Residence Individuals – -Joachim v FCT (2002) 50 ATR 1072.

Australian Taxation Office, 2020. F.C. of T. v. Applegate (79 ATC 4307; (1979) 9 ATR 899). [Online] Available at: https://www.ato.gov.au/law/view/document?docid=ITR/IT2650/NAT/ATO/00001.

Federal Court Of Australia, 2019. Commissioner of Taxation v Pike [2020] FCAFC 158.

Federal Register of Legislation, 1936. Income Tax Assessment Act 1936. [Online] Available at: https://www.legislation.gov.au/Details/C2020C00166.

The Treasury, 2020. Income Tax Treaties. [Online] Available at: https://treasury.gov.au/tax-treaties/income-tax-treaties.