Question

Residence and Source

1.         Briefly explain the relevance of ‘residence’ and ‘source’ in determining a taxpayer’s taxation liability.

2.         What four tests are used to determine the question of an individual’s ‘residence’?

3.         How have the courts interpreted the phrase ‘permanent place of abode’?

4.         Define ‘domicile’.

5.         Briefly describe:

(a)        domicile of origin;

(b)       domicile of choice;

(c)        domicile of dependency.

6.         In broad outline, how do you determine the ‘source’ of particular income? What are the possible sources of personal exertion income?

The Taxation Equations

7.         Briefly define and give examples of:

(a)        gross income;

exempt income;

non-assessable non-exempt income;

assessable income;

allowable deductions;

taxable income;

tax offsets.

8.         What is the difference between exempt income and a taxpayer who is exempt?

9, What is the difference between exempt income and non-assessable non-exempt income?

10, What is the role of Div. 11?

Answer 1

1.

Residency is a key factor in taxation, since a taxpayer is generally liable to payment of taxes to the state where he is resident. Residence connotes the idea of remaining and settling in a place for a fairly long period. It is for this reason that residence is used to determine liability for personal income tax. The residence of an individual under the Personal Income Tax Act (PITA) has a lot of bearing on whether or not his income can be subjected to tax. By virtue of the provisions of section 2 (2) of PITA, it is evident that tax for any year of assessment may be imposed only by the state in which the individual is deemed to be resident for that year. Thus, no tax can be assessed on any individual whose residence in a state cannot be proved for a year of assessment.

Determining the source of income is of critical importance in a territorial system, as source often determines whether or not the income is taxed. Source of income is where the income is considered to arise under the relevant tax system. The manner of determining the source of income is generally dependent on the nature of income.

Example: Income from the performance of services (e.g., wages) is generally treated as arising where the services are performed. Financing income (e.g., interest, dividends) is generally treated as arising where the user of the financing resides. Income related to use of tangible property (e.g., rents) is generally treated as arising where the property is situated. Income related to use of intangible property (e.g., royalties) is generally treated as arising where the property is used. Gains on sale of realty are generally treated as arising where the property is situated.

2. Four tests which are used to determine the question of an individual’s ‘residence’

The first test to establish ultimate residency is to determine the permanent home.

Under this test, an individual would qualify as a resident of the country where he has a permanent home available to him. A permanent home in a literal sense would not mean owning a house. Any form of home, including a rented apartment or rented room which brings some degree of permanence at all times continuously can be considered as permanent home.

The second test is identifying the vital interest.

Under this test, an individual would be a resident of the country where he has retained his personal and economic ties. That is where the individual’s family, social relations, investments, occupation, political and cultural activities are closer. These circumstances need to be examined in totality. In case social and economic interests are split between two states or are undeterminable, the subsequent test applies.

The third test is determining the habitual abode.

Under this test, an individual would tie-break his residency to the country in which he has a habitual abode i.e. the place where he has stayed for a longer duration or the country he would like to stay after completion of the deputation.

The fourth test is nationality.

When the residency cannot be determined by any of the above tests, the next step is to determine an individual’s nationality. In case the individual is a national of both the countries or neither of the countries, the competent authorities of India and the other country shall endeavour to settle the question by mutual agreement.

3. A permanent place of abode is a residence (a building or structure where a person can live) that:

• you maintain, whether you own it or not; and
• that is suitable for year-round use.

It is possible for you to have more than one permanent place of abode. Additionally, a permanent place of abode generally includes a residence your spouse owns or leases.

A structure that is not suitable for year-round use and that you use only for vacations is not a permanent place of abode. Also, a barracks or any structure that does not contain facilities ordinarily found in a dwelling, such as facilities for cooking, bathing, etc., is not generally considered to be a permanent place of abode.

4. The domicile is the country which a person officially has as their permanent home, or has a substantial connection with. When you're born, you're automatically assigned to the same domicile as your parents, which is defined as your domicile of origin. If your parents were not married, typically your domicile of origin will be the same as your mother, although this may vary depending on each individual's circumstances.

Your domicile of origin then continues until you acquire a new domicile - even if you move abroad, unless you take specific action, it is unlikely that your domicile will change.

5. a) Domicile of origin: Domicile of origin means the home of an individual’s parents. It does not mean the place where the child was born when the parents were on a visit or journey. It is not a place where a child happens to be born. Domicile of origin comes into existence as soon as the child becomes an independent person by birth. If the child is born in a lawful wedlock then the child takes the father’s domicile. But if the child is illegitimate that is born out of a lawful wedlock, the child takes the mother’s domicile

b) Domicile of choice: A domicile of choice is a self-acquired domicile. It is a domicile which a person chooses to replace his/her former domicile, which may be either a domicile of origin or domicile of choice. Only a legally competent person can choose his/her domicile.

According to common law every independent person can acquire a domicile of choice by satisfying the following conditions. They are:

• s/he must have a freedom of choice;
• s/he must make an intention to change their current residence;
• s/he must change the residence to some other state; and
• s/he must have an intention to make the new residence his/her permanent residence.

However a person can abandons his/her domicile of choice in a country by satisfying the following two conditions:

• s/he must cease to reside in the country; and
• s/he must have an intention to cease their residence permanently.

c) Domicile of dependency: Domicile of dependency is solely based on the operation of law. This means that there is no intervening event in the acquisition of domicile, viz. the domicile of origin. Thus, where a child is born, directly he acquires the domicile of the appropriate parent without the intervention of any process.