| Fairness, alongside certainty and simplicity, is a posited | | | | residence taxation who do not maintain a substantial |
| ideal of a tax system. But fairness to whom? Both | | | | connection with Australian society. |
| residents and foreigners must pay tax. Normatively | | | | Further, if a resident takes foreign employment for 91 |
| speaking, it is accepted that residents face more | | | | days or more, that income will be excluded from |
| substantial tax burdens. But how is residence | | | | residence taxation and only investment income will be |
| determined? By fact or degree or perhaps by | | | | taxable (s23AG ITAA36). It might be questioned, |
| citizenship? Further, how do fairness principles apply to | | | | however, whether a fixed test of days is really fair. |
| different types of taxpayers, e.g. corporations? Both | | | | Arbitrariness acknowledged, a fixed standard is certain. |
| Australia and the United States have developed | | | | In addition, alternative tests allow the ATO to look to |
| different legislative answers to some of these | | | | the substance of a personal arrangement (see TR98 |
| questions. They will be considered below. | | | | 17 examples). |
| Fairness, it is said, is best evidenced by the ‘ability | | | | For foreigners, the US adopts a "substantial presence" |
| to pay' concept which says people should contribute to | | | | test for applying residence taxation. A sufficient |
| their society according to their means (Shay). | | | | presence is established if a person is physically |
| According to the various philosophical rationales for this | | | | present in the US for a total 183 days over a specified |
| (Smith, Kant, Rawls), it is accepted that residents carry | | | | period (current year, plus last two years) (§ |
| a burden to pay tax in connection with their status as | | | | 7701(b)(3)). Exemptions apply for students and |
| members of the community. Liability is determined by | | | | medically sick persons (§ 7701(b)(3)(D),(5)(C)). |
| material ability or "well-being", judged by reference to | | | | Citizens, however, are taxed regardless of a |
| income as equitably ascertained (Shay, 306). | | | | "substantial presence". A US citizen will pay tax on |
| For example, this means that foreign income (in | | | | foreign income, regardless of whether (s)he treats the |
| addition to domestic income) must be assessed in | | | | US as home or permanently resides outside the US. A |
| calculating a resident's ability to pay (Shay et al, 310-12). | | | | US citizen could remain abroad for 30 years and |
| Fleming posits the scenario of ‘A' and ‘B' (both | | | | never return, yet still be subject to taxation as a |
| US residents) each earning $8,000 of domestic income. | | | | resident (note however a US$90,000 foreign-income |
| A has no foreign income. However, assume that B | | | | threshold). |
| has $10million in foreign income. Ergo A and B are not | | | | A fairness objection is persuasively put: citizens who |
| comparable taxpayers. Clearly B has a greater ability | | | | have no substantial connection to the taxing society |
| to pay and must be taxed on that ability – if A and | | | | should not be taxed as members of that society. It |
| B are to be treated fairly relative to each other. | | | | might be argued that citizenship residence is imposed |
| Another demonstrative implication of the fairness | | | | (a) because of past connection to the society (i.e. |
| principle applies to corporate taxpayers. Arguably | | | | liability for past benefits) or (b) on an assumption of the |
| corporate status changes considerations of the | | | | continuing availability of benefits associated with |
| ‘ability to pay' and lofty obligations implied by | | | | citizenship. Either way, it is argued the deemed |
| societal membership. | | | | association is voluntary. An estranged citizen can |
| But regardless of those wider arguments, a simple | | | | simply renounce. |
| answer can be rendered in equity – corporations | | | | With respect to corporate residents, Australian and US |
| must pay according to the ability to pay in the same | | | | regulation is similar. Residence is determined by place |
| terms a natural person might – because, if they did | | | | of incorporation, management or where voting |
| not, individuals would simply use corporate structures | | | | shareholder power is located. Inevitably corporate |
| to manipulate their tax obligations (e.g. deferral | | | | residence is more easily manipulated than personal |
| measures). Given this those better able to arrange | | | | residence. Typically a resident corporation will |
| their tax affairs would pay less tax than those less | | | | incorporate a foreign resident subsidiary elsewhere. |
| able to arrange their tax affairs. | | | | This can achieve significant tax deferral benefits in low |
| Another contested aspect of fairness relates to when | | | | tax jurisdictions (Fleming, Time Value). Arguably |
| a individual or company should be treated as being a | | | | fairness relative to personal taxation is sacrificed here |
| resident of a jurisdiction. Residence is important | | | | unless tax reform is achieved. |
| because different tax obligations accrue to residents | | | | One avenue is to tax shareholders directly (ignoring the |
| versus non-residents. Critically, residence-based | | | | separate corporate entity) as residents of their |
| taxation allows a country to tax the foreign income of | | | | respective countries. In this way deferral benefits |
| an individual or corporation. | | | | would be removed and individuals relative to |
| Various statutory tests determine whether an individual | | | | corporations would be taxed similarly. In summary, |
| is an Australian resident (ITAA s 6(1)). Specific | | | | fairness requires that resident taxpayers should be |
| thresholds aside, a person is an Australian resident of | | | | treated alike. Different hooks upon which residence |
| they are a resident by ordinary concepts, their place of | | | | taxation is imposed across jurisdictions raise |
| domicile is in Australia (not elsewhere) or they meet | | | | comparative fairness questions. |
| the 183 day test (TR98/17). A person will cease being | | | | On balance, inflexible rules (re US citizenship test) |
| an Australian resident if they (a) establish a domicile | | | | seem less fair. Fairness also requires corporate and |
| elsewhere, (b) cease to be a resident by ordinary | | | | individual taxpayers be taxed on a comparable basis. It |
| concepts or (c) leave Australia for more 2 years | | | | is evident that present regimes leave fairness still |
| (TD2650). Arguably Australia attempts to give weight | | | | wanting in some aspects. |
| to the fairness rationale by excluding those from | | | | |