Jenny is 35 years of age, single and is a professional barber. She was born in Australia; but she often travels overseas for extended periods for work purposes. Jenny recently returned to live in Australia in the year of 1 May 2012 after living overseas for the past 14 months. Throughout that time, Jenny travelled to different cities throughout Europe to showcase her hairdressing styling and methods. Jenny stayed at various short-term accommodation facilities.
On 1 April 2011 Jenny opened a German bank account and rented a post office box in Germany to that she redirected some of her business mail to. Throughout her time in Europe, Jenny stayed for a maximum period of 3 months in any one city. She spent the greater part of her time in Germany however also had relatives in France with whom she stayed for a period of 2 months. Jenny was exceptionally busy with her showcasing for most of the time, though she did always try to take off 1 day per week to go sight-seeing and to soak up the local custom. Prior to her departure for Europe, Jenny was uncertain how long she would spend in a foreign country. Her sole objective was to gain an international reputation and she was prepared to stay abroad till she had done so and only then to return to Australia. Jenny thus terminated the lease of her unit in the Bondi Beach, where she had been living for the past 7 years. She also sold her car and closed two of her short-term deposit bank accounts.
On her return, Jenny decided to set her own salon because of the success of her trip to Europe. Jenny has now employed 4 fulltime hairdressing staff at the salon. Three of these staff is qualified barber and the other is a hairdressing assistant. While Jenny generates the majority of income, the income generated by the other 3 hairdressers is not unimportant. The hairdressing salon has a large supply of hair care products, like shampoo and conditioners, however most of the income of the salon comes from the fees paid for hairdressing services. Jenny needs customers to pay on the day by cash, credit card or debit card. She doesn’t offer credit to her customers. Most of her customers pay cash, however she does allow credit cards and debit cards. There are 4 large wall-mounted hair dryers and 8 specifically designed basins in salon.
As part of her professional reflection, Jenny needs her staff to wear smart designer suits. Jenny stipulates that the suits should be either black or dark blue pin-striped in colour and have no decorative logos. Sally, one of the 3 qualified hairdressers, purchased an Armani suit for $770 on 1 June 2010. In order to keep the suit in pristine condition, Sally doesn’t wear the suit for any occasion other than to work at Jenny’s salon. She could have purchased another pinstriped suit for $400, but she preferred the Armani suit.
Questions
Question1. Will Jenny be classified as an Australian resident or a foreign resident for taxation purposes during her time overseas? Provide full reasoning with reference to legislative provisions and case law to support and justify your answer.
Question2. What method of tax accounting will Jenny use for her hairdressing salon business? Give full reasons, citing relevant cases and other authorities for your decision.
Question3. Will Sally be entitled to claim an income tax deduction for her suit? Cite legislative references, case law and any other relevant authority for your decision.