Taxation Laws For Residence And Source

Case Study1: Residence and Source

Describe about the Taxation Laws for Residence and Source.

The determination of the residential status is made in the light of the provisions specified in the taxation laws of a country. In Australia, the government has promulgated the Income Tax Assessment Act 1997 to provide for the matters connected with the taxation of the income (Prince, 2013). Further, the Australian Taxation Office works as the administrative body in Australia and bears the responsibility for the imposition and collection of the income tax. Additionally, the Australian Taxation Office also provides for the rules to help the taxpayers in determination of the taxable income. It is important to note here that in regard to determination of the taxable income the residential status plays a crucial role (Prince, 2013).

The provisions of section 6 of Incomes Tax Assessment Act 1997, defines the non-resident as the taxpayer not a resident of Australia. The determination that whether a taxpayer is a resident of Australiais made in accordance with the tax ruling 98/17 issued by the Australian Taxation Office (Australian Taxation Office, 2016). The ruling provides three types tests of residency such as domicile test, 183 days test, and superannuation test for determination of the residential status of an individual taxpayer. A brief description of these tests of residency is given as under:

Domicile Test: The provisions prescribe that an individual having permanent place of living (abode) is deemed as resident of Australia (Australian Taxation Office, 2016).

183 Day Test: Here, the period of stay is taken into account. The provisions prescribe that an individual staying for a period of 183 days or more during the income year in Australia is deemed as resident (Australian Taxation Office, 2016).

Superannuation Test: This test is specific to the government employees of Australia and provides that government employees of Australia deputed outside Australia to perform duties in connection with the employment will be deemed as resident (Australian Taxation Office, 2016).

Further, it should be noted that in applying the 183 days test, the other considerations such as behaviour of the individual and intention and purpose of stay in Australia are taken into account. After taking into account all the factors, if it appears to the commissioner of Income tax that the individual coming to Australia intents to live permanently there, the commissioner may regard that individual as resident even if the period of stay is less than 183 days (Australian Taxation Office, 2016).

Determination of Residential Status in Australia

In the current case, Fred who resides ordinarily in the UK comes on an official visit to Australia. The main purpose of this visit of Fred is to set up a branch office in Australia. Further, the behaviour of Fred indicates his intention to live for longer period in Australia. For instance, his wife accompanies him and he rented out the property in UK. These circumstances would be enough for the commissioner of the income tax to conclude that Fred’s intention is to live permanently in Australia. Moreover, the actual period of Fred’s Stay in Australia is 11 months, which is more than 183 days. Thus, it could be articulated that Fred is a resident of Australia for income tax purposes.

Case study 2: Ordinary Income

There have been contradictions in various cases on the issues of taxation of sale of land. The outcomes in respect of few of the cases of sales of land have been discussed as under:

Case 1: Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159     

In this case, the taxpayer sold land to a company and received shares from that company as the consideration of the land. The taxpayer made huge profits out of this transaction. The income tax authorities levied tax on these profits considering as ordinary business income, whereas, the taxpayer contended that the profits were not taxable as ordinary business income (Manyam, 2011). The issue came up before the court for determination of the nature of profit wherein the court made the following observations:

The mere realization of the investment (land or securities) or enhancement in the value of investment is not liable to tax, but the realization of the investment with the business motive is taxable. The existence of business nature activities is necessary to tax the profits on sale of land as ordinary business income (CCH Australia Limited, 2011).

In the current case, the court observed that Californian Copper Syndicate Ltd was holding the land not as investment but as trading asset. Referring to the memorandum of the company, the court found that there was business objective behind the sale of land (CCH Australia Limited, 2011).

Based on these observations, the court pronounced that the taxpayer was carrying on the business activities and thus, the profits of sale of land are taxable as ordinary business income.  

Case 2: Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188        

Tests of Residency

In this case, the taxpayer company was engaged in the mining operations and for this purpose the company acquired land. After several years of operations when the mines got exhausted, the company sold that land carrying out some development work and subdividing it. The income tax authorities taxed the profits earned from sale of land as ordinary business income, while the taxpayer contended that the same were capital receipts not liable to tax (Jade. 2016). The taxpayer appealed against the decision of the income tax authorities in the high court. While hearing this case, the court observed that the development work carried out by the taxpayer was merely to sale the land in the most advantageous way (High Court, 1950). The subdivision and the development work carried out by the taxpayer was not substantial that indicates carrying business. Thus, the court held that the taxpayer was merely engaged in realisation of the capital asset, which should not and can notbe equated with carrying on the business of land development. The court ordered to set aside the orders made by the commissioner to tax the profits on sale of land as ordinary business income.

Case 3: FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR

In this case, Whitfords Beach Pty Ltd sold land after carrying out some development work. Once again the income tax authorities and the taxpayer got head to head on the issue of levying tax on the profits from the sale of the land (Jade, 2016). Considering the fact that the taxpayer carried out certain development work on the land before finally disposing off the same, the income tax authorities levied tax on the profits. The company appealed against the decision of the income tax authorities in the federal court of Australia (Jade, 2016). In this case, the federal court of Australia pronounced its decision in favour of the taxpayer taking the high court’s decision pronounced in the case of Scottish Australian Mining Co Ltd as base. However, the circumstances of this case were quite different from those that were prevailing in the Scottish Australian Mining Co Ltd. Considering this fact, the income tax authorities appealed in the high court to overrule the decision of the federal court (Hart, 2007).

The high court observed that the taxpayer altered the articles of association and includedland development and sale as one of the business activities (Jade, 2016). Further, it was observed that the taxpayer company changed the ownership structure before the sale of the land being made. Considering these facts, the high court held that in this case the company was not merely realising the capital asset, but it was engaged in the business of land development. Therefore, the high court overruled the decision of the federal court and opined that the profit on sale of land to be taxed as ordinary business income (Jade, 2016).    

Case study 2: Ordinary Income

Case 4: Statham & Anor v FC of T 89 ATC 4070

In the case, the issue in question was that whether the profits earned from the sale of the land after carrying out development work to be taxed as ordinary business income. The court observed that it is the a well established principle that if the land development work was carried out merely to get the land sold advantageously and there was no hint of profit making scheme, the profit from sale of land could not be taxed as ordinary business income(Morse, 2016). In the present case, the court did not find any profit making scheme being acted upon by the taxpayer in carrying out the sale of the land. Further, the court took the following facts into consideration before disposing off the appeal:

• The development work was limited to clearing of the land and minor structural changes (Wolters kluwer, 2016).
• The sale of land was not advertised as the companies engaged in the land development usually do.
• The sale of land took place simply through real estate agents (Wolters kluwer, 2016).

The court asserted that these circumstances indicate that the land development work carried out by the taxpayer was for mere realization of the capital asset. There was no intention to carry on business of land development was seen. Thus, the court held that the profit earned on the sale land was not taxable as ordinary business income in this case (Wolters kluwer, 2016).

Case 5: Casimaty v FC of T 97 ATC 5135

In this case, the taxpayer was engaged in the business of farming in the name of “Action View” a proprietorship firm. For the purpose of business, the taxpayer was holding various farms in the area of operations. In the later years, the taxpayer subdivided the land, which was caught by the income tax authorities to levy tax (AUSTAX PBR, 2016). The income tax authorities levied tax on the profit on subdivision and sale of land considering the same as land development business income. However, the taxpayer contended that he was not engaged in the business of land development and thus, the profit on sale of land should not be taxed as ordinary business income (AUSTAX PBR, 2016).

The court observed that the subdivision and development of the land was mainly done to sale the land in the most advantageous way and pay off the accumulated debt out of the sales proceeds. Further, the court observed that there was not any plan or scheme made up for the sale of the land with the profit motive (Australian Taxation Office, 2016). Additionally, it was also observed that the development work carried out by the taxpayer was limited. There was no construction of dwelling and internal fencing on the land subdivided. With these facts, the court asserted that the taxpayer can not be said to be engaged in the business of land development. Therefore, the court ordered that the sale of land by carrying out subdivision was merely the realization of the capital asset, which is not to be taxed as ordinary business income (AUSTAX PBR, 2016).

Contradictions in Taxation of Sale of Land

Case 6: Moana Sand Pty Ltd v FC of T 88 ATC 4897

In this case, the company was engaged in selling sand extracted from the land. Further, the company was also engaged in selling the land after extraction of sand there from. The sale of land was also the primary activity alongside the sale of sand in the case of Moana Sand Pty Ltd v FC (Wolters Kluwer, 2016). The company used to hold the land until it could get a good price for the same. Thus, the profit motive was quite clear as the company was holding the land to earn profit by selling it. Considering these facts, the commissioner of income tax levied tax on the profits earned on the sale of land as ordinary business income. However, the company appealed to the tribunal against the order of the commissioner contending that the sale of land was not the business activity undertaken by the company. Further, the plaintiff claimed that the sale of land was ancillary to the main business of extracting and selling sand, thus, the profit on sale of land should not be taxed as business income (Australian Taxation Office, 2016).

The tribunal considered the claims of the taxpayer and took the view that the sale of land was secondary to the business of extracting and selling sand. Therefore, the tribunal allowed the appeal and decided the case in favor of the taxpayer. However, the matter was not closed yet, now the income tax authorities went to appeal to the high court challenging the decision of the tribunal. The high court observed that there was intention of the taxpayer to sell the land with the profit motive and thus, the elements of business were present in land selling. The high court asserted that the findings of the commissioner were valid and overruled the decision of the tribunal (Wolters Kluwer, 2016).

Case 7: Crow v FC of T 88 ATC 4620

In this case, the court ordered to tax the profits earned on the sale of land as ordinary business income. The court observed that the taxpayer was engaged in the land development business. The activities of subdivision and land development were repetitive and systematic, which established the existence of the land development business. Considering the nature of activities carried out by the taxpayer, the court was satisfied that the sale of land was undertaken with the profit making motive (Australian Taxation Office, 2016). Further, in regard to the nature of profits and gains, the court made the following observations:

Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159

The profits and gains arising from a transaction that forms part of the ordinary business of the taxpayer is to be taxed under section 25 of the income tax assessment act 1936 (Australian Taxation Office, 2016).

However, the profits and gains arising from a transaction which is incidental to the main business need to be treated differently for income tax purposes (Australian Taxation Office, 2016).

The circumstances of the current case indicate that the taxpayer was continuously carrying out land development activities and thus, the sale of land in this case could not be said to be incidental. Based on these findings, the court ordered     to tax the profits earned on the sale of land as ordinary business income (Australian Taxation Office, 2016).  

Case 8: McCurry & Anor v FC of T 98 ATC 4487

In the current case, the taxpayers were in possession of the inherited land. On this inherited land, the taxpayers carried certain development work and constructed dwellings. On sale of these dwellings, the profit was taxed by the income tax authorities as the ordinary business income (Wolters Kluwer, 2016). However, the taxpayers were of the view that the profits earned on the sale of the dwellings should not be charged to tax as ordinary business income. They claimed that there were no business activities being carried out in relation to the sale of the dwellings. However, the court observed that the taxpayers made the arrangements with the engineers and property consultants in regards to the development work and sale of the dwellings (Wolters Kluwer, 2016).

Finally, considering all the circumstances, the court found that the inherent intention of the taxpayers was to develop the dwellings and sale them to earn profit. Thus, the court found the profit making motive in the land development work carried out by the taxpayer and ordered to tax the profits as ordinary business income(Wolters Kluwer, 2016).

References

Prince, J.B. 2013. Tax for Australians for dummies. John Wiley & Sons.

Australian Taxation Office. 2016. TR 98/17: Income tax: residency status of individuals entering Australia.[Online]. Available at: https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR9817/NAT/ATO/00001[Accessed on: 15 September 2016].

Australian Taxation Office. 2016. Test of Residency. [Online]. Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/Work-out-your-tax-residency/Residency-tests/[Accessed on: 15 September 2016].

CCH Australia Limited. 2011. Australian tax casebook. CCH Australia Limited.

Hart, G. 2007. The limited impact of whitfords beach in urban land development. Revenue law journal, 1(17), pp. 1-14.

Manyam, J. 2011. Taxation of gains from banking and insurance businesses in New Zealand. Revenue law journal, 1(20), pp. 1-29.

High Court. 1950. The Scottish Australian Mining Co Ltd. [Online]. Available at:   https://eresources.hcourt.gov.au/getPdf/1/238280/1_81clr188.pdf?sequence=3&isAllowed=y [Accessed on: 15 September 2016].

Jade. 2016. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188.[Online]. Available at: https://jade.io/article/64663 [Accessed on: 15 September 2016].

Jade. 2016. FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR.[Online]. Available at: https://jade.io/article/67040[Accessed on: 15 September 2016].

Wolters kluwer. 2016. Statham & Anor v. Federal Commissioner of Taxation, Federal Court of Australia, Full Court, 23 December 1988.[Online]. Available at:https://www.iknow.cch.com.au/document/atagUio544343sl16788832/statham-anor-v-federal-commissioner-of-taxation-federal-court-of-australia-full-court-23-december-1988[Accessed on: 15 September 2016].

Morse. 2016. Selling the farm piecemeal – the tax issues. [Online]. Available at:https://www.morsegroup.com.au/files/docs/white%20papers/morse%20group_white%20paper_selling%20the%20farm%20piecemeal.pdf [Accessed on: 15 September 2016].

Australian Taxation Office. 2016. Sale of subdivided farm land. [Online]. Available at:https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2002273/00001[Accessed on: 15 September 2016].

AUSTAX PBR. 2016. Casimaty v FC of T 97 ATC 5135 (Casimaty’s Case).[Online]. Available at:https://austaxpbr.com.au/document/PBR_84107#section_9[Accessed on: 16 September 2016].

Australian Taxation Office. 2016. Sale of subdivided farm land. [Online]. Available at:https://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR923/NAT/ATO/00001[Accessed on: 16 September 2016].

Wolters Kluwer. 2016. Moana Sand Pty. Limited v. Federal Commissioner of Taxation, Federal Court of Australia, Full Court, 21 November 1988. [Online]. Available at:https://www.iknow.cch.com.au/document/atagUio545633sl16801479/moana-sand-pty-limited-v-federal-commissioner-of-taxation-federal-court-of-australia-full-court-21-november-1988 [Accessed on: 16 September 2016].

Australian Taxation Office. 2016. Sale of subdivided farm land. [Online]. Available at:https://www.ato.gov.au/law/view/document?docid=AID/AID200155/00001  [Accessed on: 16 September 2016].

Wolters Kluwer. 2016. McCURRY & ANOR v FC of T, Federal Court of Australia, 15 May 1998.[Online]. Available at: https://www.iknow.cch.com.au/document/atagUio539084sl16707683/mccurry-anor-v-fc-of-t-federal-court-of-australia-15-may-1998 [Accessed on: 16 September 2016].