Tax Residency Position And Assessable Income: A Case Study

Issue

The main issue in the case study is to comment on the tax residency position of the concerned taxpayer Kit and to determine the available tax treatment on the derived income of Kit from different sources.

Tax treatment of derived income of the taxpayer depends on the tax residency position of the concerned taxpayer. Tax treatment based on the tax residency position is outlined below (Barkoczy, 2015).

• Australian tax resident: Income derived from international and domestic(Australian) sources would be assessable for taxation under section 6-5(2).
• Foreign tax resident: Income derived from Australian sources would be assessable for taxation under section 6-5(3) and the income derived from overseas would not be considered for taxation.

Hence, it is imperative to find the tax residency position of taxpayer for the respective assessment year.  The relevant provisions are highlighted in subsection 6(1), ITAA 1936. Moreover, the four main tests to check the tax residency are advocated in the tax ruling TR 98/17 (CCH, 2013).

The two main terms of this test are essential and need to be fulfilled by taxpayer. Taxpayer must possess domicile of Australia and have permanent residence on Australian land (Gilders et. al., 2016).

Further, there are some imperative factors along with these two aspects that must be checked on behalf of the tax commissioner to decide the tax residency position as per IT 2650 (ATO 1991).

• Level of social, personal, educational or professional ties with Australia while residing outside
• Reason of visits to overseas and underlying duration (both planned and actual)
• Number of visits to Australia in assessment year especially if the overseas country is native place of taxpayer
• Number of fixed assets or properties owned by taxpayer in Australia
• Actions that shows motive of taxpayer to locate the permanent residence in foreign places but not in Australia

This test checks the tax residency position of taxpayer who is living in overseas and is an officer of federal government. The involvement of taxpayer in the superannuation fund scheme is considered to be an essential condition of this test (Sadiq et. al., 2016).

This test is employed to taxpayer who is a foreign resident. The numerous parameters related to this test are listed below (Deutsch et. al., 2016).

• Reason for visits to Australia
• Number of visit in one assessment year
• Deviation in the expected duration of abode and real duration of abode in Australia or in overseas
• Various ties of taxpayer with Australia or with overseas and so forth 

183 days is the minimum duration of abode in oneassessment year on behalf of the taxpayer. Further, it is critical that taxpayer must have aim to reside in Australia onconstant basis. This test is applicable for foreign tax resident (Nethercott, Richardson and Devos, 2016).

Chilean citizen Kit is a permanent resident (PR) of Australia.For the given assessment year, he has Australian domicile as per the rules of Australian Domicile Act 1982. Moreover, he enacted a contract with a US based company and hence, lives in oil rig based at the coast of Indonesia. However, his permanent residence is located in Australia only where he lived with his family before leaving for the job. He and his wife have a joint bank account in Australia. In this account only, he receives his income from job. The frequency of visit to Chile(country of origin) is also very low. It is evident from case study that Kit does not want to shift the permanent residence from Australia to other country. After considering the above factors, it is apparent that Kit has completed the requisite terms of domicile test and therefore, would be designated as Australian tax resident based on this test.

Rule

Kit is not an officer of federal government and also does not involve in the superannuation fund scheme. Therefore, this test is not applicable.

It is apparent that this test can be applied to foreign residents only and in present case, Kit is a PR of Australia. Therefore, this test is not applicable.

Taxpayer Kit is a PR of Australia and thus, this test is not applicable because it is validated only for foreign residents only.

Conclusion

Taxpayer Kit has satisfied the requisite terms of domicile test and thus, it can be concluded that he is an Australian tax resident. The income derived in Australia and in other countries would be legally considered for taxation under section 6-5(2), ITAA 1997. Therefore, the income through foreign (US based company) salary and from foreign company dividends would be assessable for tax in Australia. 

• Company owned a copper enriched land in New Zealand.
• They took permission for mining from relevant authorities.
• No mining was started on the land because company did not have finance to start the mining.
• Land was sold with the consideration of shares in the respective buyer company.
• Shares were of high commercial worth and resulted in huge profit to Californian Company.

Company said that the profit received from shares was due to the sale of capital asset. It was mere capital asset conversion from land assets to share assets. Therefore, the income should be considered as capital income. However, honourable court disagreed with the argument made on behalf of the company and ruled that company purchased the land for liquidation only as they knew beforehand that they were not in the position to start mining. It was pre-planned and same had been executed by the investors. Therefore, the presence of profit making intention of investors would be of business nature and the profit would be categorised as assessable income (Barkoczy, 2015).

• A coal enriched land was efficiently mined on behalf of the Scottish Company for many decades.
• Land completely exhausted in coal content.
• After making subsequent development and construction on the exhausted land,company liquidated the land for residential use.
• Company received handsome gains from sale.

Tax Commissioner believed that development and construction were for making higher yield and hence, it would be assessable for taxation under the rulings of section (25)1 of ITAA, 1936. Taxpayers did not assent with the decision of tax commissioners and finally appealed to court. Court decided that company owned land for coal extraction which was conveyed till the land become exhausted and then only the selling was performed. Further, an unshaped land could not use directly for residential way and thus, the development was essential. Therefore, gains from realisation of land asset would not be categorised as assessable income (Nethercott, Richardson and Devos, 2016).

• Whit Forts Beach Pty Ltd was a leading land trading company.
• Company owned a beach land which was initially utilized for aeration of fishing shacks.
• Subdivision was conducted on land and then sold to customers.
• Company made essential modification in “Article of Association (AOA)” to allow for land selling.

Company made arguments that they sold a capital asset and thus, the income would not be accountable for taxation under assessable income treatment. Court rejected the arguments of company and stated that they used the land in the line of their land trading business. They had clear intention of deriving gains from sale. Further, the modified AOA was projected as the witness of this aim. Therefore, the derived assessable income would be taxed (Gilders et. al., 2016). 

• Taxpayer received a deceased land property and started a small scale cattle business on land.
• Taxpayers had to shut-down the cattle business because they did not have sufficient knowledge to run cattle business.
• In order to stabilize the financial condition of family, they divided the land and sold a large part of it.

Domicile Test

Taxpayers had requested that they invested their fund to start the cattle business,and it failed in the initial phase. Court stated that the sale was not with the focus of making profits. They were forced to sale the part of land so that the financial conditions can be improved. Therefore, it would be categorised as realisation of available capital asset and income would not be considered as assessable income (CCH, 2013).

• Casimaty started their traditional farming business on the land.
• He took loan at significant interest rate to start farming by believing that he would easily repay the loan from the income received from farming.
• However, he did not get enough money from farming because of occurrence of drought.
• These issues created adverse effects on his health.
• He sold a section of the land and again commenced the farming business on the rest of the available part.
• The profit was used for paying the loan amount and for his health treatment.

Federal court decided that taxpayer was operating his traditional farming business and the sale of the section of land was realisation of available asset so that he could pay the outstanding amount. There was no intent of Casimaty to use the land for land trading business. Hence, the income from realisation of capital asset would be capital income and non-taxable (Sadiq et. al., 2016).

• Moana Sand Pty Ltd commenced extraction of sand from the land.
• When the land did not remain useful for further extraction then company decided to sell it.
• For higher benefits, subsequent division, plots, parks, public amenities, water and sewage plants were installed.
• Sizable revenue was derived through sale.

It had been ruled on the part of court that company owned the land for mining not for deriving profits through land development and sale. However, subsequently the various installations by company were with the motive of enhancing values. Therefore, the act to derive maximum revenue would be categorised under business function. Therefore, the income would be treated for taxation as per assessable income concepts (Deutsch et. al., 2016).

• Taxpayer started land trading business on the land, which was acquired in the name of farming business.
• Taxpayer systematically, divided the land blocks and sold to different potential buyers.
• He also owned more land blocks which were sold after subsequent subdivision.

Court cited the verdict that the land which was supposed to utilize for farming was used for land trading business. The activity of taxpayer of purchasing new blocks, systematic subdivision on the owned land selling to potential buyers are the testimony of the business nature of taxpayer Crow. Hence, the revenue receipts would be of ordinary income and assessable for income tax (Barkoczy, 2015). 

• Old property was bought by taxpayers at cheaper cost.
• They had clear intention of selling property after making subsequent development.
• They took loan from bank.
• Three houses were constructed in place of old property.
• Advertisement also conducted for attracting more buyers.
• They hold the selling for a year so that potential buyers could be searched.
• Within a year, houses were acquired by premium buyer and handsome revenuewas received by taxpayers.

Court observed the systematic and planned activities performed by the taxpayers and decided that they took ownership of property so that they could develop it and make high returns. Moreover, the advertisement and holding houses for a year with the intention of receiving high price were the witness of this. Therefore, the income would be accountable for taxation as per section 25(1), ITAA, 1936 of assessable income (Nethercott, Richardson and Devos, 2016).  

References

ATO 1991, IT 2650, Australian Taxation Office, [Online] Available at https://law.ato.gov.au/atolaw/view.htm?Docid=ITR/IT2650/NAT/ATO/00001 [Accessed April 22, 2017]

Barkoczy, S. 2015, Foundation of Taxation Law 2015, 7^thed., North Ryde: CCH Publications

CCH 2013, Australian Master Tax Guide 2013, 51^st ed., Sydney: Wolters Kluwer

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. 2016, Australian tax handbook 8th ed., Pymont: Thomson Reuters,

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. 2016, Understanding taxation law 2016, 9^th ed., Sydney: LexisNexis/Butterworths.

Nethercott, L., Richardson, G. and Devos, K. 2016, Australian Taxation Study Manual 2016, 4^th ed., Sydney: Oxford University Press

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 8^th ed., Pymont:Thomson Reuters