This part of the study deals with the applicable of residential provisions as per Australian taxation to determine source and taxability of income for individuals.
Applicable law
In accordance with the Australian taxation provisions, an individual is considered to be resident if the satisfied the conditions described in subsection 6(1) of Income Tax Assessment Act 1936 (ITAA). Four tests covered under this section are enumerated as below:
Residency- the “reside” test: As per this test, residential status of an individual is determined by considering the following factors:
183-day rule: An individual is considered to be a resident in Australia if they reside in the country for more than or equal to 183 days. Generally, this rule is applicable until and unless Commissioner is satisfied with the case facts.
The Superannuation Test: It is a substitute test for the ordinary test used to check residential test. As per this, individuals considered to be a resident in Australia on this test in situations when in a general sense they do not reside in Australia.
Residency- the “domicile” test: In accordance with this test an individual is considered to be a resident if they obtain a domicile in Australia. However, for applicability of this rule commissioner must be satisfied with the fact that personal place of the individual is outside Australia.
One of the above four test is required to be satisfied to attain residential status for tax purpose in Australia.
Facts of the case
In accordance with the given case situation, Kit is a permanent resident of Australia as he was born in Chile and retains his citizenship. He spends most of his year for working at the coast of Indonesia an oil risk for the company in the United States. He got a job in Australia and signed the contract for the same. He has basically income from two sources one is salary, and another one is dividend income.
Decision
By considering the case facts, it can be said that Kit is a resident of Australia as he is temporarily outside the country and he does not have a residence in another country (Residency – the domicile test, 2016). Thus, he satisfies the condition of Residency- the “reside” test. Further, as per the provisions cited by ATO, he is an Australian resident for the purpose of calculation of taxes. By considering the fact of residency of Kit, it can be said that all his income whether domestic or international will be taxable in Australia.
In this part, various case study has been explained for better understanding of provisions related to taxability of income regarding sale of property.
Californian Copper Syndicate Ltd v Harris
Considered case depicts the issue of realisation of a capital asset and whether or not the net profit earned from the sale of property to be exploited for its minerals should be considered as ordinary income i.e. assessable or should be treated as capital in nature (Barkoczy, 2016). In this case, the taxpayer was a company. They purchased a land as per their memorandum, but they do not have sufficient funds for further operation, so they sold the asset and realised the gain. In this case study, it was held that sale of land would be considered as assessable income for the purpose of tax as mining transaction did not occur and it will be considered as an ordinary investment for which benefit is assessable as tax provisions of Australia.
Scottish Australian Mining Co Ltd v FC of T
In the considered case, the taxpayer was a company engaged in mining of land as the mainstream of coal. This land sold after completion of development activities. Profit of this transaction was considered to be assessable as per commissioner, but taxpayer was not agreed with the fact. The court provided a decision in favour of the taxpayer that above transaction is the mere realisation of the asset (Jones, 2016). In this case, opinion was provided by Williams J, that opinions of the case must be very strong prior that court would consider profit from the sale of land is not acquired for the purpose of making profits for sale in a case where the company had realised land to attain the best advantage.
FC of T v Whitfords Beach Pty Ltd
In the case, FC of T v Whitfords Beach, the taxpayer had purchased land in 1954 so that shareholder can do fishing on the beach. In 1967, three development companies planned to acquire the land through the subdivision and to make a profit. In accordance with the commissioner, acquire land and subdivision for sale is clearly taxable under sec 25A (1) ITAA 36 (Maloney, 2015). However, to prevent taxability developers had purchased the share and conduct this transaction that was considered to be the act of tax evasion. In this case, the ruling of the high court had expanded the scope of receipts for the one-off transaction to be considered as ordinary income if the transaction occurs for the mere realisation of the asset (Dixon, 2016).
In the considered case study, taxpayers were trustees of the deceased estate. As per case facts, deceased had acquired a parcel of farming land with the objective to nurture his family and for conducting farming activities. However, after some years the deceased sold half of land to a company of which controlling power was in the hands of family members. There was no intention to resell the property, and they entered into a partnership for raising cattle. Although, the partnership doesn’t work well and as a consequence, they decide to sell the land by subdividing it. In this case, the argument was provided by the commissioner that some of the subdivided lots are assessable income for the deceased estate (Clough and Roberts, 2014). The taxpayer was not agreed with the fact as according to them it was not ordinary income. The judgement of the court was in favour of assessed as they held that profits were not ordinary income as owners were not operating profitable business or scheme. In addition to this, failure of farming business and sale of land does not imply that realisation of the asset is taxable.
In the stipulated case study, assessed had acquired a farming property inheritance from his father. On this property, he carried production business for next 20 year. Later, due to unfavourable family and business conditions, he subdivided the property and sold its large part. There were 8 subdivisions for which roads were constructed, and other basic facilities were provided. In accordance with the viewpoint of the commissioner, profit from the sale of the block was ordinary income, and consequently, it will be assessable. However, contradict judgement was provided on the appeal from the court that profit was earned by received from the subdivision for the mere realisation of a capital asset as the land subdivision was not the business of taxpayer as the original purpose of assessed was private residence and farming (Woellner, Evans and Pinto, 2011).
In accordance with the case facts, a company acquired a land in Adelaide for the purpose of business. However, later they subdivided the land and sold the same to their related parties by taking approval from the board. Through this transaction, the company had earned a profit and same was considered to be taxable as an isolated transaction. Further nature of income was considered to be profit from the sale of land. This aspect clarifies the fact that objective of the company made a profit. In the case, profit of the transaction was assessable for tax under a Section of 26(a) as provision will be applied because of carrying out a profit- making undertaking.
In this case, a farmer had borrowed a huge amount of money for the purchase of land containing five blocks with the duration of 10 years. Initially land was used for the purpose of farming, but eventually, it was subdivided. After this purchase, asset has sold 51 blocks and sale of the same had provided a net profit of $388,288. In this case, the decision was provided by a federal court that income is taxable in the hands of the assessee as he carried business of land development (Woellner, Evans and Pinto, 2011). However, the fact was considered that initially land was used for farming, but there was evidence that taxpayer new the outset that assets net to be sold for the repayment of debt. In this case, a matter of fact was that land purchased and was further subdivided involve transactions and characteristics of business, so it will be taxable. The decision of Scottish Australian Mining Company Ltd v FC of T was not applicable in the present situation because Scottish Australian Mining Company Ltd was engaged in mining for a longer time.
In this case, assesses were brothers who acquired a land by financing the transaction through a bank loan and their own resources. On that land, there was an old house. For the sale of property, the advertisement was given in 1987, but not sale occurred. So they lived there for one year, and again advertisement was given in 1988 and sale occurred. In this transaction, there was a total profit of $150000. A few years later they acquired the second block and constructed units and then sold the same. In this case, the conclusion was drawn by the commissioner that profit was under of property which was denied by assesses as according to them it was not a venture (Dixon, 2016). In this case, judgement was provided in against of assessed that Section 25(1) will be applied and profit will be taxed as a venture (McLaren, 2014). Further, it was clarified that carrying business is not essential for commercial dealings. In this case, assessee acquired the property for the purpose of sale, not for residence.
References
Books and Journals
Barkoczy, S. 2016. Core tax legislation and study guide. OUP Catalogue
Clough, M. and Roberts, J., 2014. Commissioner of taxation wins appeal upholding tax assessment issued to. Australian Resources and Energy Law Journal, 33(2), p.93.
Dixon, B., 2016. Land transactions and the new Australian foreign investment regime. Australian Property Law Journal, 25(1), pp.55-68.
Jones, D., 2016. Capital gains tax: The rise of market value?. Taxation in Australia, 51(2), p.67.
Maloney, D.A., 2015. Unless or until Australian mining and petroleum legislation-statutory interpretation. Australian Resources and Energy Law Journal, 34(3), p.209.
McLaren, J., 2014. A uniform land tax in Australia: what is the potential for this to be a reality post the Henry Tax Review. Austl. Tax F., 29, p.43.
Woellner, R., Evans, C. and Pinto, D., 2011. Australian taxation law. CCH Australia.
Woellner, R., Evans, C. and Pinto, D., 2011. Australian Taxation Law Select legislation and commentary. CCH Australia.
Online
Residency – the domicile test. 2016. [Online].Available through < https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Residency/Residency—the-domicile-test/>. [Accessed on 27th April 2017].
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