Taxation Theory, Practice And Law For Residence

Residence and Source

Discuss about the Taxation Theory Practice and Law for Residence.

The current case is based on the determination of the Kit residential status along with the determination of his salary and investment come for the purpose of tax. As evident from the current case study, that Kit is a permanent resident of Australia even though he was born in Chile. He also retains the citizenship of Chile despite being a permanent resident of Australia. Australian residents are usually taxed for their worldwide income derived from all their sources.

An individual living in Australia for temporary purpose along with the foreign residents are generally taxed for their Australian based income. For instance, income earned from working in Australia. In order to understand the tax situation of Kit it is essentially required to work out the residential status for the purpose of tax (Barrett and Elsayed 2014). As in the current case, it is evident that Kit despite being Australian resident for permanent purpose cannot be considered as an Australian citizen since he holds the Chilean residency. To understand the taxation situation of Kit it is necessary to work out his residential status based on the residency test.

The primary test of determining the residential status of Kit is the domicile test. Below stated are the criterion for determining the domicile test are as follows;

Domicile is regarded as the legal concept of determining the residential statues under the “Domicile Act 1982”. The primary rule of common law states that an individual acquires the birthplace as the domicile of his own origin. The rule is also subjected to certain exception.  An individual retains the domicile of their origin until and unless the individual decides to acquire the domicile of their own choice in another country (Burnett, Taylor and Wong 2015). As stated in the case of “Henderson v. Henderson [1965] 1 All E.R.179” the intention of the person should have to be in order to obtain the domicile of their own choice in a country which is the intention of making their home indeterminately in that nation. From the current case study it is understood that Kit had bought a house three years ago to live with his wife which satisfies the intention of acquiring the domicile of his own choice to stay in Australia along with the intention of making his home indefinitely in Australia.

As stated under “section 6 (1) of the taxation rulings 2650” in determining an individual domicile it is necessary to take into the consideration the person intention as to where that individuals makes their home indefinitely. An individual with Australian domicile but living outside Australia will be retaining that domicile if the person returns to Australia on a clearly foreseen reason (Silver, McGregor and Tarr 2017). Therefore, Kit being employed with Australian company in the coast of Indonesia often returns to visit his wife and children in Australia. Kit will retain the Australian domicile since he often return in Australia despite being living outside that domicile. As stated under “section 6 (1) of the ITAA 1936” it is assumed that

1. Kit domicile is in Australia and satisfies the conditions that his permanent place of abode is in Australia (Trakman 2015).
2. Kit has been in Australia continuously and intermittently for more than half of the income year prior to his visit at off shore oilrig in Indonesia and satisfies that his usual place of dwelling is in Australia

Domicile Test

The 183 days test states that if an individual was present in Australia for more than half of the income year in Australia either for a continuous period or with breaks will be considered as Australian resident (Sharkey 2015). Kit however, being employed in Indonesian oilrig only returns in Australia once in every three months to visit his family. This only sums up to a mere 120 days approximately of his stay in Australia, however it cannot be ruled out that he cannot be considered as an Australian resident under such circumstances. He will be considered as an Australian resident since his permanent place of abode is in Australia as Kit has bought a house three years ago to stay with his wife in Australia. As held in the case of “F .C. of T. v. Applegate (79 ATC 4307; (1979) 9 ATR 899” that despite Kit absence from Australia does not rules out the fact that his domicile was in Australia. Therefore, Kit intentions of taking up the residence in Australia satisfies the 183 days test.

The liability to tax originates with the questions of determining the taxpayer’s residency in accordance with the facts, which is applied in the income year that is under considerations. Therefore, if the taxpayer satisfies the residential test according to the ordinary concept then the person will be considered for taxation due to his residential status. The salary received by Kit in his bank account constitute an Australian sourced income since he is employed with an Australian company (Maurer et al. 2017). Furthermore, kit also derives income from his other source of income such as shares portfolio, which is subjected to double taxation. Kit despite being an Australian resident he is required to declare his overseas income while lodging income tax return and he is required to declare all the foreign employment income.

As held in the case of “Applegate per Franki J 79 ATC” the liability to tax arises based on the residential status. However, Kit can overcome the circumstances of double taxation by claiming exemption on his shares portfolio as Australia has signed tax treaties with several countries (Thampapillai 2016). Kit is required to declare income from such sources in his Australian tax return and his salary and shares portfolio shall be liable to be taxed. The liability to tax arises for Kit since he has satisfied the residential test that is applicable on the facts that he is a permanent resident for the income under considerations.

The current case is based on the problems relating to the realisation of the capital assets whether the profits derived from the disposal of particular property is considered for assessment as ordinary income and will be considered as capital. The court in its verdict stated that the taxpayer would be liable for tax for the sum of profit derived from the sale of land (Sadiq and Marsden 2014). The profit will be treated as income since the original intention of the taxpayer was make profit. The capital available with the taxpayer was never adequate to commence the work of mining. The judgement of the court held that the profit from sale of land was not a mere substitution of one investment for another instead it constituted as trading transactions.

183 Days Test

The study determines whether the subdivision and disposal of land was used for mining activities or else it constituted a mere realisation of the capital asset. Arguably, the taxpayer had merely sold the land in a gainful manner and had executed the business activities where his profits were assessable (Woellner et al. 2016). The taxpayer proclaimed that extensive work, which was carried on the land, was to obtain a better price. The outcome of the court stated that the decision of realisation of capital asset was enterprising in the capital account of the taxpayer. According to the reports from commonwealth law stated that commercial activities was treated as the realisation of the capital asset.  

The current case study determines whether the subdivision and sale of land constituted capital in nature. Arguably, the taxpayer asserted that realisation of capital and profits derived cannot be held as assessable income. According to the judgement, the taxpayer was considered for assessment under “section 25 (1)” for profit generated from the sale of land. The court in its judgement declared that the actions of taxpayer constituted executing the business of land development (Barkoczy 2016). The court in its rulings stated that the profits derived by the taxpayer must be assessed in compliance with the accounting principles. The commissioner of tax assessed the taxpayer under “section 25 (1) or under 26 (a)” as profits derived from commercial activities.

The case study determines whether the revenue derived on sale of subdivided land can be assessable in the form of income under “section 25 (1) or 26 (a)”. The commissioner of tax stated that the net proceeds generated from the sale of subdivided land will be considered as assessable income under “section 25 (1) or 25 (a)”. Arguably, the taxpayer stated that the activities on land did not constituted business since the deceased had not entered into any kind of profit-based scheme (Taylor and Richardson 2013). The court in its outcome stated that realisation of land did not cover business activities but the nature of realisation is somewhat relevant to the manner and must be considered for assessment considering the nature of such realisation of land.

The case study determines whether the sale of part of land will be considered for assessment under “section 25 (1) or 25 A”. The federal court in its rulings declared that subdivision and sale of land cannot be held for basement under “25 (1) or 25 A”. The federal court in its verdict stated that the taxpayer had obtained the “Action View” with the purpose of not taking into the considerations the profits for assessment derived from the sale of land under the “first limb of section 25 A (1)”. Not even the second limb possess any kind of implication since no sale of land took place during the course of business activities (Saad 2014).

The case study determines either or not “Section 25 (1) or 26 (a)” in assessing the income of taxpayer for the value received on the sale of land. As held by Sheppard, Wilcox and Lee JJ of federal court that both the section “25 (1) and 26 (a)” is applicable in determining the taxpayer income for assessment and amount received by the taxpayer constituted profit during the year that was derived from the sale of land (Miller and Oats 2016). The outcome of the court stated that profits of the taxpayer constituted ordinary income. According to the decision passed in the case of “FC of T v The Emporium Ltd 87 ATC 4363” the profits will be considered as assessable income under “section 25 (1)”.

The current case is based on the sale of subdivided land that is acquired for farming and profits generated will be considered for assessment as the realisation of capital asset. As per “ITAA 1936”, the federal court stated that the profits from the carrying out the business activities of land development will be considered for assessment (Lang 2014). As evident, that court recognised during the initial stages, the land was used for farming however, the burden of debt forced the taxpayer sell off the land. The court passed its decision by stating the transactions were of repetitive in nature and represented a character of continuing the business of land development.

Under the current case, the taxpayers were brothers and were assessed based on their earnings derived from the sale of land under “Section 25 (1) of ITAA 1936”. The outcome of the court stated that the income of the taxpayer was assessable under “section 25 (1)” as the profit making scheme from business activities (Sadiq and Marsden 2014). The outcome stated that venture was formed with the intention of trading and generated the anticipated amount of profit. Hence, the taxpayer formed a commercial venture and was indulged in development of land.

Reference List:

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

Barrett, J. and Elsayed, A., 2014. Deductibility of employer contributions to employee remuneration trusts-where are we at?. Governance Directions, 66(5), p.307.

Burnett, C., Taylor, C.J. and Wong, J., 2015. Qualification of Taxable Entities and Treaty Protection: National Report for Australia.

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

Maurer, L., Port, C., Roth, T. and Walker, J., 2017. A Brave New Post-BEPS World: New Double Tax Treaty Between Germany and Australia Implements BEPS Measures. Intertax, 45(4), pp.310-321.

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

Sadiq, K. and Marsden, S., 2014. The small business CGT concessions: Evidence from the perspective of the tax practitioner. Revenue Law Journal, 24(1), p.1.

Sharkey, N., 2015. Coming to Australia: Cross border and Australian income tax complexities with a focus on dual residence and DTAs and those from China, Singapore and Hong Kong-Part 1. Brief, 42(10), p.10.

Silver, N., McGregor-Lowndes, M. and Tarr, J.A., 2017. Delineating the fiscal borders of Australia’s non-profit tax concessions.

Somers, R., 2014. Navigating family law settlements. Taxation in Australia, 49(5), p.269.

Steen, A. and Peel, V., 2015. Economic and Social Consequences of Changing Taxation Arrangements to Working Holiday Makers. J. Austl. Tax’n, 17, p.225.

Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), pp.12-25.

Thampapillai, D.J., 2016. Foreign Employment Income and Double Tax Avoidance Agreement: Australia’s Possible Governance Failure. Browser Download This Paper.

Trakman, L., 2015. Domicile of choice in English law: an Achilles heel?. Journal of Private International Law, 11(2), pp.317-343.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.