Discuss about the Tax Planning.
The following assignment presenting the case studies in relation to certain aspects of income tax under Australian Tax laws. Determination of residential status of individual, judgments of court on outcome on sale of land has been represented in the following solution.
Australian Government has defined the term residential status for the purpose of determination of tax liability of an assessee as per the Income Tax Assessment Act 1997/36 under section 6(1) and Taxation Ruling 98/ 17. However, the status of being resident of Australia as per Immigration and Border Protection Department is different from the definition as per taxation department (Zelinsky, 2016).
The determination of tax residency is done by the primary test known as “resides test”. As per this test if an individual resides in the country, Australia he/ she is considered an Australian Resident for the purpose of tax liability (Arendse, Stark & Renaud, 2015). In this situation, the judgement of the Levene v IRC [1928] AC 217 case is taken into account as well as the assessee is not required to form any other residency test.
However, if the individual fails to satisfy the residency test then the he/ she is required to take three secondary tests and is required to satisfy any one of them. These tests are Domicile test, 183 days test, superannuation test (Cooper, 2016).
Under the first test, Domicile test, an individual is regarded as an ordinary resident of Australia if his/ her permanent home is in Australia unless the department of taxation office is satisfied that the place of residence is outside Australia (Barkoczy, 2016). As per the argument of the verdict of the Federal Commissioner of Taxation v Applegate case the individual is required to continue his residence in Australian territory.
In order to examine the intention and location of the individual with regards to permanent residence according to the argument of Taxation Ruling IT 2650 factors that are included by Tax Commissioner are:
In the second test, 183 days test, an individual is regarded as an ordinary resident of Australia if he/ she reside in the country for more than half of the income or financial year whether or not continuously (Palan & Mangraviti, 2016). This test is considered until the taxation government is satisfied the permanent place of residence Lastly, in the third test, Superannuation test, employees of Government of Australia working offshore under Public Sector Superannuation Scheme and Commonwealth Superannuation Scheme are considered Australian resident (Zelinsky, 2016).
In the given case, Kit has been a permanent resident of Australia and kept his Chilean citizenship where he was born while most of the years he spent working off the Indonesian Coast for a United States organization. Kit also owned a permanent residential property acquired three years back from the current year as well as owned a joint bank account along with his wife who lived in Australian territory for last four years with their two children. Salary income of Kit is directly credited to his Australian bank account while all other family investments and dividend income from shares remains in Chile. During the month off from work, Kit spends time with his family either in Australia or in Chile.
On examining, the above factors and the fact of the case provided in the assignment it can be recognized that the residential status of Kit can be determined by the Domicile test. This is because Kit has to move out of the Australian territory for work purpose but at the same time, he has a permanent residence in Australia and has no intention to settle outside the country. According to the first significant condition of the Domicile test, Kit is a permanent resident of Australia and has Australian Domicile. Additionally, from the other information and facts given about having joint bank accounts in Australia where his salary is credited, having wife and children residing there it can be concluded that Kit has no intention to settle down outside Australia. Therefore, it can be said that Kit has satisfied the primary conditions of Domicile test as per ITAA 1997/ 36 and hence Kit is said to be an ordinary tax resident of Australia under section 6(5) (Palan & Mangraviti, 2016).
Moreover, the treatment of Kit’s salary income and other income from foreign land and family investments will be done according to the tax provisions of Income Tax Assessment Act 1997/ 36. Since, Kit is an ordinary resident of Australia therefore all his domestic and foreign income will be taxable as per the rules of the Australian Tax Office. Apparently, his salary income from the United States organization and income on family investments and dividend income on shares from Chile shall be taxable as per the rules of ITAA 97/36 (Eryilmaz & Sergici, 2016).
In the following case studies the respective outcome reached by the court in context to the judgment on sales of land:
The fact of the case is about the acquisition of 480 acres of land for mining copper that was later sold to another copper company, Fresno in consideration of fully paid shares. The contention of the Californian Copper Syndicate is the income earned from the transaction should be capital income and would not be taxed because the purpose of land is for mining copper the main product of the company. Whereas, on considering the facts of the case it observed that the company has entered into the sales transaction in order to earn profit therefore, it can be concluded that the income earned by the company from the sales of land is recognized as an ordinary/ revenue income and not capital income (Rosenberg & Schuldenfrei, 2015). Hence, the same would be liable for tax payment on the profit incurred.
In this cited case, the intention of acquiring the land by the company is mining of coal whereas over the period the Scottish Australian Mining company decided to sell off the land for the purpose of business activity or for residential purpose. For this reason, the management has bifurcated the plot of land and sold at the premium rate. According to the decision made by court it has been stated that the land cannot be used for the purpose other than the main objective it was acquired for. Accordingly, as the main objective of the land was coal mining and not for any other business purpose and hence, any income generated on the sale of lane would be treated as ordinary income and not capital income. Therefore, the same shall be taxable in the books of Scottish Australian Mining Company (Chirelstein & Zelenak, 2015).
In this case, Whitfords Ltd had acquired to secure for its original shareholders for accessing shacks instead of generating profit on sale of land or by any other business activity. Apparently, three companies and Whitfords Limited had entered into the transaction on sale of land generating profit more than it was intended to. This income may be regarded as an assessable income in terms of ITAA 1997/36 as decided by the courts because the transaction entered by the company in context to ordinary usage and did not use the land for its main business activity. Hence, the income from the sale of land cannot be regarded as a capital income under Income Tax rules of Australia (Graetz & McDowell, 2015).
The given case is about the sale of farm land owned by a farmer who was traditionally involved in farming. Over the period the owner decided and sold off a portion of the land to earn income and not to carry any business activity on such land. Therefore, as decided by the court verdict the said income from the sale of land would be considered as a capital income because the income realized from the land is a capital asset under the meaning of capital asset given by ITAA 1936 (Parker & Thurman, 2016).
The cited case is about Casimaty, a farmer had acquired a farming land as a gift from his father and further he acquired an adjoining land in order to erect homestead and for performing farming and fences business with no intention to sell it off. However, in later years due to hardships of bad health, debts, drought Casimaty had to sell the parts of the property around two- third of the land. According to the court’s verdict, the income on sale of this land considered to be a capital income instead of assessable income for tax under section 25(1) or 25A because the intention of owner was not to generate income from profit making undertaking but a realization on sale of capital asset (Hopkins, 2015).
The fact of the given case is the intention of Moana Sand Pty Limited was to extract sand from its land property. But in later years, the land became insufficient for the sand extraction quantity and the same was divided into sub parts by the owner and eventually sold off. As the purpose of the taxpayer in this case was to generate profit from the sale of property the income earned was decided by the court to assessable under section 25(1) of the Income Tax Assessment Act 1936 instead of treating it as a capital income (Shay, 2015).
The given case stated the intention of purchasing the land by owner is to farming which the farmer acquired from the borrowed fund. Over the period, the farmer divided the land property into fifty one subparts that were sold by the farmer in different intervals at high rates. This activity was observed to be repetitive in nature with the intention in profit making business activities. Therefore, as per the provisions and decision by the court the realized income from sale of land cannot be claimed as a capital income but is to be assessed as assessable income according to ITAA 1936 (Hong, Yi & Tiantian, 2016).
In this case, an individual purchased an old house for the purpose of investment that was renovated by him and turned into three townhouses with an intention to sell the house property. But due to the market structure, he was not able to sell this townhouse and hence, he started using the townhouse for his own living. After using the property for a year he sold all three townhouses at a very high rate. Apparently, on considering all the factors Federal government decided that the intention of the owner is to make an investment to earn a profit that is a business activity. Hence, the income received by selling the townhouse would be considered as ordinary income and would be taxed under Australian law under section 25(1) instead of considering the same as a capital income (Chirelstein & Zelenak, 2015).
Reference List:
Arendse, J., Stark, K., & Renaud, C. (2015). The Cohen and Kuttel stories: Is the place where I hang my hat still relevant to determine my residence for tax purposes?. Southern African Business Review, 19(1), 1-24.
Barkoczy, S. (2016). Foundations of Taxation Law 2016. OUP Catalogue
Chirelstein, M., & Zelenak, L. (2015). Federal Income Taxation, 13th (Concepts and Insights Series). West Academic.
Cooper, G. S. (2016). Tax Treaty Policy of Developing Countries Post-BEPS.Singapore Management University School of Accountancy Research Paper, (2016-S), 45.
Eryilmaz, D., & Sergici, S. (2016). Integration of residential PV and its implications for current and future residential electricity demand in the United States. The Electricity Journal, 29(1), 41-52.
Graetz, M. J., & McDowell, B. (2015). Tax Reform 1985: The Quest for a Fairer, More Efficient and Simpler Income Tax. Yale Law & Policy Review,3(1), 3.
Hong, Z., Yi, Z., & Tiantian, C. (2016). Land remise income and remise price during China’s transitional period from the perspective of fiscal decentralization and economic assessment. Land Use Policy, 50, 293-300
Hopkins, B. R. (2015). The law of tax-exempt organizations. John Wiley & Sons
Palan, R., & Mangraviti, G. (2016). 21. Troubling tax havens: multi-jurisdictional arbitrage and corporate tax footprint reduction. Handbook on Wealth and the Super-Rich, 422.
Parker, D. P., & Thurman, W. N. (2016). Tax Incentives and the Price of Conservation
Rosenberg, D. L., & Schuldenfrei, A. F. (2015). Gross Income Omissions and the 6 Year Tax Assessment Period: Seemingly Straightforward, the Extended Statute of Limitation Can Be Fraught with Complications. Journal of Accountancy, 219(2), 54.
Shay, S. E. (2015). Formulary Apportionment in the US International Income Tax System: Putting Lipstick on a Pig
Zelinsky, E. A. (2016). Defining Residence for Income Tax Purposes: Domicile as Gap-Filler, Citizenship as Proxy and Gap-Filler. Michigan Journal of International Law, 37.
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