Assessable Business Income For Taxation Law

Issue

Discuss about the Assessable Business Income for Taxation Law.

The case presented states certain information about Fred who has come to Australia to setup office for a British company. He is being accompanied by his wife while his children are in a college in London pursuing their studies. The prime concern is to use the above facts and the relevant statutes and tax rulings to determine if Fred is a tax resident of Australia for the year under assessment.

In order to determine the tax residency of any individual taxpayer, TR 98/17 is of significance since it highlights the various tests that may be applied for objectively testing the tax residency status. It is imperative that compliance with even one of the tests would result in the taxpayer getting the recognition of Australian tax resident (Barkoczy, 2014). The relevant details of these tests are outlines below.

Domicile Test

This is commonly used to ascertain residency status for tax purpose of Australian domicile holders who are residing abroad for a multitude of reasons. Fulfilment of this test requires that the taxpayer should comply with both the clauses mentioned below (Woellner, 2014).

Australian domicile should be there with the taxpayer.

Permanent abode of the taxpayer must be situated in Australia

To determine permanent abode of the given taxpayer, factors outlined in IT2650 are often deployed.(Deutsch et, al., 2016).

Resides test

Limited information is available on this in the concerned legislation and hence guidance sought from precedents of court cases and relevant tax rulings. The critical factors worth considering are the underlying significance of the taxpayer’s purpose of visit, nature of various ties that exist in Australia along with the nature of social life that the taxpayer leads in Australia. Tax residency is granted taking into consideration all the factors (Coleman, 2011).

183 day test

It essentially requires both the following conditions to be met (Deutsch et. al., 2011).

Stay of atleast 183 days (in Australia) in the given assessment year

Intention to settle in Australia in the long run irrespective of whether it materialises or not.

Superannuation Test

The tax residency of Australian government officials serving in foreign nations is determined on basis of their contribution to particular superannuation schemes (Barkoczy, 2014).

Application

Domicile Test – Fred has come from England and does not hold Australian domicile. Test failed.

Resides Test – Fred’s visit purpose is significant since he has come for unemployment and duration also seems several months even though exact time not given. Further, his life in Australia is comparable to that in country of origin i.e. England. Considering both above facts, the test is deemed to be passed.

Rule

183 day test – First condition satisfied since Fred has resided in Australia for a period in excess of 183 days. However, no intention to settle in Australia as house in England is rented and no fixed asset has been purchased in Australia, even house is on short term lease of 12 months. Hence, test failed.

Conclusion

For the current assessment year, Fred would be considered as a tax resident of Australia.

When the concerned taxpayers or shareholders are a part of a scheme of making profit, then in such cases the receipts will be termed as revenue receipts and would be treated as per the ordinary income concept of the taxation.  A significant example of such cases can be examined in Californian Copper Syndicate Ltd v Harris case, in which a company bought a land in New Zealand. This land was basically copper enriched and the company used all their capital to purchase the copper land. However, no single mining activity was performed by the company due to unavailability of the working capital. The shareholders of the company initially knew about the financial position that they would not be left with enough working capital after spending all the capital to own the land .Hence, copper land was liquefied to another firm which was performing mining activities. The return amount would be decided as the shares of that company in the exchange of the copper land (Barkoczy, 2014). The court ruled about the case that the focus of the company behind the buying of the copper mine was to sell the land to the other company. There was no intent of the taxpayer to begin the mining. Therefore, the business intent of the taxpayer to sell the land would be liable for tax under the section 25(1) of ITAA, 1936 as per the ordinary income concepts on the part of the taxpayer (Manyam, 2010).

In this case, the coal enriched land was used for coal mining by the Scottish Australian Mining Company. After years of conducting the mining operation on the land, the land got exhausted in the coal content.  There was no possibility for further coal mining on the land. Thus, it was decided by the company to sell the land for residential purposes to the potential land and plot buyers. For this action, a large section of the land was subdivided and subsequent activities of land development were performed by the company. This included sub section of the land into different size plots, road construction around the plots termed as Russel Roads and water and sewage plants, railway station, and park, church, hospitals were also made in this large land. It was stated on the part of the company that the received income should be treated as the capital receipts and would not be accountable for income tax. The honourable court ruled that the company was initially contributed in the coal mining and when the land was prepared for ripe process, it was decided by the shareholders to sell the ripe land, beside this factor, the land was huge in the size and it was essential to developed the land in order to make it feasible for residential purpose. Therefore, this trading of the land to the various potential buyers would be treated as mere realisation of the available asset (Jade, 2016).

Domicile Test

A beach land was purchased in regards to dry the shacks that are the basic component of the fishing business in the year 1953. This land was liquefied to land development companies, which were searching for a land nearby beach in the year 1967. The new shareholders intentionally divided the land into sub sections and same had been updated into article of the association of the firm. Companies made several plots on the land and subsequently sold them to the respective buyers. This activity of selling land plots caused sizable earning from isolated transaction. Therefore, the court pronounced that the intent of the shareholders is sufficient to determine the business intent of profit making. These land development activities on the land performed by the shareholder were also explained the mind set and willingness of the taxpayer to earn profit and also same activities were registered in the new article of association of the company. Thus, the income earned from isolated transaction would be ordinary income and taxed as per relevant taxation norms (CCh, 2016a).

Two trustees named Statham & Anor received a deceased farm land from their uncle. In order to use the land, they planned to begin a small cattle business to provide financial support to their families. This cattle business could not sustain for long and caused a loss also. Finally they decided to sell some specific part of the land to get some money to improve the financial issues.  The tax commissioner ruled in this case that the received income from selling of the deceased land would be labelled as assessable income and would be taxed.  This ruling of the commissioner was not accepted by the taxpayers and hence, they appealed to court. Court had taken the initial facts into consideration and decided that no activity of the taxpayer indicated the involvement in carrying business of selling the land also the taxpayer used the remaining land for farming business. The activity of the sale of the land would not be considered under the concepts of ordinary income. This was non assessable income and derived from realisation of the available land asset (CCh, 2016b).

There are several aspects that can help to examine the nature of the transaction and the involvement of the taxpayer in the profit making schemes or business. Also, any change in the prime intention on the part of the taxpayer will also change the type of the received income. This case can be viewed in the highlights of the above mentioned aspects. Casimaty who was initially involved in the farming activity sold a large part of his land by sub dividing it into several parts. These parcels of the land were made a sizable profit on the part of the taxpayer. Moreover, he was facing some financial shortage, which forced the taxpayer to sell his farm land. He had not sold the entire part of the land because he did not want to earn money by sale of the land. Additionally, he did not have enough capital to divide the land hence, he borrowed fund to divide the land. This also indicated his low financial condition. Hence, to improve financial condition, he sold some part of the land. This activity of selling of the land would be termed as mere realisation of the capital asset and received income would be capital receipts (CCh, 2016c).

Resides Test

Moana Sand Pty Ltd v FC of T 88 ATC 4897

The Mona Sand Company was involved in the sand excavation on a purchased land. After years of the sand excavation process from the sand land, it was exhausted in the total sand mass and become ready for ripe process.  The company had expected revenue of around $ 500,000 from sale of the land. For this respect the company systematically divided the land into plots of specific size, construct roads and parks, water supply units to improve the commercial worth of the land. The court ruled that the action of dividing the land into specified plots size and installation of various extra facilities would be lead the characteristics of owning a business of land development (Deutsch et, al., 2016). Thus, the earned revenue would be constituted according to the ordinary concepts. The revenue receipts would be taxed under the section 26(a) and 25(1) of ITAA, 1936. It was commented from the above arguments that only the receipts received from sale of the subdivided plots would be taxable due to the business nature of the transaction. The reason being there was no intention on the part of the taxpayer to indulge into profit deriving activity from sale of land. Hence, the tax tribunal pronounced the decision in the favour of the company that sale of the land caused due to the involvement in the realisation of the land asset (Austax, 2016).

Taxpayer had taken loan from various financial funds in order to purchase a five block land.  In the early days, the taxpayer was involved in farming activity on this five block land. After few years of farming, a subsequent and systematically land subdivision took place by the taxpayer.  Fifty one of various sized blocks were made from the farm land and sold among several land buyers. This resulted in an approximate revenue of $388,288. The court said that Crow the taxpayer had completely involved in the business of selling of the plots by conducting repetitively and systematically land division. However at the initial time frame, some farming was also performed by Crow but the main intent on behalf of the taxpayer can be taken from the evidences like he borrowed funds to purchase the land so that after few years of farming he could sell the land by dividing it into several blocks and earn sizable amount. There was continuously selling of the subdivided blocks which expressed the purpose on the part of the taxpayer. Therefore, based on the ordinary nature of the transaction from business carrying activity would lead for taxation (CCh, 2016d).

183 Day Test

McCurry & Anor v FC of T 98 ATC 4487

McCurry & Anor the concerned taxpayers had bought a land, which was having few small old buildings. In order to develop the land, three newly design town houses were constructed on the land by the taxpayers.  Taxpayers exclusively involved in the activity of advertising about the selling of the new constructed town houses. However, they were not successful in the sale of the houses and started using one townhouse for their own living. After 12 months of living, they were sold the town houses and earned net revenue of $150,000.  The tax authority pronounced that the taxpayers were completely engaged in the commercial activity of land development and selling of the land and earned revenue was ordinary in nature. However, taxpayers disagreed with the decision given by the tax authority and claimed that in order to overcome from financial issues, they sold the land. The honourable court said that if taxpayers were facing financial difficulties than they were not in the situation to construct newly designed townhouses. They constructed the townhouses in order to sell them to get higher return revenues. Also, it was pronounced that purchasing of the land house would not be considered under investment activity hence, it was not be realisation of the capital asset.  There was full intent on the parts of the taxpayers to sell the land to earn sizable profit. Hence, the received revenue from isolated transaction coming from sale of the townhouses would be considered as assessable income and liable for the taxation under the section 25(1) of ITAA, 1936 (CCh, 2016e).

References

AusTax 2016, Assessable Income: Subdivision of pre-CGT land, Available online from https://austaxpbr.com.au/document/PBR_3062 (Accessed on August 29, 2016)

Barkoczy, S 2014, Foundation of Taxation Law 2014, 6^th eds., CCH Publications, North Ryde

CCh 2016a, FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR, Available online from https://www.iknow.cch.com.au/document/atagUio549860sl16841994/federal-commissioner-of-taxation-v-whitfords-beach-pty-ltd-high-court-of-australia-17-march-1982 (Accessed on August 29, 2016)

CCh 2016b, Statham & Anor v FC of T 89 ATC 4070, Available online from 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 August 29, 2016)

CCh 2016c, Casimaty v FC of T 97 ATC 5135, Available online from https://www.iknow.cch.com.au/document/atagUio539843sl16716249/casimaty-v-fc-of-t-federal-court-of-australia-10-december-1997 (Accessed on August 29, 2016)

CCb 2016d, Crow v FC of T 88 ATC 4620, Available online from https://www.iknow.cch.com.au/document/atagUio545564sl16800674/crow-v-federal-commissioner-of-taxation-federal-court-of-australia-17-august-1988 (Accessed on August 29, 2016)

CCh 2016e, McCurry & Anor v FC of T 98 ATC 4487, Available online from https://www.iknow.cch.com.au/document/atagUio539084sl16707683/mccurry-anor-v-fc-of-t-federal-court-of-australia-15-may-1998 (Accessed on August 29, 2016)

Coleman, C 2011, Australian Tax Analysis, 4^th eds., Thomson Reuters (Professional) Australia, Sydney

Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2016, Australian tax handbook 9th eds., Thomson Reuters, Pymont

Jade 2016, Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188, Available online from https://jade.io/j/?a=outline&id=64663 (Accessed on August 29, 2016)

Manyam, J 2010, ‘Taxation Of Gains From Banking and Insurance Businesses In New Zealand’, Revenue Law Journal, Vol. 20, No.1, pp. 1-29

Woellner, R 2014, Australian taxation law 2014, 8^th eds., CCH Australia, North Ryde