To discuss whether Kit is an Australian tax resident or not and the taxation provision for the income received by him during the tax year.
“Section 6(1) of ITAA 1936” highlights the tax residency of taxpayer and to find the tax residency position for the assessment year Tax Ruling TR 98/17 would be used. In accordance to TR 98/17, four residency tests are available which may be applied on the taxpayer and if the taxpayer has successfully completed the provisions of minimum one residency test, then he would be classified as an Australian tax resident (Barkoczy, 2017).
In the accordance of the provisions of “section 6-5(2) of ITAA 1997,” the domestic income earned from Australia and foreign income derived from the other countries would be held for taxation purposes if the respective taxpayer has been declared an Australian tax resident (Coleman, 2011).
Domicile test is used to check the tax residency of those individuals who are Australian residents. This test cannot be applied on foreign resident. The main provisions of domicile test are listed below:
The essential factors that would be considered to find out if the permanent residence of taxpayer is located in Australia only in the accordance of IT 2650 are highlighted below (Deutsch, et al., 2017).
The taxpayer who is a foreign resident and has completed the below highlighted conditions of 183 day test would be termed as tax resident of Australia (Sadiq, et al., 2016).
The taxpayer who is foreign resident but living in Australia due to any personal, professional, or other reason could apply this test, The various factors that are applicable in judging the resides test are strength of ties with Australia and with foreign land, frequency and magnitude of stay in Australia coupled with underlying nationality if required (Gilders, 2015).
When taxpayer is government officer serving abroad and constantly contributed in the either of the superannuation schemes then, taxpayer would be termed as tax resident of Australia even though the taxpayer is living on foreign land (Sadiq, et al., 2016).
Taxpayer – Kit
Kit is PR of Australia and hence he possesses domicile of Australia. It indicates that he justified the one prerequisite of domicile test. Further, during his employment he has to work in an oil rig off the Indonesian coast but his permanent residence is present in Australia only. This can be verified with the facts that Kit has acquired a house in Australia in which his family is living. He along with his wife has opened a bank account in Australian bank from where he gets his salary from employment. Moreover, he is residing in Indonesia because of the liability of the employment agreement. There is no future plan of Kit to migrate from Australia or to settle in foreign land. This indicates that Kit’s permanent residence is in Australia only. Irrespective of possessing Chilean citizenship Kit has made very less visits to Chile and goes to Chile when he gets one month off from services every three months. Additionally, there is no evidence present that define that Kit want to shift their permanent resident. Therefore, it can be concluded from the above discussion that Kit is an Australian tax resident under the clauses of Domicile Test.
It is apparent from the highlighted case fact that Kit is Australian resident and hence, 183 day test would not be relevant.
It is apparent from the highlighted case fact that Kit is Australian resident and hence, resides test would not be relevant.
It is apparent from the highlighted case fact that Kit is working for a US based company and hence, superannuation test would not be relevant. It is because superannuation test is relevant only when taxpayer is Australian government officer.
Conclusion
Kit is a tax resident of Australia because he passes the criteria of domicile residency test. Therefore, the salary income derived through employment and investment income resulted from share portfolio would be taken into consideration for taxation purpose in the accordance of “section 6-5(2) of ITAA 1997.”
Californium Copper Syndicate Ltd purchased a copper mine despite having insignificant amount of working capital. The intention was to purchase the land and then to liquidate the ownership to other competitor mining company. After a year, company sold the ownership and received substantial shares in that company. Company made the claim that selling of ownership was substitution of land asset with the share asset and hence, there would not be any income tax liability on the income earned from share. Court decided that initially, company knew the financial condition and very well aware that they would not be able to commence the mining and even then they purchased the mine. The reason for purchase was to profit from liquidation. Therefore, the profits from shares would be assessable income from isolated transaction of pre-planned profit intention of company (Woellner, 2014).
Scottish Australian Mining Co Ltd carried on coal mining operation on the acquired land. The mining operation continued for approximately six decades. It had been analysed that more mining of coal from mine would not be efficient because of the insufficient coal contents in the mine. Therefore, it was decided to convert the land suitable for residential place. In regards to this aim, company carried out essential development works and construction and then sold the plots to buyers. Tax Commissioner believed that the income from the sale of plots would be assessable income. The case was taken to court where it was ruled on behalf of the honourable court that the company used the exhausted land for residential purpose and there was no intention of creating high profits or to start business. Therefore, it would be counted as realisation of capital assets and the nature of proceeds would be capital receipts (Jade, 2017).
The original shareholders used the land (near beach) for fishing operations such as aeration of net and shacks. After that company was purchased by a consortium of leading estate development companies. Company wanted to derive profit from the beach side land and hence, updated the article of association and started essential development and construction. Finally, the beach side land was sold and significant amount of profit was received by Whit Fords Company. Taxpayers claimed that they had realised the land capital asset. Court made the judgement that company used the capital asset for profit purpose. Further, land development and construction were the business activities carried by the company. Therefore, sale would be considered a business action of company and the receipts would be ordinary income (CCH, 2017a).
Tax commissioner advocated that taxpayers sold the land for profit and therefore, the income would be classified as assessable income. Taxpayers appealed against the decision of Tax Commissioner to court where it was claimed on behalf of taxpayers that sale was incorporated because of poor financial condition. It resulted because majority of the money was used to start cattle business on the land which failed within a couple of months and closed. Hence, they had to sell a large section of land. Further, it was claimed by taxpayers that there was neither motive of generating high income from sale nor to get involved in any land sale business. Court considered the claims of the taxpayers and ruled that the activity of land sale would be categorised under realisation of capital asset because poor financial condition was the primary reason prompting the sale. Hence, the nature of the income would be capital receipts and non taxable besides taxing of capital gains (CCH, 2017b).
Tax commissioner cited that taxpayer Casimaty had sold the land in order to earn profit and hence, the income would be assessable income. Taxpayer claimed that the land was gifted from his father for the farming only. Due to low available finance, he issued loan from bank and believed that when he received profit from farming he would pay the loan. However, farming resulted very low income and hence, he could not be in the position of repay the loan. This made adverse health issues. To repay the loan and to get better health treatment he sold a subsequent section of land asset. Court accepted the claim of Casimaty and said that due to adverse situation he sold the capital asset which would be categorised under realisation of capital asset (CCH, 2017c).
Moana Sand Pty Ltd was involved in the sand mining on the land. After some time, when company was unable to produces significant revenues from sand mining and selling, then it was decided by the investors to sell the land. To maximise the revenues, company used significant money to bring about development and to install various facilities. Sizeable income was produced through the sale. Court had opined the judgement that company made profit through isolated transaction. The development and installation of facilities were the witness of the act of maximizing revenues. Therefore, the profit would be categorised as assessable income and liable for taxation under Section 25 (1) of ITAA, 1936 (Coleman, 2011).
Taxpayer purchased a land for farming. However,within 12 months, the land was subdivided and sold to different customers at attractive prices. Taxpayer was receiving significant proceeds from the division and selling and hence, completely finished farming and acquired the land sale business. In process of business, he made significant number of blocks even though he purchased another land block to earn more profits. Court opined the verdict after considering the facts that closing of initial farming business, acquisition of other lands, subdivisions, selling was the witness of the business action of taxpayer. Thus, the proceeds would be assessable income mainly from ordinary income from business concepts (CCH, 2017d).
Taxpayers with the intention of deriving high revenues purchased a land that already had some old constructions. In regards to constructing new building, taxpayers borrowed money from bank and used the amount for two purposes. First was to build three townhouses in place of old houses and second was to do marketing for the new houses. They expected higher prices for the houses and hence, did not sell them for a year when market was not conducive and stayed in one house. Further, the townhouses were sold off at their expected prices and resulted in sizable profit. Claim was made by taxpayers that it was realisation of acquired capital asset. Court overruled the respective claim and announced the verdict that the initial plan of the taxpayer was to derive sizeable profit. The provision of taxpayers conduct like construction, holding houses for a year and marketing were with the perspective of making high proceeds. The profits gained would be assessable income (CCH, 2017e).
References
Barkoczy, S 2017, Foundation of Taxation Law 2017, 8th eds., North Ryde: CCH Publications.
CCH 2017a, 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 May 4, 2017]
CCH 2017b, 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 May 4, 2017]
CCH 2017c, 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 May 4, 2017]
CCH 2017d, 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 May 4, 2017]
CCH 2017e, 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 May 4, 2017]
Coleman, C 2011, Australian Tax Analysis, 4th eds., Sydney: Thomson Reuters (Professional) Australia.
Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2017, Australian tax handbook 9th eds., Pymont:Thomson Reuters.
Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2015, Understanding taxation law 2015, 7th eds., Sydney: LexisNexis/Butterworths.
Jade 2017, 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 May 4, 2017]
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 9th eds., Pymont: Thomson Reuters,
Woellner, R 2014, Australian taxation law 2014, 8th eds., North Ryde: CCH Australia.
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