Describe about the Business Setting Operations in Australia.
Fred works for an English employer which has sent him to Australia with the intention of aiding in the process of setting operations in Australia. During his visit to Australia, his wife comes along with him while his teenage children continue their education in London. The owned house in England is rented and they start living in Australia in a leased apartment with a lease of 12 months. Already, Fred has stayed for 11 months in Australia and now returns to England due to illness concerns. In the wake of the above information, Fred’s tax residency needs to be ascertained by paying consideration to the relevant statute.
Rule and Application
There are primarily four tests that have been outlined for checking the tax residency and are discussed below.
Domicile Test
To pass this test, two conditions are required to be satisfied (Woellner, 2014).
An Australian domicile must be possessed – In Fred’s case this is violated as he is a resident of England.
Permanent abode located in Australia
Since, one condition already fails, this test is failed by Fred.
Resides Test
Residency is determined based on the cumulative impact of the following factors (Barkoczy, 2014).
Amount of duration of stay and underlying purpose – Fred has already stayed for 11 months and still professional commitments pending. Also, employment is a significant reasons.
Nature of ties and life – Life is similar to that Fred lived in England and also wife is present. Besides, life lead in Australia with wife is quite similar to back home in England.
Based on the above aspects, it is apparent that the test has been passed.
183 Day Test
Following two conditions shall be complied with (Coleman, 2011).
Atleast 183 day stay in Australia by the taxpayer – Fred satisfies this
Intention to set up permanent home in Australia going forward – Not true for Fred as he has no such plans and intends to return back once the office is setup.
Hence, test failed.
Superannuation Test
This is only applicable for government employees but Fred is an employee of an English company and hence this test is irrelevant in Fred’s case (Gilders et.al., 2015).
Conclusion
As Fred has managed to satisfy one test from the given four, he would be classified as a tax resident of Australia.
Facts about the case
The shareholders of the Californian Copper Syndicate Ltd Company were issued loan from the bank in regards to buy a mine.
The land was located in New Zealand and had rich copper reserves.
Company had mentioned that they will mine the copper from the land but eventually they did not commence mining operation on the land.
The reason to not start the mine was that they did not have initial working capital to bear the expense occurred in the mining from the land.
The ownership of the land was transferred to another mining company in the return of the significant number of shares of that company.
The commercial value of the shares was significantly greater than the purchase cost of the mine which directly yielded a huge profit to the original shareholders of the land.
It was ruled by the court that the income from the shares would be assessable for taxation according to the section 25(1) of ITAA, 1936. The point behind the purchase of the land was to yield high revenue by conducting the selling operation of mine. Thus, the income received would not be considered as the capital proceeds since, the intent of the shareholders behind land sale was business activity rather than capital realization. Hence, the arguments claimed by the shareholders were rejected by the court and it was ruled that the overall income received from the sale of the land would be subjected to the taxation as per the ruling of the Income Tax Assessment Act 1936 (Sadiq et. al., 2016).
Case 2 Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR
Facts about the case
From the memorandum of the company, it was observed that coal mine was purchased by the investors of the company to commence coal mining in the 1860s.
Effectively and efficiently, company operated the mine and after certain time approximately in 1924, the coal reserves become exhausted for commercial exploitation.
The size of the land was 1771 acre, Hence, in order to utilize the empty, unshaped and exhausted land the company concluded to sale it for residential purpose. However, to make it ready for residential purpose, they executed various land development works.
A huge profit was produced in this process for the investors from sale.
The tax commissioner had ruled that the company which performed the sale of the 1771 acre large sized mine land for residential use would be taxable because the respective investors had accomplished several land development activities in regards to increase the worth of the land. Thus, the revenue would be subjected for the taxation as per the section 25(1) or section 26(a) of ITAA, 1936. The investors/ taxpayers had claimed that they executed land development tasks for the realization of the capital asset. Hence, the transaction receipts would be considered as capital receipts and outside the purview of taxable income (Deutsch et. al., 2016).
The court had observed the claims of the taxpayers along with the decision provided by the tax commissioner and finally ruled that the claimed of the taxpayers were correct. This was because the taxpayers had used the land for mining the coal and hence operational work carried for several years till the mining could no longer be feasible. Hence, they were involved in the land realization process only when the already mined land could neither be used for coal mining nor for residential purpose due to its unshaped structures. They performed the essential land development process like plot making, roads, water supply and so on. Hence, all these primary activity performed by the investors would be categorized under the realization of the capital asset and not legally responsible for tax under section 25(1) of tax law (Jade, 2016).
Facts about the case
Land situated on the beach was used for aerating the shacks and net used in the fishing business
Taxpayer had performed the sale of the land since he received high price offer from the land trading and development company.
Company had taken the ownership of the land and commenced land development. Same was also reflected through requisite changes in the article of association.
The land was further sold to prospective land buyers which caused handsome gains for the company.
Relevant law and Decision
The court had overruled the claimed of the taxpayers and provided the judgment that the taxpayers would be subjected to the provision of the assessable income of the section 25(1) of ITAA, 19936. The authentication of this judgment was the change in the intention on the part of the taxpayers. At the initial stage, the asset realization was carried by the taxpayer by fishing and when he received the offer of the high rate of the land then he sold the land to the land trading companies whose, main work was commercial i.e. land trading and land development. The company made alternation in the article of association with respect to the work conducted by the company. These aspects were enough to predict the focus on the part of the taxpayers to execute the profit yielding business from sale of the land. The assessable nature of the transaction would be accountable for taxation (CCH, 2016a).
Facts about the case
The taxpayers were exposed to a situation of financial distress.
The two trustees (taxpayers) had a deceased land where they executed a cattle business.
The cattle business did not result in any significant gains for the trustees and hence had to be closed down.
Sale was the most suitable option left to stabilize the looming financial ailments of the family. A large section of the land was sold after undertaking the subdivision on the land.
The sale was done by the taxpayers and the gains were consumed against the outstanding financial dues.
Relevant law and Decision
The appeal made by the taxpayers was accepted by the court because it was related to their activity and the reasons behind the sale of the land. It was claimed that the land was not utilized under the profit scheme related to the business. Hence the gains received from sale of the estate land should not be chargeable as ordinary income. The court had considered the situation of the taxpayers and decided that the sale of the land was listed under the realisation of the asset since they had to sell the land owing to their situation but not their profiteering intent (CCH, 2016b).
Facts about the case
The taxpayer had received 998 acres of the farm land from his beloved father in regards to commence the traditional farming business.
He did not have the funds to start the new occupation because his previous business was failed because of drought. Failure of the business had adverse impact on the health of the taxpayer.
He had acquired a high loan from the bank for treatment of his poor health.
The interest burden kept on accumulating for the taxpayer.
There was no other source of the income left with taxpayer to pay the loan amount hence he concluded to sell a substantial part of the land with the intent of paying his dues.
The residual part after sale of the land was used for farming for his living.
Relevant law and Decision
The Federal Court had opined that the selling of the substantial part of the farm land with respect to pay the interest and the loan amount was not assessable in the accordance of the ordinary income mentioned in the section 25(1) or 25A. The taxpayer had initially tried to resolve the loan problem by doing farming but eventually it could not provide the significant amount to pay the interest or the loan amount. Therefore, he sold the subsequent part of the land and paid the amount to the bank and again involved in his faming business on the remaining farm land. The act of the taxpayer was realisation of the land asset to discharge the loan amount and not the activity of undertakings gains from land sale (CCH, 2016c).
Facts about the case
The central intention of acquiring the land by the company was to conduct two functional activities
Extraction of the silica (sand) from the land
Selling the extracted sand into market
After continuously extracting sand,, the land become unstructured and exhausted and no further extraction was possible.
Company sold the land
Some essential land development activities were undertaken so as make it suitable for domestic purposes
Company earned a sizable income of approximately $370,000 form sale.
Relevant law and Decision
The verdict of the case was different from the verdicts given in the Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR case, because the Scottish Company had sustained the coal mining operation for years and then sold the land to utilize it for residential intent. However, the verdict of the Moana Sand Pty Ltd v FC of T 88 ATC 4897 case was different since the company purchased the land with the intention of mining but with indulgence in land development activities for the purpose of profit making, the business activity of the company had effectively altered. Therefore, the intention of deriving the maximum returns would be subjected to the isolated concepts of the ordinary income of taxation. The verdict of the FC of T v The Emporium Ltd 87 ATC 4363 case is the testimony of the above judgment (Coleman, 2011).
Facts about the case
The taxpayer purchased five blocks of land for the purpose of agriculture.
After 24 months, the taxpayer decided to sell the land and for executing this decision he made different blocks and systematically started selling the land block.
The received income was $ 388,288 from sale of the blocks which continued over a long length of time.
Meanwhile, the taxpayer also kept purchasing more land for development through sub plotting and selling.
Relevant law and Decision
The Federal Court decided that the proceed of $388,288 from sale of the land blocks was ordinary income and assessable under the Income Tax Assessment Tax 1936. The reason behind this ruling was the intent of the taxpayer to profit from selling the land block after carrying out development with no intention of conducting any farming.. The sale of the plots was executed to different buyers, at different time frame which was prime indication of taxpayer’s intent to increase the value of the block for higher proceeds. These sets of commercial action led to the establishment of a business undertaking and hence the taxpayer was held accountable for taxation (CCH, 2016d).
Facts about the case
The taxpayers had purchased an old unshaped property at very low cost.
They purchased the land so that they could liquidate it in the near future after developing it.
The taxpayers also issued a loan from bank so that they could execute some value addition process.
In the process of increasing the commercial value of the acquired land, they made three designer houses with the help of loan amount.
Various modes of advertisement were also used by the taxpayer to invite the premium buyers to purchase the houses.
They had not sold the house because they were not receiving the expecting proceeds.
They resided in one house for one year and then the houses were sold with a sizable profit amounting to $151,622.
Relevant law and Decision
The judgment of the court was based on the various aspects and activity performed by the taxpayers in the duration starting from sale of the land till they received the net profit of $151,622. These facts are (Deutsch et. al., 2016).
Objective behind the purchase of land – Sale after some time to get high gains
Construction of new designer houses on the land – Value addition activity to maximize the commercial value
Advertisement for sale of the house – To earn higher proceeds/ returns
Taking loan for value addition activity – To show that their financial condition was not well.
From the above factors, the court reached the verdict that the income from sale of the houses was assessable for taxation under the section 25(1) of ITAA, 1936. It was also stated that the activity of taking loan was to show the poor financial stage, however, they had used the amount in the value addition process in order to extract gains from property sale (CCH, 2016e).
References
Barkoczy, S 2014, Foundation of Taxation Law 2014, 6th 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 September 8, 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 September 8, 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 September 8, 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 September 8, 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 September 8, 2016)
Coleman, C 2011, Australian Tax Analysis, 4th 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
Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2015, Understanding taxation law 2015, 7th eds., LexisNexis/Butterworths
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 September 8, 2016)
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 9th eds., Thomson Reuters, Pymont
Woellner, R 2014, Australian taxation law 2014, 8th eds., CCH Australia, North Ryde
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