Clements And Taxation : Taxation Law

Fred does not reside or is domiciled in Australia hence for the purpose of assessment of tax his residency will be determined based on the statutory tests. Under the Australian Taxation law, an individual is determined to be a resident for the purpose of taxation as per the statutory requirements mentioned under Section 6 of ITAA (1996). Section 6 lays down the following test for the determination of resident for the purposes of taxation:

Domiciled in Australia: the individual’s domicile is in Australia.

183 days requirement: the individual resides in Australia for more than 6 months, either for a continuous period or intermittently period in an income year. However this condition is subject to the intention of the individual, whether he intends to reside in Australia or not and his usual place of abode is outside Australia. If either through his actions or intention he does not wish to reside in Australia or his usual place of abode is outside Australia then he is not a resident for the purposes of taxation.

Superannuation Scheme: if the individual is a member of the superannuation scheme in Australia then he is a resident of Australia for tax Assessment.

In the given situation Fred is a resident of Australia for taxation purposes as he falls under the second test laid down in the Income Tax Assessment Act, which is the 183 days test. Since Fred resides in Australia for a period of 11 months consecutively, he fulfils the condition of residing in Australia for more than one-half of the income year. Here the income year is not the calendar year but the year when the income is actually earned. In Clemens and Commissioner of Taxation [2015], it was stated that the assessee must be physically present in Australia for more than 183 days in an income year to be resident of Australia.

Herein, Fred being a British citizen has come to Australia with the intention of residing in Australia, although the period of residence is not fixed, but his intention is apparent from the fact that he has come to Australia to set up a branch of his company (Ato.gov.au, 2015). Also he rents his family home and brings along his wife too which shows that he intends to stay for a long duration, because if that was not the case then he would have left his wife with his children.

The usual place of abode is not the permanent place of residence, as was held by the administrative tribunal in Jaczenko and Commissioner of Taxation, [2015]; it is the current or the habitual place that is considered as the usual place of abode. In this case also, Fred’s usual place of abode is in Melbourne as he has leased a property for 12 months which shows his intention of habitual as well as current residence. Although Fred has a family home outside Australia, still his place of abode will be determined by his ‘usual’ place of abode.

Therefore, Fred is a resident for the purposes of tax assessment and the income he gains from renting out the family home and other interest accrued from his investments in France, he shall pay taxes in Australia for that income gained.

Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159:

This judgment clears the concept of assessment of tax in case of sale proceeds from a land or building.  As a principle when an ordinary investment is realised the gain received from the difference in value is not considered as profit and is only an ordinary income and not a capital gain. However, gains from realising securities are considered as capital gains as they are profits earned in the ordinary course of business. Lord Justice Clerk explained the scheme of capital gains, and states that there is a very slight difference between the above two situations and in each case the situation is to be determined based on the idea of whether there is an enhancement of value by mere realisation or change in investment or whether there is a gain while carrying out a profit making activity.

The case discusses in general the assessing of income generated from sales proceeds of land/ building. The ratio of the judgment was that in order to assess taxability it is to be first seen whether the profit is in the nature of income falling under the category of capital income/gains. It was held that if the sale of the building/land is not for the purpose of business, i.e. the sales is not in ordinary course of business for profit making motive and is only a realisation from sales due to enhanced value meant for further investment and not for profit making then the character of the gain so received is not a capital gain or income but only an ordinary income under the Income Tax Act.

Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188

It was submitted by the respondent that the income that was generated from sale of land belonging to the company was an income that falls under either section 6 or Section 24, which are the income’s generated not for profit making purposes or in the ordinary course of business arising from carrying out of the business. The business of the respondent company as evident from its memorandum was of mining, the sale and other activities were only a part of the business in order to fulfil its final work of mining.

The court held that, the Lambton lands were bought for the purpose of coal-mining and not for profit making by sale of the land. It was only after the purpose of coal-mining became redundant, that the respondents started to sell the land. The mere sub-division of the land before selling it and was only a method of using the land to its advantage, which is not the same as profit making in the ordinary course of business of sale of land. The construction of railway lines, parks and other amenities are only a part of the advantage that the company was trying to seek, as sub-division is not possible without that. Hence, it cannot be said that the sale of land by the respondent was for the purpose of profit making rather it was only for realisation of the land.  Therefore the income generated would fall under the category of Section 6 of the ITAA as in order to fall under section 26, it falls out of the ambit of carrying on or carrying out for profit making by sale.

FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR

This is a case that establishes the principle that not every sale wherein the magnitude of proceeds is high can be said to be as a profit assessable under section 26 of ITAA. Here, the taxpayers had bought the land for the purpose of securing entry for its shareholders to the shacks at the beachside. Later on the land was developed by the shareholders into residential areas and was developed for the same purpose and there was a residential subdivision of the said land. The sales of the same generated huge profits, but the intention of the taxpayer while buying it or while selling it was not for the purpose of profit.

It was held that the degree of proceeds is not the parameter on which the assess ability shall be governed but what happens to the land in the course of conducting the business that would be the subject of assess ability. In the present case the development of the land and its sale was considered as mere realisation of the land, assessable under Section 25 of the ITAA.

Statham & Anor v FC of T 89 ATC 4070

In this case the court held that there was only realisation of land and the tax-payers were trying to sell of the land in the most advantageous way for them. This conclusion was derived at after thorough consideration of the facts that the tax-payers bought the land for the purpose of farming, they later tried to sell off the land in one lot but were unable to do so, they did not engage into commercial activity of selling the land by employing brokers, working, developing site office etc, they continued with their respective professional tasks, they only subdivided the land in order to make the most out of the sales. Also none of their actions were in the nature of profit making by sales nor were they professionally involved in land development in the ordinary course of business. Hence, merely shifting from farming to development of land for selling it in order to take advantage does not amount to profit making under section 26, rather in the present case it was only realisation of the capital asset and is an income under Section 25 of the Act.

Casimaty v FC of T 97 ATC 5135

In this case there were 5 applications before the court for reviewing the decision of the Commissioner of Taxation disallowing objections of the applicant to amended assessments of tax in 1987, 1988, 1989, 1990 and 1991 stating that successive subdivisions of the property “Acton View” occurred in the course of carrying on a business. The issue for determination was whether the subdivision and sales were undertaken as part of conduct of business such that the profits are accessible under Section 25(1) of The Income Tax Assessment Act, 1936 or under second limb of S. 25A of the Act. The Court decided in favour of the taxpayer being influenced by factors that apart from activities necessarily undertaken to obtain approval for subdivision, he did nothing to change the purpose of “Acton View” and used it as residence and conducted the business of a primary producer. Also, he did not acquire any other land to add to his stock suggesting that he did not carry a business of lands. Also, though he worked in partnership with his wife and son, he made no attempt to bring “Acton View” as a partnership asset, considering the fact that subdivisions were undertaken only to meet debts and problems of deteriorating health. Thus the taxpayer carried no business of land and thus the appeal was allowed that each assessment be remitted to reassessment in accordance with these reasons.

Moana Sand Pty Ltd v FC of T 88 ATC 4897

In this case, the applicant (the company) appealed against the decision of the Administrative Appeals Tribunal where the Tribunal disallowed the objection of the company to the Commissioner’s claim of bringing to tax $ 500,000 less the cost of land and other expenses wherein the land owned by the company was resumed. Here, the tribunal decided that $ 370,000, less costs and expenses, should be bought to tax for 1980 since only the aforesaid amount was paid in this year. The principal of this company is Mr. Roche to whom the land was transferred in 1951 as nominee for a family syndicate. The land has many sandhills on it. The company, incorporated in 1955 contained in its MOA the only object to acquire lands for the purpose of carrying on business of working on/or selling the sand thereon. The tribunal came to the conclusion on the basis of the evidences before it that the company while acquiring the land had the predominant purpose of working on/selling the sand on it while secondary to it, was the purpose of selling the land for profit when the time became ripe for subdivision and thus held the income taxable under Section 25(1) according to ordinary concepts and usages and the second limb of 26(a) which says that assessable income of a taxpayer should include profit arising from the carrying on or carrying out of any profit making undertaking or scheme. Before this Court, the interpretation of the tribunal’s findings were disputed. The Court critically analysed the tribunal’s findings and concluded that the company had a twofold purpose in mind while acquiring the property and held the income taxable under S.2 5(1) and second limb of S. 26(a). Turning to 26(a), it said that it was not required that the second limb only apply when the profitable resale was the dominant purpose, it just has to be a purpose in mind. Also, it distinguished the case from the Kratzmann’s case because unlike it here although due to compulsory acquisition, the ultimate purpose of the company in relation to the land was fulfilled. Thus, it dismissed the appeals with costs.

Crow v FC of T 88 ATC 4620

In the present case the court was of the view that the activity of the tax payer of purchasing land and then sub-dividing it and selling was a continuous activity, which is considered to be as an activity for profit making by sale. The contention of the tax payer that he purchased the land for the purpose of farming and then in order to clear his indebtedness he had to sell of the land so bought by him, was not considered by the court. This is because the court stated that the land was bought although with the intention of farming, but the tax payer being a poor farmer, borrowed money in order to buy the land and then he had to mortgage further to pay off the mortgages. Therefore, the tax-payer already knew that he would have to the sub-divide the land in order to pay off the credit, specially taken from the bank. 

Hence, even if the initial intention of the tax payer was to use the land as a farm but his continuous actions of buying and selling and then the obvious need of development in order to pay off the debts makes the sale in the nature of profit making activity done in the course of business. Hence the ingredients of section 25 of the Income tax Act. The ratio of the judgment by Lockhar J. was that in order to determine whether the activity was in the nature of profit making or not, all the ingredients, including the intention and the circumstances needs to be taken into consideration and not an individual act.

McCurry & Anor v FC of T 98 ATC 4487

In this case, two brothers purchased a land which had an old house of no value on it with the intention of removing the old house and constructing three townhouses on the land. The purchase price was $ 32,000 of which they borrowed $ 15,000 from the bank. Later, they borrowed $ 80,000 from the bank for building the townhouses. They advertised the units for sale before their completion but no sale was affected. Then after completion, they, along with their family moved into two of the townhouses. After about an year of this, they sold the townhouses resulting in a net profit of about $ 150,000. For some time thereafter, they lived in two of the townhouses as tenants. Also, they undertook a similar development in the area and sold those units.

The Commissioner of Taxation alleges that the sums were assessable to tax under Section 25(1) of The Income Tax Assessment Act, 1936 the purpose of purchase being to make profits by sale of the townhouses which the taxpayers reject by saying that the townhouses were sold because of financial difficulties and that the purpose in mind while buying the property was to derive regular income by renting them. The Court, not convinced by their arguments  came to the conclusion that the taxpayers had the purpose of realising profits by the sale of the property based on the fact that that the money for purchasing the land and building townhouses was obtained by loan. Moreover, the fact that they gave advertisement for the sale of townhouses before their completion is suggestive of their motive and no attempt was ever made to let out the townhouses.  Also, the taxpayers claim that if they had undertook a profit making venture they would not have abandoned it by occupying it for a year was rejected by the Court which said that though it was used for some other purpose as per their convenience, the motive of realising profits out of it remained the same and thus the court dismissed the application with costs.

Case study 1:

Clemens and Commissioner of Taxation [2015]AATA (Administrative Appeals Tribunal of Australia), p.124.

Jaczenko and Commissioner of Taxation [2015]AATA (Administrative Appeals Tribunal of Australia), p.125.

Ato.gov.au. (2015). Residency tests | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/Work-out-your-tax-residency/Residency-tests/ [Accessed 17 Aug. 2016].

Income Tax Assessment Act, 1996

Case study 2:

Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) [1904] 5 (TC), p.159.

Scottish Australian Mining Co Ltd v FC of T [1950] 81 CLR, p.188.

FC of T v Whitfords Beach Pty Ltd [1982] CLR, p.150.

Statham & Anor v FC of T [1989] ATC, p.4070.

Casimaty v FC of T [1997] ATC, p.5135.

Moana Sand Pty Ltd v FC of T [1988] ATC, p.4897.

Crow v FC of T [1988] ATC, p.4620.

McCurry & Anor v FC of T [1998] ATC, p.4487.