Foundation Of Taxation Law For Residency And Taxpayers

Issue

Describe about the Foundation of Taxation Law for Residency and Taxpayers.

By considering the given situation and the facts regarding English resident Fred who has arrived in Australia with his wife to discharge his professional obligation, the pivotal aim is to opine on the underlying tax residency status for him by considering the relevant statutes.

Rule

For the determination of tax residency of individual taxpayers, TR 98/17 prescribes the following four residency tests to be used on an annual basis by the taxpayers (Nethercott,  Richardson & Devos, 2016)

Domicile Test – This is used only for residents of Australia since one of the pre-conditions is that the given taxpayer under assessment should have Australian domicile. Additionally, the location of permanent residence for the taxpayer should not lie outside Australia (Barkoczy, 2015).

Superannuation Test – This is used only for tax residency determination of Australian government employees who tend to serve abroad. The essential condition that needs to be met is contribution to select superannuation scheme (Coleman, 2011).

183 day Test – This is used only by foreign resident currently in Australia. Two conditions need to be satisfied as listed below (CCH, 2014).

A stay period of minimum 183 days in Australia for the taxpayer.

Taxpayer’s willingness to settle in Australia going ahead.

Resides Test – The following factors are considered pivotal for determination of tax residency of foreign residents (Gilders et. al., 2015).

Nature of ties in the professional and personal field that the taxpayer maintains in Australia.

Extent of visits to the country of origin along with the underlying intent and duration.

Extent of significance of the purpose with which taxpayer has come to Australia.

In case of Fred, owing to his foreign domicile and employment with England based employer, domicile test and superannuation test are ruled out. Thus, the remaining tests need to be performed for Fred.

183 day test – The condition regarding minimum stay period of 183 seems to be adhered to by Fred owing to 11 month stay. However, the intention to settle in Australia seems lacking as Fred has refrained from making any investment in fixed asset in Australia and continues to hold the home in England. Thus, due to the latter condition not met, the test is failed.

Resides Test- The test is passed considering the following factors.

Employment of 11 months which is still expected to continue further is a significant purpose to visit Australia.

Rule

Fred has not gone to England even once during the 11 month period and also his behaviour during stay in Australia is not different from that exhibited in England.

Conclusion

Based on the above arguments, it is apparent that Fred manages to satisfy a residency test and hence is Australian tax resident.

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

The Californian Company acquired a land containing a copper mine but could not commence the mining operation on the land as they were short in the working capital. The investors knew about the fact that they would not be left with the requisite fund, after spending such a huge amount for acquiring the mine before making the decision to buy land. Company sold the mine to other competitor mining company and received shares in that company as compensation. The saleable value of the acquired shares was high and the derived profit was much higher than the amount they used for acquiring of the mine.  The company made claims that it was only shifting of one asset with another and thus, they would not be liable for income tax on the received gains (Sadiq et. al., 2016). The tax commissioner pronounced that the gains from the shares would be assessable for taxation. Company appealed in the court against the verdict of the tax commissioner. The court believed that the gains from the liquidation of the company’s ownership would be assessable for taxation as profit intent was present before the purchase of land and mining use was never intended. Hence, the transaction was of isolated nature with the profit intention on the part of the investors (Deutsch et. al., 2016).

The Scottish Mining Company bought a mine with the focus of coal mining. The company constantly mined the land and the process was continued for multiple years stretching into decades. It was observed that the coal content in the land was exponentially decreasing and after some time the land could not be mined further. Therefore, the mining operation was closed on the land and it was of no use to conduct any other business activity due to amorphous structure. Company liquidated the mine, after undertaking several requisite development actions like roads, plots, parks, school, and hospital and water supply and so on. Considerable profit was received by the investors from the mine land liquidation. The matter landed into court, where it was advocated that the company performed the central work i.e. coal mining for years and when the land was of no use then only, the investors liquidated the land. It was also stated on behalf of the investors that the land development was not with the intent of maximizing the profit. The activities were requisite to convert the amorphous land into residential place. Hence, it was just realisation of the asset in the most effective manner possible. The court accepted the claim of the company and announced that the profit would not be assessable as it was realisation of the asset (Jade, 2016).

Application

A beach front land was purchased by the given company, which was used for drying of the fishing shacks and other fishing related equipment. The owners decided to alter the fishing business and finally liquidated the shares of the company to three companies.  The basic functions of the companies were land development and land trading for higher profit. These companies wanted a beachfront land property and thus, bought the fishing company with the main focus of deriving the profits from the beach front land. Companies modified the old article of association of the company. Plethora of land development activities were started on the land and finally, the newly constructed plots were sold and caused sizable profits.  The court opined that the companies acquired the fishing company especially for the beach front land so that the beach side land could be developed and then liquidated for higher gains, same had been introduced in the article of association of the company. Therefore, these business actions of the taxpayers caused the tax accessibility on the received proceeds under the ordinary income scheme of ITAA, 1936 (CCh, 2016a).

A piece of deceased estate farm land was given to Statham & Anor, which was originally used for agriculture. A small cattle firm was started by the taxpayer on this land. However, during its initial stage the business became abortive and caused reasonable loss to the taxpayers. They were also facing financial struggles and required funds to support even their living expense. They did not have enough funds to commence any other business on the land and thus, subdivided the farmland into smaller plots and without advertising, liquidated the plots to prospective buyers. The taxpayers articulated that the monetary issues forced them to sell the farm land and thus, the gains should not be assessable for tax. The court agreed with the request made and passed the judgement that the land liquidation resulted due to the failure of the business and due to the shortage of funds to sustain the livelihood. There were neither the land development activities nor the business action on the part of the taxpayers. Therefore, the gins would be termed as capital receipts and not assessable for income tax (CCh, 2016b).

The taxpayer received a part of farm land from his father for conducting the farming business. He undertook sizable loan from the bank basically for dual purpose, for fencing around the land and to start the farming. The production from the farming was not much, due to drought in the same year and caused insignificant income to the taxpayer. The taxpayers had taken sizable loan at high interest rate, which was increasing debt related liabilities on him. High financial debt and low income from the farming caused high stress and weakened the health of the taxpayer. In order to resolve the issues, he decided to liquidate the land. Since, he did not want to liquidate the whole farm land and took more loans to make subdivision on the land. A huge block of the land was sold and the earned gains were consumed to repay the loan amount. Moreover, the remaining block of the land was used for farming by the taxpayer.  The honourable court passed the verdict that the liquidation of the portion of the land would be categorised under realisation of the capital asset as there was no profit intention of the taxpayer behind the sale. Additionally, the taxpayer continued his traditional farming occupation on the remaining block of the land. Therefore, the gains would be considered as capital income and non-assessable for income tax (CCh, 2016c).

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

The given company purchased sand mine to carry the sand mining business. The essential work permits were also acquired from the municipal corporations by the company. After some time of steady mining, the sand reserves were finished and further sand mining could not be performed. Hence, the company decided to sell off the mine land. In regards to maximize the sale revenue, several value enhancement actions were carried on the land like plots, roads, parks, hospitals, water supply, churches, sewerage plant unit and other requisite service were installed. These developed plots were sold to premium buyers and derived reasonably high revenues. Company made various claims that the land was of no use and thus utilized by selling (Coleman, 2011). The court overruled the claims of the company and believed that the property was acquired for sand extraction not for land business. However, company invested a sizable amount just to develop the land. The instalment of the services on the land was conducted so that higher revenues could be generated. Therefore, the revenues from sale would be assessable for the income tax (Barkoczy, 2015).

Any repetitive course of business action would cause ordinary income that would be chargeable for income tax in the accordance of the Income Tax Assessment Act, 1936. The taxpayer Crow had performed the same action as he acquired a five block land from borrowed amount and commenced the farming for very limited time and then started development actions on the bought land. Fifty one sub-blocks were formed from this five block land and sold to retail customers. This activity was continued for many years as new land was bought and then sold to buyers at higher price after carrying some development activities. The central business strategy of the taxpayer was to buy the land, make subdivision and finally sell to buyers. The commissioner stated that the business motive of the taxpayer would be considered for tax accessibility. The taxpayer claimed that he sold the land in regards to repay the loaned amount. The matter was taken to court, where court rejected the claims and passed the verdict that the repetitive action of land trading and division was clear sign of carrying the land trading business. Hence, the proceeds from the sale would be assessable for income tax (CCh, 2016d).

The taxpayers acquired a land parcel, which already had few old unstructured buildings. Three townhouses were constructed on the purchased land by availing borrowed funds. Advertisement was also made for the sale of the townhouse. Irrespective of this advertisement, the townhouses could not be sold. They decided to keep the townhouses for the time being and sold when they would receive the expected amount. Moreover, one townhouse was used for personal residence by the taxpayers. After a year, the townhouses were sold as per their expected profits. It was cited on behalf of the taxpayers that the gains should not be considered under the outlines of the ordinary income of income tax. The honourable court passed the decision that the arguments of the taxpayers were not valid. Since, their intention was to derive higher gains, and with the same, they constructed new townhouses. Additionally, they conducted advertisement to sell the townhouses. They kept the townhouses for a year so that higher returns could be achieved. These systematic business actions would lead to tax liability on the taxpayers (CCh, 2016e).

References

Barkoczy, S 2015, Foundation of Taxation Law 2015, 7^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 September 18, 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 18, 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 18, 2016)

CCh 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 18, 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 18, 2016)

CCH 2014, Australian Master Tax Guide 2014, 52^nd eds., Wolters Kluwer, Sydney

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

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 18, 2016)

Nethercott, L, Richardson, G & Devos, K 2016, Australian Taxation Study Manual 2016, 4^th ed., Oxford University Press, Sydney,

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016, Principles of Taxation Law 2016, 8^th edn, Thomson Reuters, Pymont