Discuss about the Judicial Interpretation of Tax Treaties.
In this case, Eric was carrying on a business of producing milk in a land acquired in 1990. The land was purchased at a price of $750000.00. The business was successful for 26 years but recently it generated insufficient profit. Therefore, Eric decided to sell the plot of land. The real estate agent offered two options for selling the land the first option is to sell the land in 50 parts for $ 3000000.00 or in a single transaction for $2500000.00. In selling the land in part, it will take 3 months for approval and another 6montrhs for completing the entire sale. The issue here is to establish whether Eric is required to include in his assessable income the earnings from sale of land from both the options:
Subdividing and selling of land in 50 lots for a total of $3000000 over a period of six months;
Selling of land in one transaction for $250000.00 without subdividing land;
The section 4-1 of the Income Tax Assessment Act 1997 provides that it is necessary for an individual, corporation or an entity to pay tax on their income. The income on which the taxes are paid is known as taxable income. The taxable income is calculated after subtracting allowable deduction under section 8-1 of the ITAA 1997 from the assessable income (Saez 2013). The assessable incomes are of two type ordinary income and statutory income. The sections 6-5 of the Income Tax Assessment Act 1997 provide that income according to the common concept is known as ordinary income (Burkhauser et al. 2015). The incomes that are not regular income are known as statutory income under section 6-10 of the Income Tax Assessment Act 1997. The capital gain is an example of statutory income. The section 102-5 of the ITAA 1997 states those net capital gains are included in the assessable income (Alvaredo et al. 2013). It is important for a business to determine whether income from particular activity is ordinary income or capital gain because amount included in the assessable income will be different.
The distinction between capital receipt and revenue is important because of the judicial analysis of the section 8-1 of the Income Tax Assessment Act 1997. In the case of Sun Newspapers ltd V FCT (1938), it was held that distinction is made between the capital expenditure and revenue expenditure by establishing the process by which business earns regular income (Grubert and Altshuler 2016). The principles that have been applied for distinguishing between the capital receipt and revenue income is the flow of income. The ordinary income as declared in section 6-5 of the Income Tax Assessment Act 1997 includes earnings from personal exertion, business income, isolated transactions and income from property (Graetz and Warren 2014). The section 25-1 of the Income Tax Assessment Act 1997 term isolated transaction have been referred to include transactions that are outside the ordinary course of business activity and the transaction that have been entered into by non business taxpayer (Faccio and Xu 2015). The Taxation Ruling 92/3 in Para 6 states whether a profit that have been made form isolated transaction should be include in the ordinary income depends on particular circumstances of the case. In Para 13 of the Taxation Ruling 92/3 it states that whether a particular transaction is an isolated business transactions depends on the following:
Therefore based on the above discussion it can be said that if a particular transaction is considered as isolated transaction then income derived from that operation should be regarded as ordinary income.
In the case of Scottish Australian mining Co V Federal commissioner of Taxation (1950) it was held that realization from capital assets are generally is regarded as capital. In the case of Federal commissioner of Taxation V Whit fords beach Pty Ltd (1982) it was held that if a capital assets is used for venturing in trading activity then it is an ordinary income (Hanlon and Pinder 2013).
In this case, Eric decided to sell a plot of land that was used for farming business. Therefore, it is capital assets and as per the case of Scottish Australian mining Co V Federal commissioner of Taxation (1950) this profit from sale of land should be regarded as capital gain. However it can be seen that if Eric chooses the first option then it satisfies the condition laid down in the Para 13 of the Taxation Ruling 92/3. Then in such case, the transaction is considered as an isolated transaction and is treated as an assessable income (Rimmer et al. 2014).
If Eric chooses, the second option of not dividing the plot and selling it in lump sum then in such case the capital gain or loss will be computed and that will be integrated in the assessable income. The section 102-22 of the ITAA 1997 states that capital gain is calculated by using two methods and then it is compared to include it in the assessable income. The two methods are discount method under division 114 and discount method under division 115. The calculations are given below:
|
Computation of Capital Gain |
||
|
Particulars |
Discount Method |
Indexation method |
|
Sales Proceed |
$ 2,500,000.00 |
$ 2,500,000.00 |
|
Less: |
||
|
Cost of acquisition |
$ (750,000.00) |
$ (873,305.08) |
|
commission |
$ (62,500.00) |
$ (62,500.00) |
|
Gross Capital Gain |
$ 1,687,500.00 |
$ 1,564,194.92 |
|
Less: |
||
|
Discount 50% |
$ (843,750.00) |
|
|
Net Capital Gain |
$ 843,750.00 |
$ 1,564,194.92 |
Table 1: Capital Gain
(Sources: created by author)
Based on the above argument it can be concluded that as there if the plot of land is subdivided into 50 plot and sold for a period of 6 months. Then it should be considered as a isolated business transaction and income should be included as assessable income as an ordinary. The expenses that are made for the purpose of sale are allowed as deduction. On the other hand, if the land is sold in one transaction as a single plot then it is considered as income from capital gain. The calculation above shows that capital gain is less in discount method so this should be included in assessable income.
In this case, George Eals was born in USA but currently he is a permanent resident of Australia. He currently works in technology firm and is required to visit oversea. In the year 2016, George has stayed outside Australia for 150 days. The firm has offered George for a job outside Australia for three years. He will be allowed to visit Australia for one month after every three months. The issue in this case is to determine the residential status of George in the flowing two circumstances:
The determination of residential status is important because it affects the assessable income of the taxpayer. The section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 states that in case of a resident the income received from all the sources are taxable. This section also provides that in case of nonresident the income received only form Australian sources are assessable (Sharkey 2015). In the case of Federal Commissioner of Taxation V Applegate (1979), it was held that it is necessary to establish the residential status of an individual annually. It was held in the case of Levene V the Commissioner of Inland Revenue (1928) that for the purpose of tax a person can be resident for more than one country.
The section 995-1 of the ITAA 1997 states the meaning of resident. It is provided in the section that for the purpose of tax an individual residing in Australia is regarded as resident for the purpose of tax (Wickramasuriya 2014). The residential status of an individual is ascertained after referring to the rules provided in the section 6-1 of the Income Tax Assessment Act 1936. The Para 32 of the Taxation Ruling 98/17 provide four test for determining the residential status:
In section 6-1 of the ITAA 1936 provides that the expression resides in used in the legislation in the ordinary sense and no further clarification is provided. Therefore, in accordance with the ordinary concept any individual residing in Australia is regarded as resident for the purpose of tax (Garbarino 2016).
The domicile rules states that the there are two conditions that needs to be fulfilled for deciding the residential status of a person. The first condition of the rule is that the person must have a residence in Australia (Palassis 2014). The subsequent condition is that the person should not have a permanent place of abode outside Australia. The taxpayer will be considered as resident if these two conditions are satisfied. In the case of Udny V Udny (1869), the meaning of domicile is stated as a place that the individual considers as a home.
If an individual resides in Australia for more than 183 days or more then the individual is regarded as resident. The two additional conditions are that the individual does not have a permanent place outside Australia and the individual has decided to reside in Australia. The fourth test is not applicable in this case as the taxpayer is not a government employee. The Taxation Ruling 98/17 also states that if any one of the rule is satisfied then the person is considered as resident for the reason of tax (Love 2015).
In this case, George is a resident of Australia but has stayed overseas for 150 days during the year 2016. Therefore, 183 days rule is not satisfied. George has a permanent place of abode in Australia where his three child and wife resides therefore he has satisfied the domicile test. Based on this discussion it can be said that during the year 2016 George was a resident for the purpose of tax. As per section 6-5 and section 6-10 of the ITAA 1997 for a resident income received from all the sources is taxable. In 2016, the income received form Google and salary both are taxable in Australia (Appiah-Adu 2013).
The second issue provides that George will have to predominantly stay outside Australia for three years and will be coming to Australia for only three months in a year. The residential status of George is assessed based on further two conditions:
If the family of George stays in Australia then he will continue to have a permanent pale of adobe in Australia. Hence, the domicile rule will be satisfied and George will be regarded as resident for the purpose of tax. Then in such case both the salary and investment income from Google will be taxable in Australia.
The house is sold and the family moves with George
In this situation, George will not have a permanent place of adobe so the domicile rule is not satisfied. As earlier assessments have shown that George satisfies no other rule of residency, so he will be regarded as nonresident for the purpose of tax. In this situation, income received as salary is taxable as it is received from a firm based in Australia. However, profits received from investment are not taxable as the source of earnings is outside Australia (Zirgulis and Staehr 2015).
Conclusion
Based on the above discussion it can be concluded that for the year 2016 George is a resident. Therefore, all the income received is taxable in Australia. It is advised that if George takes the overseas assignment for three years and keeps his family in Australia then he will be regarded as resident for the purpose of tax. On the other hand, if George takes his family with him then he will be regarded as nonresident for the purpose of tax. Hence only income that are received from Australia is taxable.
Reference
Alvaredo, F., Atkinson, A.B., Piketty, T. and Saez, E., 2013. The top 1 percent in international and historical perspective. The Journal of Economic Perspectives, 27(3), pp.3-20.
Appiah-Adu, K., 2013. The Norwegian experience: potential lessons for Ghana and other African countries. In Governance of the Petroleum Sector in an Emerging Developing Economy (pp. 271-283). Gower Oxford.
Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.
Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(03), pp.277-300.
Garbarino, C., 2016. Judicial Interpretation of Tax Treaties: The Use of the OECD Commentary. Edward Elgar Publishing.
Graetz, M.J. and Warren Jr, A.C., 2014. Unlocking Business Tax Reform. Tax Notes, 145, pp.707-712.
Grubert, H. and Altshuler, R., 2016. Shifting the Burden of Taxation from the Corporate to the Personal Level and Getting the Corporate Tax Rate Down to 15 Percent.
Hanlon, D. and Pinder, S., 2013. Capital gains tax, supply?driven trading and ownership structure: direct evidence of the lock?in effect. Accounting & Finance, 53(2), pp.419-439.
Love, P., 2015. Frank Anstey, money power and the Labour split in war time. Victorian Historical Journal, 86(1), p.161.
Palassis, S.N., 2014. From The Hague to the Balkans: A Victim-oriented Reparations Approach to Improved International Criminal Justice. International Criminal Law Review, 14(1), pp.1-41.
Rimmer, X., Smith, J. and Wende, S., 2014. The incidence of company tax in Australia. Economic Round-up, (1), p.33.
Saez, E., 2013. Income inequality: evidence and policy implications. Arrow Lecture, Stanford University.
Sharkey, N., 2015. Coming to Australia: Cross border and Australian income tax complexities with a focus on dual residence and DTAs and those from China, Singapore and Hong Kong-Part 1. Brief, 42(10), p.10.
Watson, M., 2013. The Foundation for Law, Justice and Society.
Wickramasuriya, T., 2014. Dempsey: Don’t call Australia home. Taxation in Australia, 49(3), p.138.
Zirgulis, A. and Staehr, K., 2015. Tax competition for capital with an emphasis on productivity spillovers (Doctoral dissertation, ISM University of Management and Economics).
Discuss about the Judicial Interpretation of Tax Treaties.
In this case, Eric was carrying on a business of producing milk in a land acquired in 1990. The land was purchased at a price of $750000.00. The business was successful for 26 years but recently it generated insufficient profit. Therefore, Eric decided to sell the plot of land. The real estate agent offered two options for selling the land the first option is to sell the land in 50 parts for $ 3000000.00 or in a single transaction for $2500000.00. In selling the land in part, it will take 3 months for approval and another 6montrhs for completing the entire sale. The issue here is to establish whether Eric is required to include in his assessable income the earnings from sale of land from both the options:
Subdividing and selling of land in 50 lots for a total of $3000000 over a period of six months;
Selling of land in one transaction for $250000.00 without subdividing land;
The section 4-1 of the Income Tax Assessment Act 1997 provides that it is necessary for an individual, corporation or an entity to pay tax on their income. The income on which the taxes are paid is known as taxable income. The taxable income is calculated after subtracting allowable deduction under section 8-1 of the ITAA 1997 from the assessable income (Saez 2013). The assessable incomes are of two type ordinary income and statutory income. The sections 6-5 of the Income Tax Assessment Act 1997 provide that income according to the common concept is known as ordinary income (Burkhauser et al. 2015). The incomes that are not regular income are known as statutory income under section 6-10 of the Income Tax Assessment Act 1997. The capital gain is an example of statutory income. The section 102-5 of the ITAA 1997 states those net capital gains are included in the assessable income (Alvaredo et al. 2013). It is important for a business to determine whether income from particular activity is ordinary income or capital gain because amount included in the assessable income will be different.
The distinction between capital receipt and revenue is important because of the judicial analysis of the section 8-1 of the Income Tax Assessment Act 1997. In the case of Sun Newspapers ltd V FCT (1938), it was held that distinction is made between the capital expenditure and revenue expenditure by establishing the process by which business earns regular income (Grubert and Altshuler 2016). The principles that have been applied for distinguishing between the capital receipt and revenue income is the flow of income. The ordinary income as declared in section 6-5 of the Income Tax Assessment Act 1997 includes earnings from personal exertion, business income, isolated transactions and income from property (Graetz and Warren 2014). The section 25-1 of the Income Tax Assessment Act 1997 term isolated transaction have been referred to include transactions that are outside the ordinary course of business activity and the transaction that have been entered into by non business taxpayer (Faccio and Xu 2015). The Taxation Ruling 92/3 in Para 6 states whether a profit that have been made form isolated transaction should be include in the ordinary income depends on particular circumstances of the case. In Para 13 of the Taxation Ruling 92/3 it states that whether a particular transaction is an isolated business transactions depends on the following:
Therefore based on the above discussion it can be said that if a particular transaction is considered as isolated transaction then income derived from that operation should be regarded as ordinary income.
In the case of Scottish Australian mining Co V Federal commissioner of Taxation (1950) it was held that realization from capital assets are generally is regarded as capital. In the case of Federal commissioner of Taxation V Whit fords beach Pty Ltd (1982) it was held that if a capital assets is used for venturing in trading activity then it is an ordinary income (Hanlon and Pinder 2013).
In this case, Eric decided to sell a plot of land that was used for farming business. Therefore, it is capital assets and as per the case of Scottish Australian mining Co V Federal commissioner of Taxation (1950) this profit from sale of land should be regarded as capital gain. However it can be seen that if Eric chooses the first option then it satisfies the condition laid down in the Para 13 of the Taxation Ruling 92/3. Then in such case, the transaction is considered as an isolated transaction and is treated as an assessable income (Rimmer et al. 2014).
If Eric chooses, the second option of not dividing the plot and selling it in lump sum then in such case the capital gain or loss will be computed and that will be integrated in the assessable income. The section 102-22 of the ITAA 1997 states that capital gain is calculated by using two methods and then it is compared to include it in the assessable income. The two methods are discount method under division 114 and discount method under division 115. The calculations are given below:
|
Computation of Capital Gain |
||
|
Particulars |
Discount Method |
Indexation method |
|
Sales Proceed |
$ 2,500,000.00 |
$ 2,500,000.00 |
|
Less: |
||
|
Cost of acquisition |
$ (750,000.00) |
$ (873,305.08) |
|
commission |
$ (62,500.00) |
$ (62,500.00) |
|
Gross Capital Gain |
$ 1,687,500.00 |
$ 1,564,194.92 |
|
Less: |
||
|
Discount 50% |
$ (843,750.00) |
|
|
Net Capital Gain |
$ 843,750.00 |
$ 1,564,194.92 |
Table 1: Capital Gain
(Sources: created by author)
Based on the above argument it can be concluded that as there if the plot of land is subdivided into 50 plot and sold for a period of 6 months. Then it should be considered as a isolated business transaction and income should be included as assessable income as an ordinary. The expenses that are made for the purpose of sale are allowed as deduction. On the other hand, if the land is sold in one transaction as a single plot then it is considered as income from capital gain. The calculation above shows that capital gain is less in discount method so this should be included in assessable income.
In this case, George Eals was born in USA but currently he is a permanent resident of Australia. He currently works in technology firm and is required to visit oversea. In the year 2016, George has stayed outside Australia for 150 days. The firm has offered George for a job outside Australia for three years. He will be allowed to visit Australia for one month after every three months. The issue in this case is to determine the residential status of George in the flowing two circumstances:
The determination of residential status is important because it affects the assessable income of the taxpayer. The section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 states that in case of a resident the income received from all the sources are taxable. This section also provides that in case of nonresident the income received only form Australian sources are assessable (Sharkey 2015). In the case of Federal Commissioner of Taxation V Applegate (1979), it was held that it is necessary to establish the residential status of an individual annually. It was held in the case of Levene V the Commissioner of Inland Revenue (1928) that for the purpose of tax a person can be resident for more than one country.
The section 995-1 of the ITAA 1997 states the meaning of resident. It is provided in the section that for the purpose of tax an individual residing in Australia is regarded as resident for the purpose of tax (Wickramasuriya 2014). The residential status of an individual is ascertained after referring to the rules provided in the section 6-1 of the Income Tax Assessment Act 1936. The Para 32 of the Taxation Ruling 98/17 provide four test for determining the residential status:
In section 6-1 of the ITAA 1936 provides that the expression resides in used in the legislation in the ordinary sense and no further clarification is provided. Therefore, in accordance with the ordinary concept any individual residing in Australia is regarded as resident for the purpose of tax (Garbarino 2016).
The domicile rules states that the there are two conditions that needs to be fulfilled for deciding the residential status of a person. The first condition of the rule is that the person must have a residence in Australia (Palassis 2014). The subsequent condition is that the person should not have a permanent place of abode outside Australia. The taxpayer will be considered as resident if these two conditions are satisfied. In the case of Udny V Udny (1869), the meaning of domicile is stated as a place that the individual considers as a home.
If an individual resides in Australia for more than 183 days or more then the individual is regarded as resident. The two additional conditions are that the individual does not have a permanent place outside Australia and the individual has decided to reside in Australia. The fourth test is not applicable in this case as the taxpayer is not a government employee. The Taxation Ruling 98/17 also states that if any one of the rule is satisfied then the person is considered as resident for the reason of tax (Love 2015).
In this case, George is a resident of Australia but has stayed overseas for 150 days during the year 2016. Therefore, 183 days rule is not satisfied. George has a permanent place of abode in Australia where his three child and wife resides therefore he has satisfied the domicile test. Based on this discussion it can be said that during the year 2016 George was a resident for the purpose of tax. As per section 6-5 and section 6-10 of the ITAA 1997 for a resident income received from all the sources is taxable. In 2016, the income received form Google and salary both are taxable in Australia (Appiah-Adu 2013).
The second issue provides that George will have to predominantly stay outside Australia for three years and will be coming to Australia for only three months in a year. The residential status of George is assessed based on further two conditions:
If the family of George stays in Australia then he will continue to have a permanent pale of adobe in Australia. Hence, the domicile rule will be satisfied and George will be regarded as resident for the purpose of tax. Then in such case both the salary and investment income from Google will be taxable in Australia.
The house is sold and the family moves with George
In this situation, George will not have a permanent place of adobe so the domicile rule is not satisfied. As earlier assessments have shown that George satisfies no other rule of residency, so he will be regarded as nonresident for the purpose of tax. In this situation, income received as salary is taxable as it is received from a firm based in Australia. However, profits received from investment are not taxable as the source of earnings is outside Australia (Zirgulis and Staehr 2015).
Conclusion
Based on the above discussion it can be concluded that for the year 2016 George is a resident. Therefore, all the income received is taxable in Australia. It is advised that if George takes the overseas assignment for three years and keeps his family in Australia then he will be regarded as resident for the purpose of tax. On the other hand, if George takes his family with him then he will be regarded as nonresident for the purpose of tax. Hence only income that are received from Australia is taxable.
Reference
Alvaredo, F., Atkinson, A.B., Piketty, T. and Saez, E., 2013. The top 1 percent in international and historical perspective. The Journal of Economic Perspectives, 27(3), pp.3-20.
Appiah-Adu, K., 2013. The Norwegian experience: potential lessons for Ghana and other African countries. In Governance of the Petroleum Sector in an Emerging Developing Economy (pp. 271-283). Gower Oxford.
Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.
Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(03), pp.277-300.
Garbarino, C., 2016. Judicial Interpretation of Tax Treaties: The Use of the OECD Commentary. Edward Elgar Publishing.
Graetz, M.J. and Warren Jr, A.C., 2014. Unlocking Business Tax Reform. Tax Notes, 145, pp.707-712.
Grubert, H. and Altshuler, R., 2016. Shifting the Burden of Taxation from the Corporate to the Personal Level and Getting the Corporate Tax Rate Down to 15 Percent.
Hanlon, D. and Pinder, S., 2013. Capital gains tax, supply?driven trading and ownership structure: direct evidence of the lock?in effect. Accounting & Finance, 53(2), pp.419-439.
Love, P., 2015. Frank Anstey, money power and the Labour split in war time. Victorian Historical Journal, 86(1), p.161.
Palassis, S.N., 2014. From The Hague to the Balkans: A Victim-oriented Reparations Approach to Improved International Criminal Justice. International Criminal Law Review, 14(1), pp.1-41.
Rimmer, X., Smith, J. and Wende, S., 2014. The incidence of company tax in Australia. Economic Round-up, (1), p.33.
Saez, E., 2013. Income inequality: evidence and policy implications. Arrow Lecture, Stanford University.
Sharkey, N., 2015. Coming to Australia: Cross border and Australian income tax complexities with a focus on dual residence and DTAs and those from China, Singapore and Hong Kong-Part 1. Brief, 42(10), p.10.
Watson, M., 2013. The Foundation for Law, Justice and Society.
Wickramasuriya, T., 2014. Dempsey: Don’t call Australia home. Taxation in Australia, 49(3), p.138.
Zirgulis, A. and Staehr, K., 2015. Tax competition for capital with an emphasis on productivity spillovers (Doctoral dissertation, ISM University of Management and Economics).
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