Tax Residency, Income Tax Treatment, And Sales Of Land: Two Case Studies

Case Study 1: Tax Residency and Treatment of Income for Kit

Issue

The issue is to determine the tax residency position of the taxpayer Kit who is a Chilean citizen and a permanent resident of Australia. Further, comment is desired about the relevant taxation treatment that would be applicable on the amount of the income earned by taxpayer Kit during the assessment year.

Rule

The tax residency position of a person is considered to be an essential aspect to decide the applicable tax treatment for the earned income. Section 6(1) of Income Tax Assessment Act 1936 deals with the tax residency of any individual taxpayer. Further, the tests to determine the tax residency position are highlighted in the tax ruling TR 98/17 (Barkoczy, 2016). There are four tests (Domicile, superannuation, 183 days, resides test) that are called as “residency test”. Each of thse is having various conditions that need to be applied on the concerned taxpayer to check the tax residency position for the assessment year.  It is noteworthy that to designate as Australian tax resident, the taxpayer should complete all the obligations of any given test. It means if any residency test is satisfied by the taxpayer for the assessment year under question, then the taxpayer would be the resident of Australia for taxation purpose (Nethercott, Richardson and Devos, 2016).

Residency Tests

1. Domicile Test
2. Superannuation Test
3. 183 day Test
4. Resides Test

The conditions and respective aspects of these tests are furnished below:

1. Domicile Test

When the taxpayer is the resident of Australia but residing overseas due to any particular reason, then the tax residency would be determined with the help of Domicile Test. The presence of Australian domicile under “Australian Domicile Act 1982” and the location of permanent residence within Australia are the two critical prerequisite that must be justified by taxpayer (CCH, 2013).  Moreover, the essential aspects with respect to the permanent residence of taxpayer that are taken into cognisance as per IT 2650 are as given below (ATO, 1991)

• Place of acquired property (especially fixed assets)
• Different ties of taxpayer with overseas and with Australia
• Reasons of stay in overseas
• Any particular action that would indicate the willingness of taxpayer to shift the permanent residence from Australia

1. Superannuation Test

The taxpayer is the government officer or employee of the Australian government and has resided to foreign land due to the obligation of duties then the superannuation test is applied. Another condition that needs to fulfil on behalf of the taxpayer is continues contribution in the Australian Government Superannuation Scheme (Sadiq et. al., 2016).

1. 183 day Test

When the taxpayer is not Australian resident (foreign resident) and residing on Australian land, then this test is applied. If the taxpayer has justified the following imperative conditions then the taxpayer is considered to be Australian resident for tax purpose (Gilders et. al., 2016).

• The requisite condition of this test is the period of stay (minimum 183 days) of the taxpayer in Australia during the assessment year.
• Another condition is the intention of the taxpayer to shift the permanent residence from overseas to Australia going forward.

1. Resides Test

There is not direct ruling or statute available to provide the meaning of the term “Reside”. Hence, the aspects and the decision announced by honourable court would be used to check the tax residency position of taxpayer through Reside test (CCH, 2013). It is noteworthy that the applicability of this test is valid onto the taxpayers who are not the resident of Australia (foreign resident) and residing in Australia.  The critical parameters about the taxpayer that would be considered by the tax authorities are the purpose or intent of taxpayer to make visits to Australia, presence of any personal, social or employment tie, duration of visits and the variation in the expected and actual stay period in Australia. Tax Commissioner would also consider the citizenship of the taxpayer if required (Deutch et. al., 2016).

Case Study 2: Tax Treatment for Sales of Land

Application

• Domicile Test

Taxpayer Kit is a permanent resident of Australia and hence the domicile test is applicable. It is apparent that taxpayer has Australian domicile because he is a PR of Australia. Moreover, his permanent residence is also present in Australia because it can be viewed from the facts that Kit has entered into an agreement with a company in Australia and has contractual boundation to reside in other country (oil rig based coast of Indonesia). Further, he is living in Australia from last four years. He has also purchased a property (a home) in Australia three year back. Before going from Australia he has stayed in this home with two children and wife. He has no intention to reside in overseas or in other country. It is apparent from the fact that he and his wife operated a joint back account in Westpac Bank located in Australia and in the same account he receives the salary. The one month off from work every third month is used either to meet his family or to go on holiday with them in South America. It can be said that after the completion of agreement he would surely return back to Australia. Hence, during the assessment year his permanent residence is in Australia only. Therefore, Kit is an Australian Tax resident.

• Superannuation Test – Not applicable ( Kit is not an employee of Australian government)
• 183 day Test and Resides Test   – Not applicable ( Kit is not a foreign resident )

Final table for the applicability and conclusion of residency test:

S. No.	Residency Test	Applicability	Result
1.	Domicile test	Applicable	Passed
2.	Superannuation test	Not applicable	Fails
3.	183-day test	Not applicable	Fails
4.	Resides Test	Not applicable	Fails

Final conclusion can be drawn that Kit has managed to satisfy the conditions of domicile test and would be designated as Australia resident for tax purpose. Due to this, the section 6-5(2) of Income Tax Assessment Act 1997 would be imposed on Kit and the income earned from employment (US company) and from the dividend from the shares (Chile) would be accountable for taxation in Australia. 

Ordinary Income  

The taxpayers were the investors of the Californian Company who purchased the land and received the mining licence from Government of Australia. The taxpayers did not have necessary fund to conduct the mining and hence, after sometime the land was sold in the exchange of the shares. This resulted in significant profits to the taxpayers. The argument made by the taxpayers was that the liquidation of land asset was merely an act of conversion of “one capital asset to other capital asset” (from land to share) and thus, the income would not be assessable for taxation. According to the verdict made on behalf of Court, the initial intention behind the purchase of land was purely for making sized gains as the taxpayers were quite awae that they were not in the condition to start mining but still they acquired so that the land could be sold for huge profit. Therefore, the income from the shares would be ordinary income (Nethercott, Richardson and Devos, 2016).

Investors of the company purchased the large coal mine so that they could conduct the coal mining. Moreover, the mining was conducted nearly for six decades and when there could be no profitable mining feasible on the land, then the investors made the decision to utilize the land for residential uses. The land was unstructured and hence the requisite development were performed on the land that was essential for any residential place. The claim was made by the investors that the proceeds should not be included for taxation. Court approved the claim of the investors and provided the judgement that investor liquidated the land after subsequent mining. Further, there was no initial motive of taxpayers to derive the profit from liquidated. Also, the best feasible option (residential uses) was acquired by the taxpayer and hence, the act would be classified as “realisation of capital asset”. The income from the sale would not be assessable income (Gilders et. al., 2016). 

Certain land development companies were looking for a beach land for their land development and trading business. Hence, they acquired the Fords Beach Pty Ltd company that was previously engaged in fishing business. Company made subsequent division and improvement on beach land. Finally, a sizable profit was derived from the sale of the land. The claim made by the company that they acquired a capital asset and thus, the act of selling would be categorised under realisation of asset. This claim was rejected by the Court and it was decided that the company used the land for making profit which was the part of their business. Further, they also updated the “Article of Association” of the acquired company for the sale of the land. Therefore, the profit would be considered under the assessable income of the company derived from the business of the company (Sadiq et. al., 2016). 

The taxpayers (Statham and Anor) established a cattle business on the land that was closed at  the initial stages because of the their lack of experience and business skills. Taxpayers used maximum share of their finance to start the business and hence, due to failure experienced financial difficulties. Therefore, the taxpayers had to sell a small section of land and used another half to start farming. Court tool into consideration the facts about the situation of the taxpayer and cited that the sale was due to poor financial stage and there was no intention to start any land trading business. Therefore, the sale would be classified under realisation of capital asset and the income would not be taxed under the assessable income concept of taxation (Barkoczy, 2016).

Any “isolated transaction” without the focus of making maximum profit would not be considered under the business activity and therefore, the proceeds would be named as capital receipts. Casimaty issued money from bank to start agriculture on the land. It had been presumed on the part of Casimaty that the agriculture would derive subsequent gains and thus, he could easily repay the outstanding amount to bank. However, very limited profit was received from the farming because of drought and bad weather realised during the year. This created adverse health issues on Casimaty. In order to get rid of both these problems, he sold a significant part of the land. The income derived from this sale was used to repay the borrowed money and for treatment of his bad heath. Court had taken notice of this scenario and declared that the sale of land was to dissolve the problem not to make maximum revenues further, taxpayer conducted farming on the available land. Therefore, the act would be classified under realisation of capital asset and income would be capital receipts (Deutsch et. al., 2016).

Taxpayers acquired the land to conduct the sand extraction. However, after a period of time, when sand reserves were low, then investors started the subsequent value additions operations on the land which includes plots, hospitals, parks, school, facilities, church, water and public amenities and so on. After sale of the land, sizable income was earned by investors. Court declared that the company acquired the land to conduct mining not to derive higher  revenues and the actions of making value additions functions on land was purely with profit intention. Therefore, the income would be assessable income from isolated transaction (CCH, 2013).

The land which was previously used for farming was used for making higher income from the land liquidation. Taxpayer completely closed the farming on the land and actively engaged in the land business and also acquired additional lands for the same. It was claimed on behalf of taxpayer that he sold a capital asset and therefore, the receipts would be named as only realisation of asset. Court rejected the claim and declared that taxpayer closed the farming on land and actively engaged in land division and selling business that was systematic and repetitive in nature and hence the income would be assessable (Barkoczy, 2016). 

Taxpayers purchased an old property that already had small houses. Taxpayer borrowed money from bank and the used the amount for constructing new houses and for advertisement for the sale of the newly developed houses. They were unable to sell the houses in the first year because of lack of buyers willing to buy at demanded prices. Therefore, they decided to hold the houses and then liquidated the ownership to premium buyers. The claim was made for the derived income that it was from realisation of capital asset. Court discarded the claim and declared that the income is from isolated transaction with the motive of deriving higher profit. The holding period to get premium purchaser and advertisement was considered the evidence of this. Therefore, the profit would be counted as assessable income (Gilders et al., 2016). 

References

ATO 1991, IT 2650, Australian Taxation Office, [Online] Available at https://law.ato.gov.au/atolaw/view.htm?Docid=ITR/IT2650/NAT/ATO/00001 [Accessed May 02, 2017]

Barkoczy, S. 2016, Foundation of Taxation Law 2016, 8^thed., North Ryde: CCH Publications

CCH 2013, Australian Master Tax Guide 2013, 51^st ed., Sydney: Wolters Kluwer

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. 2016, Australian tax handbook 8th ed., Pymont: Thomson Reuters,

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. 2016, Understanding taxation law 2016, 9^th ed., Sydney: LexisNexis/Butterworths.

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

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