1. a) In accordance with the question, Marty Goodman is a Australian citizen who has established a business in UK named as “Planks Pty Ltd”. The other relevant facts required to determine the tax residency of Marty are summarized below.
b) The various tests that have been outlined in TR 98/17 would be helpful in ascertaining the tax residency status of Australian citizen Marty. This particular taxation ruling highlights four main tests but for a domicile holder of Australia primarily the domicile test is relevant which would be discussed here in some detail (CCH, 2013).
In order to satisfy this test, a given taxpayer must adhere to namely two conditions. One, he/she must be a valid domicile holder in the year of assessment. Secondly, he/she must have a permanent abode in Australia only even though they are not physically present in Australia (Barkoczy, 2015). There is considerable subjectivity involved in ascertaining the location of permanent abode in which regards the tax ruling IT 2650 is immensely beneficial as it brings out the key factors of significance while taking a call on the location (Gilders et. al., 2016).
Often the word “permanent” attached with abode is interpreted that unless the taxpayer leaves Australia on a permanent basis to settle abroad, his permanent abode would be deemed to be situated in Australia only. However, this may not be the case as the court has highlighted in the famous Federal Commissioner of Taxation v Applegate (1979) ATC 4307. This case deals with a professional who went abroad to set up office but eventually was assured of returning to Australia. Considering the nature and scope of the project, no estimated stay abroad could be estimated beforehand but it is evident that it would be substantial. In this case, the court ruled the taxpayer as foreign resident on the premise that a significant duration of stay extending more than couple of years would result is shifting of permanent abode to the foreign duration till the period taxpayer permanently returns to Australia (ATO, 1991).
As Marty is a Australian citizen, hence he is bound to have the Australian PR. In relation to determining the location of permanent abode, the reasoning implied in Federal Commissioner of Taxation v Applegate (1979) ATC 4307 case would be relevant here. It is apparent that Marty has established a company in US and thus to ensure the success of the same, it would be reasonable to expect that he would not be permanently returning to Australia for a significant length of time. Hence, the permanent abode of Marty during this period would be located in USA and not Australia. Thereby, till the time, Marty returns to Australia permanently, he will be classified as a foreign tax resident.
b) The various pivotal aspects related to the company Planks Pty Ltd are highlighted below.
In order to determine the tax residency, the given company needs to comply with one of the following as per TR 2017/D2 (KPMG, 2017).
i) Incorporation of the company should be in Australia.
ii) A foreign incorporated company may also be considered Australian tax resident if atleast one condition of the following terms is satisfied by the company.
For the company given i.e. Planks, it is apparent that incorporation in outside Australia, but it can be presumed to have operations in Australia considering the global footprint. Since, Marty for the complete period when he is the shareholder of the company is a foreign tax resident as discussed earlier, thus it is not possible for the company to comply with the voting rights condition. Thus, the only way the company could be considered as an Australian tax resident is on account Marty acting as the management control from Australia. When in FY2014, he does come to Australia, he is primarily on holiday and it may be presumed that the business is being conducted by the board. However in FY2015 when he does come to Australia for 7 months, he is the managing director and also involved in key strategic decision making. Therefore, only for those 7 months can the company be considered as Australian tax resident and for the remainder period, it would be a foreign tax resident.
c) Having ascertained Marty’s tax residency, the objective is to determine the taxable income for him during the given period. The relevant provisions in this regards are as stated below (Sadiq et. al., 2016).
Section 6-5(2) – For Australian tax resident, all income with indifference to the contributing source would contribute to income under tax as per Australian laws
Section 6-5(3) – For foreign tax residents, only income derived from Australia contributes to assessable income.
Considering Marty is a foreign tax resident, thus income sources based in Australia would be taxable. This would include rent or lease payments from commercial properties. No rent income generated from house as Marty charges no rent for house from his sister. Additionally, employment income earned during 7 months of stay in Australia in FY2015 would be taxed in Australia as during that time the company was a resident of Australia. Besides, all income would be foreign and non-taxable in Australia.
d) The tax residency status of the company has already been discussed above and now the taxable income in Australia needs to be ascertained. The relevant provisions in this regards are as stated below (Deutsch et. al., 2016).
Section 6-5(2) – For Australian tax resident, all income with indifference to the contributing source would contribute to income under tax as per Australian laws
Section 6-5(3) – For foreign tax residents, only income derived from Australia contributes to assessable income.
The company is a foreign tax resident for the whole duration of the given time period except a the period of 7 months in FY2015 when it is an Australian tax resident. During the periods for which the company is a foreign tax resident, the income that the company generates from operations in Australia or serving Australia based clients would be taxable in Australia. On the other hand, for the period when the company is Australian tax resident during that period, the entire income of the company from worldwide operations would be taxed in accordance with Australian taxation laws.
2. A taxpayer Rommy has purchased a property for a total consideration of $ 500,000 in the year 2000 with the intention that it would serve as weekend retreat. Later, he devoted a small section of the land to grape production and started making wine. Considering that wine produced was in surplus, he gave it to his friends also and once sold some boxes. Further, the taxpayer has subdivided the land and liquidates the same for a consideration of $ 1,500,000. Based on the above relevant facts, the assessable income for taxpayer needs to be determined.
Assessable income may be generated through ordinary income (S.6-5 and S. 15-15) or statutory income (S. 6-10) (Woellner, 2014). It is apparent from the given facts that Rommy had a hobby farm and also a small scale production. Further, he did not had a proper selling mechanism which is why he sold through the honesty box mechanism. Considering the scale and the fact that the taxpayer considers this a hobby, it would be fair to conclude that the given production of grapes and wine is only a hobby and not any particular business (Barkoczy, 2015).
With regards to proceeds derived on account of hobby, it may be concluded that the same is considered as income exempt from any tax. This can be explained on account on exclusion of this income from all the other avenues leading to assessable income. It cannot be termed as ordinary income (s. 6-5, ITAA 1997) as growing grapes and producing wine is neither a business nor a profession for the given taxpayer but is essentially an activity meant for recreation. Besides, for any proceeds to be included in assessable income on account of s. 15-15, ITAA 1997 the presence of profit motive before engaging in the concerned activity must be there (CCH, 2013). However, in the given case, there is no such motive to profit from the production of wine which is why the taxpayer has no commercial means to even sell the boxes of wine. Also, since the payment derived from the sale of the wine boxes is derived in the form of cash, thus it cannot be recognized as statutory payments (s. 6-10, ITAA 1997). It is worth noticing that if the hobby income is derived in a continuous manner, then the same may be classified as ordinary income (Sadiq et. al., 2016). However, this is not the case here as it is clearly stated that only once had the taxpayer sold the boxes outside through the medium of a stall.
In relation to land subdivision, it is possible that capital gains may be derived or even ordinary income can be derived depending upon the underlying intent and profession of the taxpayer. If the taxpayer is in the business of selling and buying lands or real estate developer, then the profits on account of sale of land would be considered ordinary profit under s. 6-5 (Gilders et. al., 2016). Further, if the land was purchased with specific intention to profit from sub-division, then profits would contribute to assessable income under s. 15-15. However, if the land purchased for other reasons has been sub-divided and liquidated, then the profits would be considered as capital gains from the realization of the capital asset under s. 108-5 (Deutsch et. al., 2016). The capital gains thus derived would contribute to assessable income and would be subject to CGT (Capital Gains Tax). Under discount method which the individuals taxpayers can apply, 50% discount may be availed on capital gains which are long term i.e. where the asset has been held for more than one year (Nethercott, Richardson & Devos, 2016).
In the given case, it is apparent that the land was not purchased with a profit motive and was instead purchased as a weekend retreat and later used as a hobby harm. Also there is no information to suggest that the taxpayer is engaged in a land development business. Hence, the capital receipts would be tax free while capital gains derived would be taxed as CGT would apply. Based on the information given, it is apparent that the property’s cost base would be equal to buying price only since no information has been provided in relation to any incremental costs.
Selling price of property = $ 1,500,000
Thus, long term gross capital gains = 1500000-500000 = $ 1,000,000
In accordance with the discount method, 50% rebate on the above gross capital gains would be available to arrive at the net taxable gains.
Net capital gains subject to CGT = (50/100)* 1,000,000 = $ 500,000
Hence, it may be inferred that the only assessable income generated from the given transactions amount to $ 500,000 derived as capital gains on the sale of property.
References
ATO (1991), IT 2650, Australian Taxation Office, Retrieved on May 01, 2017 from https://law.ato.gov.au/atolaw/view.htm?Docid=ITR/IT2650/NAT/ATO/00001
Barkoczy, S. (2015), Foundation of Taxation Law 2015(7thed.), North Ryde: CCH Publications
CCH (2013), Australian Master Tax Guide 2013 (51st ed)., Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., & Snape, T. (2016), Australian tax handbook (8th ed), Pymont: Thomson Reuters,
Gilders, F., Taylor, J., Walpole, M., Burton, M. & Ciro, T. (2016), Understanding taxation law 2016 (9th ed)., Sydney: LexisNexis/Butterworths.
KPMG (2017), Rebooting central management & control, KPMG Website, Retrieved on May 01, 2017 from https://home.kpmg.com/au/en/home/insights/2017/03/rebooting-central-management-control-16-march-2017.html
Nethercott, L., Richardson, G. & Devos, K. (2016), Australian Taxation Study Manual 2016 (4th ed.), Sydney: Oxford University Press
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, & Ting, A (2016) , Principles of Taxation Law 2016( 8th ed)., Pymont:Thomson Reuter
Woellner, R. (2014), Australian taxation law 2014 (8th ed.), North Ryde: CCH Australia
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