Basic observation from the current problem situation
Present circumstance problems refers to a resident of Australia whose name is Kit which has origin from the country Chile and is still retaining its citizenship. Here the tax assesse Kit has his residential home in Australia where his family (including his wife and his children) is residing. Currently the tax assesse Kit is working out in country Indonesia with an organsiation of United States. He has made all his financial investments in Chile.
As in general the concept of VISA and country border residency do not relates with the taxation residency. In the particular problem as it is provided that the tax assesse Kit is an Australian resident, still the evaluation of residency related to the taxation matters is quite different. Australian taxation office (ATO) sets out certain rules and guidelines which comprehend in determining the residential status of an individual. The respective department uses different tools and techniques which helps an individual to access its tax residency. The tools and techniques utilised by the immigration office of Australia is quite different is that of ATO. Utilising the appropriate tools of ATO assesse Kit will be able to decide whether his global income which is attained outside the Australia country and the income received by him over the investment made by him in the Chile country will be taxable or not. Following alternatives is most suitable in this condition referring to the case study of Kit’s tax residency.
Kit is an Australian tax resident and his global income is taxable as per ATO guidelines
Kit is an Australian tax resident and the income attained by him is not taxable as per ATO guidelines due to the respective fact that Australian nation has a double taxation avoidance agreement with country of Indonesia from where assesse Kit is attaining income.
Kit is not an Australian tax resident and income attained by him related to the Australia is only taxable, rest all other incomes earned by him in at global level are not assessed to tax (both salary income in Indonesia and investment income in Chile)
In the event when there is circumstance where the Australian nation do not have any tax treaty related to DTAA with either of the country the assesse Kit has to check for resides test to determine his tax residency. Certain deductions are allowed to the individuals who are working in the country other than Australia and attaining income over there. Deductions are availed under section 26 AG for the assesse availing incomes from the countries with which government of Australia has tax treaty. If any of the condition mentioned in the particular resides test passes, particular assesse shall be considered as resident as per ATO and has to pay all the duties and taxation as per the relevant laws & guidelines. There are certain statutory tests which are depicted as follows which determines the individuals tax residency –
Domicile text– This test prequalifies the fact that the assesse do not have any permanent place of residence other than Australia. Referencing the present problem where it is mentioned that assesse Kit has a residential house in Australia where her wife and his children resides do qualifies Kit in the present test (ATO, 2016). However as per the matter of the fact if Kit is able to satisfy the commissioner of Income tax along with the appropriate documentation that he has a permanent domicile outside the nation of Australia then he is out of this first test determining tax residency.
183 days test– Government of Australia was very proactive in determining this condition. This test determine the fact that if any individual stays out in Australian nation for more than half of the year than his global income shall be taxable in Australia (ATO, 2016). Taking the present problem referring assesse Kit into account, he stayed for less than 183 days in Australia; therefore he disqualifies this condition of the test.
Superannuation test– Last but not the least, this conditions relates to the individual assesse who are working in the country other than Australian nation on the behalf of Government of Australia or the Commonwealth of Australia then his/her respective global income shall be assessed to tax as such that it has been attained in Australia (ATO, 2016). Referring the current problem, the assesse Kit has been working in the Indonesian nation on the behalf of United States based company; therefore this condition of the test is also disqualified.
The assesse kit certainly disqualifies the last two condition of the residency test of ATO, but there is doubt in the circumstance of inadequate information regarding domicile of Kit.
Case summary
In this particular case a business organsiation which was established in the year 1901 with an aim and objective to acquire a land in the region of California for the purpose of copper mining. The assesse invested major portion of his overall wealth for the particular purpose. With the span of time the relevant assesse meets out shortage to funds to perform his mining business. For the purpose assesse sold the referred land to another business group and acquired certain number of share capital of that company in consideration. The assesse attained a capital gain over this business transaction
The commissioner of income tax taking the relevant law into reference is of view that the above mentioned company was formed with an approach to attain profit by sale of land; therefore such transaction has an income nature and shall be assessed to tax.
The assesse in the particular case is of view that the subsequent transaction resulted out in mere transfer of one capital asset to another capital asset. There is no profit attainment activity involved in this case structure.
In the particular case the most appropriate income tax law fits out is profits attained on the isolated business and non business transitions as per the section 25(1) of income tax act 1936 where transaction outside the ordinary course of business is taxable. However in the current purview the applicability of section 25A seems not relevant.
The decision was given by the learned judge Lord Justice Clerk in favour of that department and stated that the income earned by the assesse in the nature of profit and relevant capital gain taxation shall be applicable over this transaction. As per the court of law the assesse has never an intention to mine the land as per his capital position, his aim was to ascertain profits from the sale of land (GUPTA, 2009).
Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188
The assesse relates to a business organsiation which was conducting a coal mining business. The business was carried on a 1,771 acre of land purchased in the year 1860. After the coal reserves on the land was exhausted the assesse worked out certain plans to sell the respective land. These plans included the land re-development through building various infrastructure facilities like developing roads, schools, parks, railway station etc. The assesse after the re-development procedure sold the land in the adequate lots and attained the adequate amount of profits (Jade, n.d.).
The commissioner of income tax is of view point that the income attained by the assesse shall be taxable under the section 25(1) of the Income tax act 1936.
The assesse is of view that the land development activity done by the assesse with the aim to bring the land asset in the most beneficial situation. It is not the routine business activity of the firm to get involved in the land re-development activity. Therefore income earned by the firm is irregular in nature and shall not be assessed to taxation under section 25(1) of the act.
If the sale of the land do form part of the normal business operations then it is referred as a normal business income taxable under section 6-5 of the Income tax act 1997, else it will be treated as a normal capital gain.
The decision in the relevant case was in favour of assesse that the mere workings out the development activities with the clear intention of bringing the land in most advantageous situation do not segment the business into the land developer, therefore relevant income earned shall not be treated as an ordinary business income (Bitomsky, 1991).
C of T v Whitfords Beach Pty Ltd (1982) 150 CLR
The assesse in the relevant case law is an incorporated company formed in the year 1954 whose prime aim and objective of business to get involved into the fishing business. In the late 1967 few companies whose prime objective is related to land development activities purchase made a bulk share deal of the fishing company. The land which was purchased by the fishing shacks by the previous owners of the company was rezoned and sold at certain profits by the new managers.
The commissioner of the income tax is of view that the amount earned by the business on sale of land in the various lots is related to income earned under the activity of land redevelopment and shall be taxed accordingly.
Assesse is of view that selling of land after compiling the activity of land redevelopment activity is activity done with the aim to bring the asset in most advantageous situation and this activity should be considered as simply realisation of capital asset. As the assesse relates to a business of fishing there is no relation with any such land redevelopment activity.
The high court decision given by the Gibbs CJ, Mason, Murphy and Wilson JJ stated that the assesse shall be liable to pay tax under section 25(1) of the income tax act 1936. The management of the company was changed with the intention to carry out the land development activities and the overall nature of the business has been changed (Jade, n.d.).
Statham & Anor v FC of T 89 ATC 4070
The issue rose over the asset previously owned by the deceased assesse Charles Aderman who has certain piece of land under his ownership acquired in the year 1970. The aim and objective of acquiring this property was to get involved in the farming activity. Later on he sold certain part of land to his relatives company in the year 1976. The above deceased assesse has certain stake in the above company and entered into an activity of cattle farming on that piece of land. Due to subsequent losses and ill health he sold out that portion of land by the subdivision process carried on by another land development firm.
The Australian taxation office claimed that the above activity is in nature of land development business activity and the revenue earned by the respective transaction is in relation to the particular business activity therefore it shall be taxed in particular section.
The assesse is of view that he has no intention to work out into a land redevelopment business; it is just due to misfortune and failure of the business he has to enter into particular transaction. This activity is not routine in nature so it shall not be classified into normal business income.
Federal court headed by the Woodward, Lockhart and Hartigan JJ favoured the assesse contention and stated that the revenue earned by the assesse shall not be taxed in section 25(1) and 26(a) of the income tax act 1936 and constituted as a normal capital gain income. Mere selling the farm land by the subdivision will not make the respective asset taxable (ATO, 2005).
Casimaty v FC of T 97 ATC 5135
The assesse in this case law inherited certain piece of land measuring 998 acre from his father which was popularly known as ‘Action view’. The assesse over the period of time purchased certain portion of nearby land to grow his farming business. But after certain period the assesse faced financial problems and things even got worse due to his ill health. Increasing debt and interest proportion over it forced the assesse to sell the certain portion of land. He did land development activities to make the land saleable in small lots.
The ATO commissioner stated that the revenue earned by the assesse after subsequent land redevelopment activity should be taxable under section 26(1) of the act and it seems that it is revenue earned in ordinary course of business.
The assesse contradicted the department view point and stated that it is mere realisation of capital asset not forming an activity involving profitably in normal course of business.
The court decision given by Ryan J. stated that simply subdivision of capital asset with the land development activity do not fulfils the condition of taxability. The basic condition of objective of business involved in land development with a regular approach is not fulfilled here.
Moana Sand Pty Ltd v FC of T 88 ATC 4897
The assesse is a company which relates to purchase, sale and redevelopment of land activity. Over the period of time it purchased a piece of land in the year 1958 amounted to £2,000. The assesse acquired the land with the motive of selling the sand available on the land and later on to sell the same at certain profit. After some time the land was acquired by the Coastal Protection Board for general public interest and paid certain compensation over it.
The ATO commissioner after deducting the certain expenses and index purchase price of land from the consideration received from the land settled the amount as the income earned by the business in the ordinary course.
The assesse rejected the claim made by the department and is of view that after the compulsory acquisition made by the costal department it has ended up the purpose for which he has acquired the land so no part of the amount received shall be taxable under the section 25(1) or 26(a) of the act.
The decision given by the federal court bench of judges Sheppard, Wilcox and lee JJ stated that as the prime intention of the assesse was to earn business income from the sale of land and mere acquiring the land by the coastal authorities on the consideration as per market valuation do not change the nature of revenue. It shall be taxed as per the income earned in the normal course of business as per section 25(1) of the act (Cassidy, 1994).
Crow v FC of T 88 ATC 4620
Assesse in the particular case law purchased certain area of different lands at regular intervals and initially showcased them as the land purchased for farming purpose. Later on due to increasing debts the assesse subdivided the land and got involved into land redevelopment activity.
The revenue earned shall be taxed as an income of ordinary business
As the prime business of the assesse relates to farming activity but due to misfortune and enhancing debts he has to sell his land by involving into the act of subdivision.
The court is of view that the assesse was involved in the farming business for shorter duration; his prime objective is to get involved in purchase and sale of land. The activity of farming is done with the intention to shadow his land development business. Therefore amount earned in particular activity shall be assessable to tax under section 26(1) of the income tax act 1936 (ATO, 2005).
McCurry & Anor v FC of T 98 ATC 4487
The assesse were the brothers who acquired certain property with the aim of redevelopment and then sell it with certain amount of profit. But as there were no buyers for the property in the external market they acquired the property for their own residential use. Eventually after certain period of time they sold the property at a relevant profit.
ATO assessed the income attained from the above transaction taxable under section 26(1)
Assesse contradicted the department view and stated that sale of residential property is mere an attainment of capital gain not a business income.
Federal court decision given by Judge Davies J. stated that the initial motive of the assesse was not to consume the property as for the residential use. The business venture was formed among the brothers with the aim to attain the property income. Therefore the court of law placed the relevant income as an income attained in ordinary course (Hart, 2007).
ATO, 2005. ATO Interpretative Decision ATO ID 2005/157. [Online] Available at: https://www.ato.gov.au/law/view/document?docid=AID/AID2005157/00001 [Accessed 17 Aoril 2017].
ATO, 2016. Residency tests. [Online] Available at: https://www.ato.gov.au/individuals/international-tax-for-individuals/work-out-your-tax-residency/residency-tests/ [Accessed 17 April 2017].
Bitomsky, G., 1991. The Concept of Assessable Income Has It Changed.
Cassidy, J., 1994. The Taxation of Isolated Sales under Section 25 (1) ITAA: TR 93/2 v Joint Submission.
GUPTA, R., 2009. Receipts from Personal Exertion: Mere Gifts or Gross Income?.
Hart, G., 2007. The Limited Impact Of Whitfords Beach In Urban Land Development.
Jade, n.d. Federal Commissioner of Taxation v Whitfords Beach Pty Ltd. [Online] Available at: https://jade.io/j/?a=outline&id=67040 [Accessed 16 April 2017].
Jade, n.d. Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation. [Online] Available at: https://jade.io/j/?a=outline&id=64663 [Accessed 16 April 2017].
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