Concept of Residence in Tax Law

Discuss about the Global Environment for Tax Law.

The issue in the given situation is whether in the given situation Fred will be taxed as a resident? Fred, however will not be taxed in the manner same as that a resident would be. It is considered in Australia that an individual is a resident if the following conditions are full filled (Section 6, Australian Income Tax Assessment Act 1936) (Australian income tax assessment act 1936-1974, 1975) (Ato.gov.au, 2016):

• if he is resident of the country under common law (ordinary meaning test);
• if he is of Australian domicile (test of domicile);
• or if the person is either continuously or intermittently in Australia for more than half of the year of income, unless the commissioner is satisfied that Australia is not his usual place of residence (183 day test); or
  • is a part of the superannuation scheme.

The concept that is there behind the tax payer’s residence is where his home is. In the case of Levene v IRC (Levene v IRC [1928]), the term “reside” had been defined by Viscount LC meaning a dwelling that is permanent or a for considerable time period. It is not difficult to determine if a man is settled or has a usual abode at a place. A person does not become less of a citizen because he has left the country either for business or pleasure (Ato.gov.au, 2016).

The Taxing Ruling TR 98/17 which was issued by ATO interpreted the resident’s ordinary meaning. The essential factors which were identified were:

• whether it is under ordinary meaning of a resident that a person who is entering the country will fall; and
• the character, behavior and quality of life of the person for the period that they are present physically.

A resident under Taxation Ruling TR 98/17 would be considered to be a resident if the period of six months has crossed and characteristics are demonstrated of making Australian a place of residence (Clinto, Bentley and James, 2016). In Fred’s case he will however, not be classified as a resident since the main factor of residence is not complied with, he has come only to set up a branch in the country. There is other than this no intention which he has for settling down. Further, he moved back permanently within the first eleven months thus, demonstrating that there was no intention of maintaining in Australia a residence (Australian income tax assessment act 1936-1974, 1975).

California Cooper Syndicate Ltd. v Harris (Survey or of Taxes) (1904) 5 TC 159

The land had been acquired to extract copper from it mainly. There was however no copper extraction. The land was sold, subsequently to another company and shares were given as consideration. It was stated by the court that the revenue generated due to the sale of land was income in nature since the main aim for selling the land was for making profit by the company. This was ordinary business of the tax payer (California Cooper Syndicate Ltd. v Harris (Survey or of Taxes), [1904]).

Scottish Australian Mining Co. Ltd. FC of T 1950 81 CLR 188

Taxation Ruling TR 98/17

The land owned by the business was being used to extract. After over a period of time the entire coal was extracted it was decided that the land would be sold (Scottish Australian Mining Co. Ltd. FC of T, [1950]). To make the land saleable it was subdivided and infrastructure made on it. The court opined that the profit which was made from the sale cannot be assessed  since the company’s business was not selling the land. The land had been sold was realizing capital asset. The profit made was capital gain.

The taxpayer company was formed to acquire the beach access land so that fishing could be done in that area. Later, this land was sold by selling shares in the company. The shareholder’s had bought the shares to gain control over the land which they wanted to subdivide, develop and the sell eventually to make profit and this was done by the company. The however, argued that this was capital realization of the land. The high court opined that it was ordinary income. This was because the main intention of acquiring the land was to make profit by selling it thus, changing the initial intention of the first company (FC of T v Whitfords Beach Pty Ltd, [1982]).

In this case the trustees of the estate of the deceased were the tax payers. The land had been acquired by the deceased for farming. However, half of the land was later sold to the company controlled by the family. There was no intention of selling the land for making profit. It was used for the purpose of raising cattle by way of partnership. Since, this was a failure the land was subdivided and sold. The deceased passed away at the time of sale. The commissioner argued that the profit generated by sale of land was assessable income of the estate, the tax payers argued otherwise. The court stated that the profit from sale was not ordinary income. It was not for the purpose of selling the land and making a profit that the land was acquired, it was for agriculture and cattle raising.

A farming property was acquired from the father of the taxpayer. He used this land for farming for twenty years. Due to the debt that was growing, he subdivided and sold the land. There were total 8 subdivisions in 18 years and various developments were made on it. The commissioner contended that the profit generated from it was ordinary income. The court on appeal however, stated that it was for private residence and agriculture that the land was acquired and there was no evidence that there had been a change in the purpose. The sale of the land was merely realization of capital asset and hence capital income (Casimaty v FC of T 97, [1997]).

Cases on Income Tax Assessment

Land was acquired by the company for the business of working and/or selling sand. There was later an application by the government that they wished to mined. This was objected by the taxpayers. They stated that they were holding the land for subdividing and selling it (Mona Sand Pty Ltd. v FC of T, [1988]). The government then rezoned the land and an intention was indicated for preserving it. For the cost of $500,000 the government resumed the land. It was argued by the Commissioner that this was ordinary income as the purpose stated was subdividing and selling the land by the taxpayer. The tax payer argued that they had acquired the land initially only for selling sand and that they would have sold it later. Court however, stated that the amount was ordinary income though the transaction was isolated, the amount fulfilled the ultimate purpose of the taxpayer.

After borrowing a substantial amount of money the farmer purchased five blocks of land over a period of ten year. He used this land for farming sometime. It was however, eventually subdivided and sold. For the starting 2 years and the over a period of number of years there were 51 blocks sold and profit generated of  $388,288. The Federal Court stated that the profit was assessable income as land development business was being carried out. Though, the court acknowledged the fact that he did use the land for farming. However, a difference was made from the Scottish Australian Mining Company where it was for a substantial period that the land was used for mining. Further the court stated that considering the debt amount it was known to the taxpayer at the very outset that he would have to sell the land. The repetitive and systematic manner was used for subdividing and selling the land (Crow v FC of T, [1988]).

A land was bought by the taxpayers. There was an old house on this land. This house was removed and three townhouses constructed in its place. The sale of this townhouses were advertised even before construction. This was however not successful. Subsequently the tax payer and his family moved into two of the houses (McCurry & Anor v FC of T, [1998]). They lived there for one year and later sold it for a profit of $150,000 approximately. The commissioner stated that that the profit accrued from sale was ordinarily assessable income. However, the tax payer argued that it was mere realization of capital asset since they were using the land for purpose of residing and sold it due to financial crisis. The court opined that it was ordinary income as the purpose for acquiring the land had been commercial and the view behind it was for making of profit and then selling it. It was not for the purposes of investment that the land had been acquired hence it cannot be stated that it was realization of the capital asset.

References

Ato.gov.au. (2016). Examples of residents and foreign residents | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Residency/Examples-of-residents-and-foreign-residents/ [Accessed 1 Sep. 2016].

Ato.gov.au. (2016). Residency tests | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/Work-out-your-tax-residency/Residency-tests/ [Accessed 1 Sep. 2016].

Australian income tax assessment act 1936-1974. (1975). North Ryde, N.S.W.: CCH Australia Ltd.

California Cooper Syndicate Ltd. v Harris (Survey or of Taxes) [1904]5 TC 159.

Casimaty v FC of T 97 [1997]ATC 5135.

Clinto, A., Bentley, D. and James, S. (2016). “The New Zealand Definition of “Residence” for Individuals: Lessons for Australia in a “Global” Environment” [2001] JlATax 1; (2001) 4(1) Journal of Australian Taxation 40. [online] Austlii.edu.au. Available at: https://www.austlii.edu.au/au/journals/JlATax/2001/1.html [Accessed 1 Sep. 2016].

Crow v FC of T [1988]88 ATC 4620.

FC of T v Whitfords Beach Pty Ltd [1982]150 CLR.

Levene v IRC [1928] [1928]AC 217.

McCurry & Anor v FC of T [1998]98 ATC 4487.

Mona Sand Pty Ltd. v FC of T [1988]88 ATC 4897.

Scottish Australian Mining Co. Ltd. FC of T [1950]81 CLR 188.