Residence and Source

Discuss about the Taxation, Theory, Practice & Law for Residence and Source.

The taxability of the income depends upon the residential status of a person, thus, it is crucial for the tax purposes to determine the residential status of a person (Prince, 2013). In Australia, the residential status of an individual is determined by referring to the provisions of Australian tax law and the rules framed by the Australian Taxation Office in this behalf. Although, there is a proper definition of the term “Resident” in the Australian tax laws but in certain complex situations, one may lead to refer to the judicial case laws. The judicial case laws also provide foundation to resolve the complex issues related to the taxation matters. However, it should be kept in mind that the judicial cases are referred to only in the situations in which the issues could not be resolved by referring to the statutory provisions of taxation law (TaxConnections, 2016).

According to the rules framed by the Australian Tax Office, the primary test that is conducted to work out the residential status of an individual is the “Resides Test”. As per this test, an individual already residing in Australia is deemed as resident for the tax purpose without applying any other provision or rule. This implies that an individual residing permanently in Australia will always be deemed as resident for tax purposes. In case of individuals not already residing in Australia, there are three conditions stipulated by the Australian Tax office, if any of these conditions get satisfied, the individual is regarded as resident for tax purposes. These three conditions are discussed as under:

• Domicile Test: Prescribed that the individual having permanent place of residence in Australia is deemed as resident (Australia Residency Test, 2016).
• 183 Day Test: If an individual has stayed in Australia for a period of 183 days or more in the year for which status is sought to be determined, then he/she is deemed as resident of (Residency- 183 day test, 2016).
• Superannuation Test: As per this test, the Australian government employees posted outside Australia are treated as resident of Australia.

However, in regard to the above discussed first two conditions, it is to be noted that if the Australian Tax Office is satisfied that the permanent place of abode of the individual is outside Australia, then these conditions will not apply and the individual may not be regarded as resident of Australia in that case (Australia Residency Test, 2016).               

In the present case, Fred, who has migrated to Australia from the United Kingdom, satisfies the 183 day test as he has been in Australia for 11 month (Australia Residency Test, 2016). Further, considering the prevailing circumstances in the current case, the permanent place of adobe for Fred could also not said to be outside Australia. This is primarily due to two reasons, first is that he is living in Australia with family (not considering children here because they could not be migrated due to unavoidable reasons) and second is that Fred has rented out his residential property of the United kingdom. Therefore, concluding the discussion, it could be articulated that Fred is resident of Australia for tax purposes and thus, he will be liable to pay taxes to the government on income earned there.

Case study 2: Ordinary Income

The outcomes in respect of the cases have been discussed as under:

The primary issue arose before the court in this case was that whether a single transaction could be regarded as business and tax can be levied under the head business income on the person who carried out that transaction. Addressing this question, the first assertion of the court was that rather than thinking about the size of the transaction, one should consider the source from which that income emanates (Manyam, 2011). Thus, it becomes clear that for taxation purpose, even one single transaction could be brought to tax under the head business income, if the transaction was carried out with the business motive. Further, the court held that if the transaction related to land and property and securities was not with the business motive, rather the land, property or securities were held as investment, the gains can not be taxed as business income. The major outcomes of this case were as under:

• In case of land, property, and securities which are held as investment, the gains arising on sales or otherwise transfer of such land, property, and securities are not to be taxed as business income (MinterEllison, 2016).
• However, in cases wherein it is apparently clear that the activities are of business nature, the gains arising on sale or otherwise transfer of the securities, land, or property are to be taxed as business income (MinterEllison, 2016).
• Further, the court held that whether the transaction was a single transaction and whether or not it was commercial in nature, the gains arising from it shall be regarded as income, however, taxed it may be under any of the heads (MinterEllison, 2016).
• Further, the court stipulated that each case must be considered separately by going through the exact nature of the transaction (MinterEllison, 2016).

Among various key cases on revenues and capital distinction for tax purposes, the Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188 is an important one (Smith, 2003). In this case, the major issue that came up before the court was that whether the sale of land, which was being previously used in the mining operations by Scottish Australian Mining Co Ltd, could be taxed as revenue income merely because that some business nature operations were performed by the company to bring that land in a saleable condition. Addressing this question, the court held that the income arising on sale of such land is not assessable income. The court based this decision on the assertion that business nature activities were taken up only to realize the land in the most advantageous way. Thus, in this case, the sale of land was held to be as not an assessable income (Smith, 2003).

This case involved a substantial question of law as regards taxation of sale of land. In this case, Whitfords Beach Pty Ltd purchased land in the year 1954, which was sold later on by carrying out some development work. Although, the primary issues in this case was same as that was raised in the case of Scottish Australian Mining Co Ltd but the circumstances were totally different. Court observed that the sale land in this case took place after altering the articles of association of the company so as to include wherein land development and sale as a business activity (Australian Government, 2016). Further, it was observed by the court that there was a change in the ownership that took place after the land was purchased. The court, by clearly making distinction between this case and the case of Scottish Australian Mining Co Ltd, held that the sale of land was assessable as business income. The judiciary observed that in this case, the taxpayer company was involved in more than the mere realization of the asset. Therefore, overriding the decision of the court in the case of Australian Mining Co Ltd, the court held that the sale of land by Whitfords Beach Pty Ltd was chargeable to tax as business income (Wolters Kluwer, 2016).

In this case also the issue of tax on the sale of land was the reason of dispute between the taxpayer and the tax authorities. The taxpayer sold land, the net proceeds of which were assessed as the income from the business activities by the commissioner of income tax (Statham & Anor. 2016). The taxpayer raised objections against the tax treatment given by the commissioner in respect of sale of such land. The taxpayer appealed in the court claiming that the tax treatment given by the commissioner is grossly wrong and the gains arising on the sale of land should not be taxed as business income.

The court decided the case in favor of the taxpayer holding that the gains arising on the sale of land could not be regarded as the ordinary income or the income from business activities. The court based its decision on certain crucial grounds; one of them was that the activities of the taxpayer were not of business nature. In this regard, the court observed that the taxpayer was not working on any profit making scheme that could be associated with the sale of that land (Court Cases, 2016). Thus, in the prevailing circumstances, the taxpayer could not be held to be carrying on a business of land development. Further, the court ruled out that the mere fact that the farming business of the taxpayer was closed down, does not make the sale of land taxable as business income.

Therefore, referring to the judicially pronouncements of other cases and considering the circumstances of the current case, the court held that the net proceeds of the sale of land can not be taxed as business income. Final order of the court also directed the commissioner to reimburse the expenses incurred by the taxpayer in connection with this appeal (Court Cases, 2016).           

The law promulgated through this case was also to assist the taxation of the sale of land. In this case, the taxpayer was gifted a farm by his father. On this farm, the taxpayer was carrying on primary production activities and using a part of it for residential purposes. Later on, after several years, the taxpayer sold a part of the land from that farm (Casimaty’s case, 2002). The tax authorities demanded tax on the gains arising on sale of that part of the land. The taxpayer challenged this decision of the tax authorities in the court by appealing that the gains on sale of part of the farm land were not chargeable to tax under section 25 (1) of the income tax assessment act (ITAA) 1936 (Australian Government, 2016). However, the decisions of the administrative appeal tribunal and the federal court came against the taxpayer. The federal court based its decision on the ground that the taxpayer was actively involved in planning and managing the sales of land, which in no case can be said to be involvement for mere realization of the asset. 

Challenging the decisions of the administrative appeal tribunal and the federal court, the taxpayer appealed in the high court. The high court turned down the decisions of the administrative appeal tribunal and the federal court by deciding the case in favor of the taxpayer. The high court held that the activities carried out by the taxpayer in connection with the sale of part of the land were not in the nature of business of land development (Casimaty’s case, 2002). Thus, the gains arising from the sale of part of the land could not be taxed in the hands of the taxpayer under section 25 (1) of the ITAA 1936. The high court based its decision on the ground that the taxpayer was not directly involved in advertising the sale of land and other activities that are considered to be indicative of business of land development (Casimaty’s case, 2002).

The sale of land and the dominant purpose of the taxpayer in selling that land was the primary finding of this case. The court observed that it is a well established law to consider the dominant purpose and intention of the party to use the land in deciding to tax the proceeds of sale of land. At the first stage, the tribunal asserted that the intention of the taxpayer was not to make profits from the sale of property. It was found that the taxpayer was using the land for the use in connection with the business activity such as sale of sand. Thus, the property was being used as the permanent asset in the business by the taxpayer and not as a trading asset. Based on these arguments, the tribunal held the gains on sale of land not chargeable to tax as ordinary business income (Moana Sand Case, 2016). However, on further appeal, the federal court pronounced that the sale of land in this case was chargeable on revenue account as well as capital account.          

In this case, the court held that the activities of the taxpayer were identifiable in the nature of business of land development. Therefore, the court held the transaction of sale of land in this case was on revenues account and thus, liable to tax under section 25(1) of ITAA of 1936. The court observed that the description of the activities that the taxpayer was carrying in relation to the land development showed that these activities were in the nature of business (Crow v FC, 2016). In this regard, the court noted that the taxpayer carried out various land development tasks on such land before disposing that off finally. Further, in the case, the purpose behind purchase of the land was clearly identifiable, which was to carry out land development by subdividing it. Therefore, considering the stated purpose of use of land and the nature of the substantial activities that were being carried out by the taxpayer in relation to development of that land, the court pronounced that the sale of land need to be brought to tax under section 25 (1) of ITAA 1936 (Crow v FC, 2016). 

In this case, the court observed that the activities of the taxpayer in relation to land were not merely to assist in realization of the land, but these were more than that and signifying the existence of profit making motive. In this case, two brothers purchased a land and constructed three houses on that land. However, they were not able sale the houses initially and for that reason they decided to use two of the houses as residence. After some time using those houses for own residence, they sold them making huge profits out of that sale. The taxpayers were of the view that the profit earned on the sale of the houses was not chargeable to tax as ordinary income (Webb Martin, 2016).    

However, the court pronounced its decision based on the inherent intention of the taxpayer, which was to use the land in profit making activities and earn profit. The court based its decision on the finding that the taxpayer did not take required steps to let out the property and further, it was likely that to repay the heavy bank loan, they would be selling the property shortly (Webb Martin, 2016).

References

Australian Government. 2016. Income tax: whether profits on isolated transactions are income. [Online]. Available at: https://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR923/NAT/ATO/00001 [Accessed on: 10 August 2016]. 

Casimaty’s case. 2002. Sale of subdivided farm land – Income or capital gain? [Online]. Available at: https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2002273/00001 [Accessed on: 10 August 2016].

Court Cases. 2016. Statham & Anor v. Federal Commissioner of Taxation, Federal Court of Australia, Full Court, 23 December 1988 [Online]. Available at: https://www.iknow.cch.com.au/document/atagUio544343sl16788832/statham-anor-v-federal-commissioner-of-taxation-federal-court-of-australia-full-court-23-december-1988 [Accessed on: 10 August 2016].

Crow v FC, 2016. ATO Interpretative Decision. [Online]. Available at:  https://www.ato.gov.au/law/view/document?docid=AID/AID200155/00001 [Accessed on: 10 August 2016].

Australian government. 2016. Federal Register of Legislation. [Online]. Available at: https://www.legislation.gov.au/Details/C2013C00040 [Accessed on: 10 August 2016].

Manyam, J. 2011. Taxation of Gains from Banking and Insurance Businesses in New Zealand. Revenue Law Journal, 20(1), pp. 1-29. 

MinterEllison. 2016. Australian tax brief. [Online]. Available at: https://www.minterellison.com/Pub/N/201002_ATB/ [Accessed on: 10 August 2016].

Moana Sand Case. 2016. Moana Sand Pty Ltd v FC. [Online]. Available at: https://www.austlii.edu.au/au/journals/JlATax/1999/13.html [Accessed on: 10 August 2016].

Prince, J.B. 2013. Tax for Australians for dummies. John Wiley & Sons.

Residency- 183 day test. 2016. [Online]. Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Residency/Residency—the-183-day-test/ [Accessed on: 10 August 2016].

Residency Test. 2016. [Online]. Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/Work-out-your-tax-residency/Residency-tests/ [Accessed on: 10 August 2016].

Smith, A. 2003. Taxation Institute of Australia. [Online]. Available at: file:///C:/Users/Abasus%20Solution/Downloads/d020520030207_prop_development_smith.pdf [Accessed on: 10 August 2016].

Statham & Anor. 2016. Statham & Anor v. Federal Commissioner of Taxation. [Online]. Available at: https://law.ato.gov.au/atolaw/view.htm?locid=%27JUD/89ATC4070%27&PiT=99991231235958 [Accessed on: 10 August 2016].

Webb Martin. 2016. Complex tax issues taking up time. [Online]. Available at: https://www.webbmartinconsulting.com.au/#!PropertySubdivision/c7zf/551ba1e30cf215f35a2ff93e [Accessed on: 10 August 2016].

Wolters Kluwer. 2016. Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd., High Court of Australia, 17 March 1982. [Online]. Available at: https://www.iknow.cch.com.au/document/atagUio549860sl16841994/federal-commissioner-of-taxation-v-whitfords-beach-pty-ltd-high-court-of-australia-17-march-1982 [Accessed on: 10 August 2016].