Case Study – 1

Describe about the taxation, theory, practice & law.
 

Based on the Kit’s case information, the central issue is to ascertain if for the given assessment year, Kit is indeed a tax resident of Australia. A secondary concern is to opine on the tax implications of the income that Kit earns from various sources.

Determination of tax residency is pivotal since the taxation treatment extended to Australian tax resident and foreign tax resident is significantly different in terms of sources of income taxable and also the extent of deductions that may be available. The statute of importance for ascertaining tax residency is Section 6(1) ITAA, 1936 while the tax ruling TR 98/17 highlights the various tests that may be applied based on the given circumstance so as to opine on the tax residency of any given taxpayer (Sadiq et. al., 2015). The brief description of the applicable tests for tax residency determination is done below (ATO, 1998).

In order to satisfy this test, it is imperative that the taxpayer under consideration must adhere to two conditions at the time of assessment (Gilders et. al., 2015).

• The possession of Australian domicile by the taxpayer when the actual assessment of performed. This must be in congruence with the prescribed statute in this regard which is Domicile Act, 1982.

• Australian located permanent abode of the given taxpayer at the time of assessment. In case of permanent abode located elsewhere, then the test will not be complied with.

It is vital that both the listed conditions must be adhered to by any given taxpayer for the Australian tax residency assess. The check for ascertaining domicile is easy to perform but this cannot be said for indicating the location of permanent abode where usually a host of factors are to be considered as has been highlighted in the ruling of IT 2650 (ATO, 1991). 

“Reside” as a word does not find any mention or explanation in any particular statute especially where it is expected. Thus, the not much information of the residency test is found in the statute book and considerable reliance is displayed on the verdicts of the useful court cases along with different tax rulings. These tend to earmark the pivotal factors that are considered useful to conduct tax residency through this test. The factors of significance that have been identified are as below (Deutsch et, al., 2015).

• The relative intensity of personal ties including social relationships that a taxpayer exhibits in Australia and also the country of origin.
• The relative intensity of professional ties including social relationships that a taxpayer exhibits in Australia and also the country of origin.
• Citizenship that the taxpayer possesses.

This test tend to opine on the tax residency of a taxpayer by assessing if the concerned person make regular contribution to either the Public Sector Superannuation Scheme or Commonwealth Superannuation Scheme. But, the test has limited usage since it can only serve the determination of tax residency of those officers that are currently on foreign soil and have been placed there by the government as their representative (Sadiq et. al, 2015).

Issue

The passing of the given test requires the taxpayer two conditions that may have to be satisfied by any given taxpayer. These are elaborated as shown below (Gilders et.al., 2015).

• Minimum period of 183 days need to be spent on Australian soil in the current assessment period.
• Taxpayer’s intent with regards to settling down in Australia in the near future.

For the attainment of residency as per this test, it is required that the given taxpayer must satisfy each of the aforesaid condition.

The above tests can be applied to the situation described in the case as follows.

• Domicile test

This test has relevance as Kit is a PR of Australia but for employment purposes tends to stay out of the country. As per the information provided, it may be concluded that both conditions are satisfied.

• By virtue of being the Australian permanent resident, Kit would also have the domicile of Australia.
• Kit’s Australia house serves as the permanent residence since after his moving out the family continues their stay. Also, there is no plan on part of Kit or his wife to move to either Indonesia or Chile on a temporary or permanent basis. Besides, there are frequent visits from Kit’s side to Australia backed by the vacation schedule at the job.

• Residency test

Even though Kit has an Australian PR but the country of origin is Chile and Kit still has the citizenship of Chile. However, in comparison to Chile or Indonesia, Kit’s personal and professional engagements are more intense with Australia. On the personal front, Kit’s family stays in Australia and besides professionally also his salary is credited in Australian bank with the employment contract also been executed on Australian soil. Considering the various factors, it may be apparent that tax residency is that of Australia.

• Superannuation test

This test does not apply for the given scenario as Kit does not represent an officer who has been living in abroad due to government’s duty.

• 183 day test

In Kit’s residency case, 183 day test is not much relevant as Kit did not stay for minimum of 183 days in the tax year under consideration.

Thus, on basis of the discussion above, it may be concluded that Kit has a tax residency of Australia which is derived from namely two tests i.e. Domicile Test and Residency Test.

As Kit’s Australia residency is confirmed, thus assessable income for him would be derived from not only income sources from Australia but also income sources from abroad. There are two main source of foreign income namely the salary Kit is deriving from working in rig off the Indonesian coast and also the dividend income of shares in Chile which also comprises income. The above treatment is as per Section 6(5) ITAA 1997. Also, there is a possibility of the shares being liquidated at higher prices and the gains made on such trade which would be subject to CGT (Barkoczy, 2015). 

The following cases deal with land sales under various circumstances and the resultant tax treatment is accorded in line with the relevant provisions of tax legislations. In cases where the receipts are capital, capital gains may be charged, however since the ownership of the asset is prior to September 30, 1985, capital gains will not charge (Sadiq et. al., 2015).

Rule

1)    Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159

The taxpayer engaged in acquisition of land which has copper mines and later sold the same and thereby assumed stake in some corporate entity. The company advocated that the transaction involved the shift from one capital asset to the other and thereby did not produce any assessable gains. However, the court was not satisfied with the above explanation and reflected that ordinary income would be produced since the initial purchase of mine was driven was profit motive since only at that time, the company had plans for liquidation of mines going ahead (Sadiq et. al, 2015).

2)    Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188

The taxpayer (i.e. mining company) purchased a coal mine with mining intention and thus indulged in same for some years. But, after five decades had elapsed, the company with profit intention indulged into land subdivision as there had been considerable increase in the land value. The gains derived from the above activity were recorded as ordinary income by the court due to the fact that profit making drove subdivision. In this case, if the coal mine was liquidated and no construction activity had been commenced, then the proceeds would have been capital and non-taxable (Barkoczy, 2015).

3)    FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR-

Whitfords Beach Pty Ltd i.e the company acting in the capacity as the taxpayer bought a parcel of land with the aim of enhancing the fishing business. However, at a later time, the earlier purchased land was subdivided for maximisation of profit. The gains thus extracted were termed as ordinary income by the court due to the presence of profit making desire. Further, the court was of the opinion that land development was enabled when company engaged in subdivision and hence the gains are ordinary (Duetsch et. al, 2015).

4)    Statham & Anor v FC of T 89 ATC 4070  

The given case involves asset realisation primarily because the taxpayer in the given case who happens to be a farmer brings about the land sale for leading up to supplement income and hence be able to meet his varied expenses. The court reached the verdict that on account of lack of intention of profit, the gains cannot be taxed but primarily would lead to capital gains which would not be taxed (Sadiq et. al, 2015).

Domicile Test

5)    Casimaty v FC of T 97 ATC 5135

Casimaty obtains a land in the form of gift from his father with the intention to conduct farming. However, he had to indulge into distress sales of two-third land brought about liquidity crisis and also deteriorating health. However, for liquidation purposes, subdivision was done but before that construction activities such as provisions for utilities were also carried out. The court opined that the land sale was done in emergency only and thus would not lead to ordinary receipts but only capital receipts subject to CGT (Gilders et. al., 2015).

6)    Moana Sand Pty Ltd v FC of T 88 ATC 4897

The company i.e. Moana Sand Pty Ltd acquired a piece of land for mining of sand and for doing so got all the clearances from the requisite government authorities. However, once the commercial deposits of sand was not feasible, the company in order to maximise their provided did land subdivision and subsequently liquidated the plots and in the process made huge gains. The profit intention acting as the motivator for subdivision implies that the income is ordinary and thus would add to the overall taxable income (Gidlers et. al, 2015).

7)    Crow v FC of T 88 ATC 4620

The above mentioned taxpayer entered into buying of land for conducting farming but for this, he had to seek financial help from lenders. However, with some time passage, it was realised on the end of the farmer that the idea to maximise the profit was liquidation of land after subdivision. The taxpayer with the intention of realising these indulged into land subdivision and thereof succeeded in profit realisation. The profit intention acting as the motivator for subdivision implies that the income is ordinary and thus would add to the overall taxable income (Duetsch et. al, 2015).

8)     McCurry & Anor v FC of T 98 ATC 4487-

The above taxpayer acquired an old dilapidated house so as to demolish it and instead constructed three townhouses in its place. The taxpayer put them to sale and even resorted to advertisement but still the sale of these townhouses was elusive due to a difficult market. Due to this, the taxpayer started residing in two of these townhouses. However, during the next twelve months, all the townhouses were sold for abundant gains. The profit intention acting as the motivator for construction of the townhouses implies that the income is ordinary and thus would add to the overall taxable income (Bakoczy, 2015). 

References

Barkoczy, S 2015. Foundation of Taxation Law 2015, 7^th edn, CCH Publications, North Ryde

Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2015. Australian tax handbook, 8^th edn, Thomson Reuters, Pymont

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2015. Understanding taxation law 2015, 8^th edn, LexisNexis/Butterworths.

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2015, Principles of Taxation Law 2015, 8^th edn, Thomson Reuters, Pymont.