Capital Gains are the difference between Capital Proceeds and Cost Base as explained in s.104-10 of Income Tax Assessment Act of 1997 (ITAA, 97). In the same Act, s.104-10(4) explains Capital Loss as Reduced Cost Base LESS Capital Proceeds. Capital Proceeds, as per s.116-20(1) of the Act is the money received or entitled to receive by the taxpayer in respect of the CGT Event which happened. Barkoczy, (2013) suggests that a taxpayer can claim deduction of the expenses which are incurred with regard to repairs of the premises or some portions of the premises or of a depreciating asset which are used by the taxpayer primarily for income generating purpose, as explained under s.25-10(1) of ITAA, 97. For detailed workings see Table-01 & 02 below.
Cost Base is based on the following Five Elements as per s.110-25 of ITAA, 97.
Cost of Acquisition of Asset as explained in s110-25(2) of the Act.
Incidental Costs incurred for acquiring the asset and these are nine categories as explained under ss. 110-25(3) and 110-35.
Costs of Owning the asset, provided it was acquired after 20 August 1991, as per s.110-25(4) of the Act.
All Capital Expenditure incurred for increasing the asset’s value as per s.110-25(5) of the Act.
Capital expenditure incurred for preserving the right to the asset as per s.110-25(6) of the Act.
Exclusions from Cost Base
All expenses which the taxpayer can avail as deduction under other sections in the ITAA, 97 such as s.110-45 of the Act, as per Barkoczy, (2012).
Rules to Access a 50% Discount on Capital Gain
When arriving at the Net Value of the Capital Gain, this case study asset is eligible for 50% Discount under the Discount Scheme available to assets acquired and disposed after 21 September 1999 (as per s.115-15 of ITAA, 97), provided the following conditions are fulfilled, say Nethercott, Devos & Richardson, (2010).
Taxpayer is an Individual Resident (s.115-10).
Taxpayer must have held the Asset for at least 12 months or more (s.115-25).
Mrs. Amy is an Australian Resident Taxpayer and hence is entitled for the laws and enactments mentioned in ITAA, 97. She is regularly assessed as per provisions of the Act and can avail all the available deductions for which she becomes eligible as per the Act, asserts Marsden, (2010). In the present case study.
6–5 of ITAA, 97 states that all non-residents are taxed in Australia on all incomes derived from sources inside Australia. The Act does not provide any specific rules or definition of the source. As noted by Jordan CJ in CT(NSW) v Cam & Sons Ltd (1936) 4 ATD 32, and I Quote ‘A source may, and commonly does, consist of several factors. The character of the source may depend upon which of the factors is dominant.’ Unquote. Common Law states, says Renton, (2012), that source of the amount arises from type of income, but it is difficult to identify it. Broadly, source is a question of ‘where’, and Common Law provides three possible explanations:
where the work is performed;
where the contract is signed;
where payment is made.
Business income is seen to be resulting from a combination of all the three factors and this is applicable in the present case study for Amy and Ben. It is only a matter of determining which factor is applicable more significantly, assert Reynolds, Williams & Savage, (2000). Even when s.6 (1) of Income Tax Assessment Act, 1936 (ITAA, 36) is considered, it distinguishes the ‘Resident Australian Taxpayers’ and ‘Non-Resident Australian Taxpayers’ on basis of the following tests and these are acknowledged by courts.
The Resides Test
This test clarifies whether the taxpayer is residing in Australia and the following facts are essentially considered:
- Actual presence in Australia of the taxpayer.
- Maintenance of a home in Australia for self and family.
- Employment for the period of residence in Australia.
- A business in Australia for making profits.
- Maintaining ‘Social Relationships’ in Australia.
In the case of Amy and Ben, Rule-1 (b), (c), (d) and (e) are applicable for establishing that they are ‘Resident Australian Taxpayers’ for taxation purposes, asserts Renton, (2012).
It defines whether the taxpayer is ‘domiciled’ in Australia or keeps a permanent place of abode outside of Australia.
Domicile is dependent on the following two elements:
- the first is in regard with the facts related to the residence.
- the second relates to individual’s intention to stay in the selected place of residence.
As per Common Law cited by Australian courts, both the elements are to be satisfied for the fulfilling the test. The test has been approved in the following cases, where the meaning of ‘permanent place of abode’ was clarified by the relevant courts, as per Barkoczy, (2012).
In the Case of FCT vs Applegate –
Here the courts ruled that ‘permanent’ does not relate to ‘everlasting’ and if the taxpayer maintains a permanent place of abode outside of Australia, it would still be considered as having passed the test.
In the Case of FCT vs Jenkins –
The courts ruled that the taxpayer was maintaining a ‘permanent abode of residence’ outside Australia, despite the fact that he had left Australia for a very definite period of time.
In the present case study of Amy and Ben, if the ‘Resides Test’ is applied first for determining their resident status, this test is found to be applicable and therefore there is no need to apply the other three tests. Even the Australian courts also recommend that if the Residency Tests becomes applicable, Amy and Ben shall be considered as Australian resident taxpayers for taxation purposes, asserts Barkoczy, (2012).
Section 995(1) of ITAA, 97 defines income to be considered as taxable in Australia if it has been derived from a source which is located inside Australia. Although the source of an income which is to be included in the individual’s assessable income is dependent on the type of income involved, it is not always easy to identify the source, as was noted by Jordan CJ in the case of CT (NSW) vs Cam & Sons Ltd (1936) 4 ATD 32. Here, the Learned CJ stated that the source itself and it commonly does, consists of many different factors and the characteristic of the source may depend on that factor which is found to be the most dominant, as per Barkoczy, (2013).
As has been ruled by the courts in the Case of FCT vs French, a general rule that concerns employment income, is that its source is considered to there where the work has been performed. Even Section 6 (1) of ITAA, 1936 defines that income from personal exertion is to be considered as income earned by an employee. The courts have also ruled that the employment income would also include other ex-gratia payments which are received by the taxpayer and these shall be assessable under Section 15–2 of ITAA, 1997. Section 15-2 of ITAA, 1997 also specifies that if any benefit is being provided to the taxpayer, then the benefit should have a link with the employment of the taxpayer and the services which are rendered by him in leau of that benefit and this fact was also upheld by the courts in the Case of FCT vs Cooke & Sherden 80 ATC 4140, says Barkoczy, (2013).
Based on the above discussion, the salary being received by Amy and Ben, while they have shifted to New Zealand, shall be deemed as assessable income in their hands and shall be subject to taxation rules of Australia as they are to be considered as Resident Taxpayers of Australia, and this has been proved by the tests above. This is irrespective of the fact that the payments are deposited in any bank outside the territory of Australia.
List of References
Barkoczy, S. 2012. Australian Tax Case book, 9th ed. CCH Australia Limited, North Ryde, NSW.
Barkoczy, S. 2013. Foundations of Taxation Law 2012, 5th ed. CCH Australia Limited, North Ryde, NSW.
Marsden, S. J. 2010. Australian Master Bookkeepers Guide, 3rd ed. CCH Australia Limited, Sydney.
Nethercott, L., Devos, K. and Richardson, G. 2010. Australian taxation study manual: questions and suggested solutions, 20th ed. CCH Australia Limited, Sydney.
Renton, N. E. 2012. Family Trusts: A Plain English Guide for Australian Families of Average Means, 4th ed. John Wiley & Sons, Milton, QLD.
Reynolds, W., Williams, A. J. and Savage, W. 2000. Your Own Business: A Practical Guide to Success, 3rd ed. Cengage Learning Australia, Sydney, NSW.