Tax Residency Determination And Income Assessment - Case Studies Essay.

Case study 1: Residence and source

Fred, an executive of a British corporation specializing in management consultancy,comes to Australia to set up a branch of his company. Although the length of his stay
is not certain, he leases a residence in Melbourne for 12 months. His wife accompanies him on the trip but his teenage sons, having just commenced college, stay in London. Fred rents out the family home. Apart from the absence of his children, Fred’s daily behavior is relatively similar to his behavior before entering Australia. As well as the rent on the UK property, Fred earns interest from investments he has in France. Because of ill health Fred returns to the UK 11 months after arriving in Australia.

Requirement

Discuss whether Fred is a resident of Australia for taxation purposes.

Case study 2: ordinary income

Explanations of the respective outcomes reached by the courts in the following cases which all involving sales of land

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

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

III. FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR

IV. Statham & Anor v FC of T 89 ATC 4070

V. Casimaty v FC of T 97 ATC 5135

VI. Moana Sand Pty Ltd v FC of T 88 ATC 4897

VII. Crow v FC of T 88 ATC 4620

VIII. McCurry & Anor v FC of T 98 ATC 4487

(16 marks, max. 2000 words).

1. Tax residency determination is a regular exercise conducted on an annual basis. The basic statute which provides guidance in this regard is the subsection 6(1), ITAA, 1936. However, the various tests are provided by tax ruling TR 98/17. If the given taxpayer is able to comply even with one of the tests, then he/she would be declared as tax resident of Australia for the assessment year (CCH, 2011). The application of this test based on given facts about Fred is shown below.

Superannuation Test

This test is meant to determine tax residency of those foreign employees which are on government duty (Barkoczy, 2014).

Relevancy to Fred’s case – As Fred is not an employee of Australian government, thus no relevance of this test.

183 day test

Tax residency conferred when following clauses satisfied (Woellner, 2012).

Taxpayer manages to stay for atleast 183 days in Australia in the given assessment year. This may be continuous or intermittent in nature.

Case Study 2: Ordinary Income

Taxpayer must intend to make Australia permanent home going ahead.

Relevancy to Fred’s case – First condition satisfied since Fred had a stay of 11 months in Australia before returning to England. Second condition not satisfied as Fred continues to consider England as the permanent home and has no intent to make Australia permanent residence at the current time.

Domicile Test

Tax residency conferred when following clauses satisfied (Gilders et. al., 2013).

Taxpayer should have valid and legal domicile of Australia.

Taxpayer’s permanent abode should lie within Australian territory and not outside.

Relevancy to Fred’s case- The first condition itself is not satisfied as no information is given which suggests that Fred has Australian domicile.

Reside Test

Limited information available from relevant statutes and legislations but application by court and tax authorities indicates at the following factors (Deutsch et. al., 2016).

Nature of social relationship especially the similarity of life style in Australia and country of origin

Taxpayer’s purpose to visit Australia – A significant purpose like long term employment stretching to several months results in tax residency

Relevancy to Fred’s case-  Following points are noteworthy.

Fred has shifted with wife and leading a social life similar to back home.

The purpose visit to Australia seems significant as it is for long term employment even though the exact period is unknown but he has stayed for 11 months.

Hence, in accordance with the reside test, Fred would be considered as Australian tax resident for the given assessment year.

Facts

Taxpayer owned a land for copper mining but he was not able to operate the mine, because of lack of the financial resource. Thus, the mine land was sold to another company and taxpayer received shares of that particular company. A sizable profit was received by the taxpayer in this transaction (Woellner, 2012).

Judgement

The received share profit transaction would be termed as assessable income because the intent of the taxpayer was not to start copper mining. This is apparent from the fact that the company exhausted the capital in buying the mine only. The company purchased the land with the motive of earning shares profit from sale of land to other company. Hence, the received share profit would be considered as taxable income (CCH, 2011).

Facts

The respective taxpayer started coal mining operations on the purchased land which was continued for years. The coal content gradually reduced in the land and when the land was rendered useless for mining, then the taxpayer planned to utilize this land asset. For the fulfilment of this intent, he sold coal deficit land to the land dealers after indulging in some land development steps like road, parks, sizable plots etc. A sizable profit was received by the taxpayer from sale of land (Gilders et. al., 2013).

Judgement

The tax authority had decided that the sale of the coal deficit land was to utilize the capital asset. There was no intent of the taxpayer to start the land sale business to earn profit. Hence, the activity of sale of the land would be regarded as realisation of the capital asset and thus, it would not contribute to assessable income and subject to only CGT (Deutsch et. al., 2016).

Facts

This case is about a taxpayer, who purchased a land to continue his fishing business in the year 1953. However, after some time the land was sold to land development companies. The companies had produced various plots, road, parks and other facilities in order to maximize the market worth of the land. This business activity was also updated in the article of association. A huge profit was received by selling of the plots (Barkoczy, 2013).

Judgement

According to the above factors, the court had decided, that the focus of the taxpayer behind the selling of the land was to reap benefits. Also, the new vendors of the land were involved in the land development actions, and also made the necessary changes in the article of association. It would be showed the involvement of the taxpayers in business process. Therefore, the income would be ordinary and taxed under S. 6-5 of ITAA, 1997 (Krever & Black, 2007).

Facts

Statham & Anor received a deceased farm land, which they used to establish a cattle business in regards to derive income for meeting their living expense. However, this cattle business was unsuccessful. Thus, in order to utilize the farm land and earn money, they planned to liquidate the farm land, which was done after making sub parts. A sizable return was received by the taxpayers from sale of land (Gilders et. al., 2013).

Judgement

Commissioner had decided that the received return would be assessable income. Statham & Anor both were dissatisfied with the decision and made an appeal in the court. Court provided the judgement that the reason behind the sale of land was to utilize the farm land, since their cattle business was failed. Hence, to employ the land in the best possible manner, the sale was operated by the taxpayers. The nature of the sale activity was termed as realisation of the capital asset and accountable as per the provision of capital gains tax (CGT) (CCH, 2011).

Facts

 In this scenario, the taxpayer was involved in the farming business on the land for many years.  The taxpayer had some financial  dues, which forced the taxpayer to sell the a large part of farm land. A large divided part of the land was sold at a very high price. This helped the taxpayer to discharge his financial dues. The taxpayer still used a small section of the land for his farming business (Krever & Black, 2007).

Judgement

Commissioner opined that this sale of land is a source of assessable income. Court ruled that the taxpayer still used the remaining section of the land for farming business. Also, in the initial phase, the taxpayer was completely involved in the farming and the sale of the land happened to pay back the financial dues and avoid bankruptcy. Thus, this was a realisation of the capital asset to resolve the financial crisis (Cassidy, 1994).

Facts

The taxpayer owned a company which was selling the sand after extracting from land.  Continuous extraction of sand caused deficit in sand level. Thus, in regards to use the leftover land, taxpayer engaged in plotting of small plots from the respective land and sold them to various plot buyers. This selling activity resulted in huge profit to the taxpayer (Barkoczy, 2014).

Judgement

The income tax commissioner decided that plotting of the land to make number of plots would be termed as business activity of land development and accountable for tax process as per the ITAA 1997. The derived income was ordinary in nature. The taxpayer did not agree with the judgement and appealed in the court. The court had announced that selling and land development activity were not the main focus of the company. It happened due to the depletion of sand reserves on the land. Thus, the plotting activity amounted to realisation of the capital asset and hence no tax would be levied (Krever & Black, 2007).

Facts

The taxpayer had purchased a land at a very less price, and produced fifty one blocks of various sizes. These sub divided plots were sold at a very high price and hence profit to the tune of $388,288 was realised by taxpayer. The concerned taxpayer was already aware about the high returns coming from sale of the block. Hence, he arranged money from various sources to buy the land at the first place. However, in the initial time, he utilized the land for farming but after some time had elapsed, he started selling land to receive profit (Woellner, 2012).

Judgement

Court had given the judgement that the prime aim of the taxpayer was to derive high profits from sale. Even, he borrowed money in this regard to buy the land. This highlighted the intention of the taxpayer to involve into the land selling business. Thus, the ordinary income derived from land sale would be taxed (CCH, 2011).

Facts

The taxpayers McCurry & Anor constructed three buildings on the purchased land. In order to achieve significant profit, they stared selling them to different buyers, but they failed to sell the buildings at the initial attempt. Therefore, for the time being, they used the building for temporary abode. After a period, all the buildings were sold with high return amount (Deutsch et. al., 2016).

Judgement

The court had rules that the primary intention of the taxpayers was to be involved in the land development activity to maximize the returns. Hence, in the view of the activity of the taxpayer, the received income would be taxable as ordinary income due to the assessable nature (Krever & Black, 2007). 

References

Barkoczy, S 2014, Foundation of Taxation Law 2014, 6th eds., CCH Publications, North Ryde

CCH 2011, Australian Master Tax Guide 2011, 50^th eds., Wolters Kluwer , Sydney

Cassidy, J 1994, ‘The Taxation of Isolated Sales under Section 25 (1) ITAA: TR 93/2 v Joint Submission,’ Revenue Law Journal, Vol.4, No.1, pp. 56-62

Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2016, Australian tax handbook 9th eds., Thomson Reuters, Pymont

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2013, Understanding taxation law 2013, 6th eds.,  LexisNexis/Butterworths

Krever, R & Black, C 2007, Australian taxation law cases 2007, 4^th eds., Thomson ATP. Pyrmont

Woellner, R 2012, Australian taxation law 2012, 6^th eds., CCH Australia, North Ryde