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Australian Taxation Residency Source And Ordinary Income

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Question:

Discuss about the Australian taxation Residency Source and Ordinary Income.
 
 

Answer:

Residency and source

Issue related to the case

Kit is a permanent resident of Australia. He took birth in Chile and is still retaining the citizenship of Chile. He is spending most of his time in the coast of Indonesia as he had been recruited for a job by a United States based company in Australia. He had signed the contract with the company in Australia. Wife of Kit had been living in Australia with their two children. They had purchased a house in Australia three years back. Kit is having a joint account with his wife in Westpac bank. The salary of Kit is directly deposited in this account. The other investment income of family including share portfolio dividend income remains in the city of Chile. Kit is getting one month off from his job in every third month and on these holidays he comes to meet his family in Australia or in Chile.

Regulations related to the case

As per the provisions of Australian taxation office, there are various types of test which help in testing the residential status of the person: [7]

Primary test

First of all primary test is taken into consideration for the purpose of checking the residential status. The primary test of residency is also called the residency test. As per the provisions of this test, the person who is residing in Australia will be considered as the resident of Australia depending on the following considerations:

Intention of residing in Australia: the assessee must have attention to live in Australia for a longer period and is not just living there for a shorter period. [8]

Ties with family and the employment: the person is considered as the resident of Australia if his family and children are living in Australia and he is also having long term ties with employer in Australia.

The location of assets: the person is considered as the resident of Australia if he is having a house, bank accounts and other assets in Australia.

Arrangement with the society: the behavior of the person must include the social arrangement in Australia that is admitting their children in the local schools of Australia.

 


Domicile test

The domicile test is the second test which provides that the person will be considered as the resident of Australia if the permanent place of business of the concerned person is Australia no matter the person is actually residing in Australia or not. [14]

183 days test

This test provides that the person will be considered as the resident of Australia if the person had lived in Australia for a period of 183 days or more. The counting of 183 days includes the days spent with breaks and without breaks both. [14]

Superannuation test

This test is applicable on the government employees that are currently working in Australia and other persons that are covered in the eligible superannuation scheme. Hence the person covered under the above scheme will be considered as the resident of Australia. [15]

Application of the relevant provision on the case

The primary test of residency is not applicable on the above case as he is not presently residing in Australia. He is working in United States and he is hired under a contract by the United States based company. He had also not fulfilled the 183 days test as he had not lived in Australia for the minimum period thus he will also not be covered under the 183 days. He will also not be covered under the superannuation test as he is not the government employee of Australia and is also not covered under the superannuation scheme. Thus he will be covered under the domicile test as the person is not living in Australia but the principal place remains in Australia. Kit had left Australia for a temporary period only to complete his contract and he will come back to Australia after the specified period. Kit does not set up the permanent home in United States and his wife and children are already living in a house which was acquired in Australia. The salary of his job from United States also comes in bank account of Australia thus he had not made any arrangements for permanent living in United States thus this shows he will not be residing permanently in United states. Thus he will be considered as the resident of Australia for the purpose of taxation and his world wide income will be taxable in Australia. [16]

 

Conclusion on the case

Kit will be considered as the resident of Australia as he is covered under the definition of domicile test and had duly passed the test. Thus he is the resident of Australia for the taxation purposes. The worldwide income of the resident is taxable in the country to which the person belongs as the resident. Hence in this case, the worldwide income of Kit will be taxable in Australia. The taxability of the person depends on various factors such as social factors etc. The various types of income such as the employment income, rental income, pension and annuities and the capital gain of the Australian resident will be taxable as per the provision of Australian taxation. Thus the investment income and salary of Kit will be taxable as per the Australian taxation. Though the investment income is received in Chile but he is considered as the resident of Australia thus it will be taxable in Australia. The salary comes in the bank account of Australia thus it will be taxable in Australia. But Kit will be eligible to claim foreign tax credit of the tax that had been deducted at source in various countries such as Chile and United States.

Ordinary income

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

The above case is identified with the offer of the capital asset and the treatment of the gain that is received on sale of the property will be dealt with as the ordinary or the capital nature. As indicated by this case, the court had given the decision that when the investments are sold by the proprietor at a value more than the cost of securing then the profit won't be considered as ordinary income yet there is an exemption that if the sale of the asset is not made only with the end goal of progress and it is identified with the normal operations of the business then it will be dealt with as income of ordinary nature. Consequently in the above case, the land was sold in connection to the typical operations of the business in this way the benefit gotten discounted of land will be dealt with as the ordinary income. [9]

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

The above case is identified with the organization that had procured certain real estate parcel so it can do mining work however it was not effective henceforth it thought about a thought to subdivide the land and after that the subdivided land were sold to various individuals at profits. In any case, the organization battled that it is having mining business and is not simply offering land. The court had given that according to the provisions of subsection 1 of section 25 of ITAA 1936, profit by sale of land will be incorporated into the assessable income. In the above case, land was sold after subdivision and in this way the subdivision was done ordinarily which led to repetition of operations and giving a feeling that it was basically a business of land improvement in this way the profits will be recorded as the ordinary income. [10]

  1. FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR

In the above case, subdivision of land was done Whit fords and they had sold the land with the feeling that it will be dealt with as the capital gain. The high court had given that the salary earned by them will be dealt with as ordinary income as it is being surveyed under section 25(1) of the ITAA 1936 and the domestic land had been changed over to the land utilized for transaction of business nature. In this manner the court had additionally extended meaning of isolated transaction and had given that individual transaction are likewise considered as ordinary transaction relying on the nature. In this manner the benefit received marked down of land will be normal income. [6]

 

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

In the above case, the land sold had initially been acquired keeping in mind the end goal to do cultivating operations by the perished individual and the land was given to a few individuals from the family and they had subdivided the land and after that sold the land. Accordingly the evaluates needed to consider the profits as the income of capital nature yet the chief needed to consider them as the regular income. In any case, the court had given the reasult that it will be considered as the ordinary income as they are doing cultivating business as opposed to land offering business. [3]

  1. Casimaty v FC of T 97 ATC 5135

In the above case, child got arrive from the father in connection to conveying the cultivating business however his business was not effective hence he subdivided the land and had sold the land yet had held some piece of the land with a specific end goal to complete the cultivating operations. Consequently the government court had given the judgment that the profit made on special of land won't be covered under section 25(1), as it is not conveying any operations to sale the land but rather had quite recently sold the land for realization of cash thus it won't be considered as income of ordinary nature. [11]

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

The organization had procured land in the above case keeping in mind the end goal to sale the sand ashore however a letter was received from the administration which provided that they require the land to complete the mining operations and organization had questioned the land. In any case, after some time the land was sold by the organization and the organization fought that it won't be considered as ordinary income. However, the court had given the judgment that the organization needed to earn profit at a sale of land thus it turned into a critical action and it is not a pre prerequisite that profit earning ought to be the sole motivation behind any action subsequently the profit will be considered as a component of the ordinary income. [5]

 
  1. Crow v FC of T 88 ATC 4620

The above case comprises of the rancher which had acquired 5 squares of land keeping in mind the end goal to do the cultivating yet it had subdivided the land after a few years and the sold the pieces of land. The court had given the judgment that the profit will be taken as ordinary income as the agriculturist realized that it can do cultivating for a few years just and after that it will sle the land in necessity of the funds. Subsequently the offer of land was plan and accordingly it will be ordinary income. [13]

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

The above case gave that a man had obtained an as of now built house yet had damaged the old house and had developed three new houses and he had likewise given different notices for sale of house. but due to any reason the sqale of house did not happen so they themselves utilized two houses for their private reason and had sold the third house at a gain of $150000 yet after some time they acquired new land keeping in mind the end goal to build house and had sold the new house as well. In this case the court had given the judgment that the sale of house was a business and repeating movement in this way the profit from sale of business will be considered as the ordinary income. [1]

 

References:

    1. Davies J., 2016, “McCurry & Anor v FC of T”; Available at: https://www.iknow.cch.com.au/document/atagUio539084sl16707683/mccurry-anor-v-fc-of-t-federal-court-of-australia-15-may-1998
    2. Keith Harvey, Ambry Legal, 2008, “Tax Basics – Taxation & CGT Aspects of Real Property Development”; Available at: https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=https://www.tved.net.au/PublicPapers/September_2008,_Tax_Basics,_Tax_Basics___Program_29___Taxation___CGT_Aspects_of_Real_Property_Development.html
    3. Australian Taxation Office, 1988, “Statham & Anor V. Federal Commission of Taxation”; Available at: https://law.ato.gov.au/atolaw/view.htm?locid=%27JUD/89ATC4070%27&PiT=99991231235958
    4. Australian Taxation Office, 2009, “Taxation Ruling: TR 2007/8W Registered Agricultural managed investment schemes”; Available at:https://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20078/NAT/ATO/00001
    1. Michael Flynn, 20xx, “Distinguishing between Income and Capital Receipts – A Search for Principle”; Available at: https://www.austlii.edu.au/au/journals/JlATax/1999/13.html
    2. Australian Taxation Office, 2016, “Taxation Ruling: TR 92/3 Whether profits on isolated transactions are income”; Available at: https://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR923/NAT/ATO/00001
    3. Australian Taxation Office, 2017, “Residency – The resides test”; Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Residency/Residency---the-resides-test/
    4. Australian Taxation Office, 2017, “Workout your residency status for tax purposes”; Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/Work-out-your-tax-residency/Residency-tests/
    5. Joel Manyam, 2011, “Taxation of gains from Banking and Insurance Businesses in New Zealand”; Available at: https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1211&context=rlj
    6. Atana Technologies Pty. Ltd., 2016, “Subdivision of Land – Income or Capital gains tax”; Available at: https://austaxpbr.com.au/document/PBR_33265
    7. Australian Taxation Office, 2017, “ATO ID 2002/273 Income Tax: Sale of Subdivided farm land – Income or capital gain?”; Available at: https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2002273/00001
    8. Atana Technologies Pty. Ltd., 2016, “Income & CGT – subdivision and sale of land”; Available at: https://austaxpbr.com.au/document/PBR_75779
    9. Australian Taxation Office, 2017, “ATO ID 2001/55 Deductions and Expenses: Loss on sale of property on subdivided land”; Available at: https://www.ato.gov.au/law/view/document?docid=AID/AID200155/00001
    10. Australian Taxation Office, 2017, “Taxation Ruling TR 98/17: Residency status of individuals entering Australia”; Available at: https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR9817/NAT/ATO/00001
    11. Neal Dallas, 2016, “ATO Residency Tests”; Available at: https://www.mcw.com.au/page/Publications/superannuation-law/ato-residency-test/
    12. Australian Taxation Office, 2016, “Taxation Ruling IT 2650: Residency – permanent place of abode outside Australia”; Available at: https://law.ato.gov.au/atolaw/view.htm?Docid=ITR/IT2650/NAT/ATO/00001
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