In this case, the issues is related to the determination of the consequences of tax for smith. In order to do that the residential status of smith is determined, as he has to move out of Australia for the employment related purpose. The study will be helpful in determining the capital gain of the land subdivided by smith.
- Subsection 995-1 (1) of the ITAA 1997;
- Taxation ruling of 98/17
- C. of T. v. Applegate
- C. of T. v. Jenkins 82 ATC 4098; (1982) 12 ATR 745
- Subsection 6 (1) of the ITAA 1936;
The domicile test 1982 provides that a person living in Australia shall be regarded as a resident for the purpose of tax unless the tax administrator is satisfied that the permanent place of abode of the individual is in any other country outside Australia (Lang 2014). In determining the residential status the domicile is considered as the legal concept. It is generally seen that an individual generally adopts the domicile of his father as the individual is born. It is observed that most Australian leaves Australia with the passport and continues to maintain the domicile in Australia for a large period. In this case, Smith is the resident of Australia and is regarded as the resident assuming that his permanent place of abode is in Australia (Markowitz et al. 2017).
The section 4-15 of the Income tax Assessment Act 1997 provides that taxable income is required to be calculated by deducting the allowable deductions from the assessable income. The income tax laws classifies assessable income as the ordinary income (section 6-5 ITAA 97) and the statutory income (Section 6-10 ITAA 97). The section 6-5 and 6-10 both states that in case of resident taxpayer income from all the source are taxable and in case of nonresident tax payer the income from Australian sources are only taxable (Ting 2014). Therefore, it can be seen that the tax liability of an individual is dependent on the residential status and hence it is important to determine the residential status of the individual. The section 6-1 of the Income Tax Assessment Act 1936 provides the meaning of the term resident and highlights different types of test that are applied to determine the residential status (Highfield and Warren 2015). There are four test this are:
- Ordinary test;
- Test according to domicile;
- Test as per 183 days rule;
- Superannuation test;
Residential status according to the ordinary concept
The residential status is conducted to determine whether an individual is a resident in Australia according to the ordinary concept. The law states that if an individual is residing in Australia and lives in Australia then the individual shall be regarded as the resident of Australia for the purpose of tax. In that case, the individual is not required to apply any other tests for determining the residential status (Eccleston and Warrnen 2015). The Taxation Ruling 98/17 provided the guidelines for ascertaining the meaning of the term residential status that is provided in the definition of the term resident under section 6(1) of the Income tax Assessment Act 1396. The residential test for the smith is to ascertain whether he is residing in Australia under the normal meaning of the term reside (Schuster et al. 2017). In this case, Smith is a resident of Australia as per the section of 6-1 of the Income Tax Assessment Act 1997. Therefore, it can be said that in the ordinary concept smith is a resident of Australia and should be considered as such under section 995-1 of the Income Tax Assessment Act 1997.
The Taxation Ruling IT 2650 provides the rules that determines the residential status of individual leaving Australia for residing abroad for work or international assignment. The general rule provides that an individual leaving Australia on a temporary basis will be treated to have preserved the residential status of Australia (Picard et al. 2016). However, the individual will not be considered as resident if the individuals have obtained the residency of their own choice or for the operation of law. In the current case, it is seen that Smith has moved to Hong Kong in a temporary basis as the employment contract in the clause provided a provision that the contract can be terminated if the family is not happy in living in Hong Kong (Paxton et al. 2016).
In the case of F.C of T V Jenkins 82 ATC 4098; (1982) 12 ATR 745 deals with the transfer of the bank officers to New Hebrides for a period of three years. It was provided that there was a need to return to Australia because of poor health related issues. The individual attempted to sell the house but failed to locate a buyer. Therefore, he made a decision to lease the house and reserved the bank account in Australia (Wu 2015). It is evident from the case study that the Smith has leased the house in Australia prior to leaving for Hong Kong. However, he continued to maintain the bank account in Australia and received interest income from that account. On analysing the permanent place of adobe of Smith, it can be said that the intent of Smith is to return to Australia and maintain it as the permanent place of adobe. In this context, the description of occupant as provided under section 6-1 of the Income Tax Assessment Act 1997 states that an individual having domicile in Australia and living out of the country will be able to retain the domicile if the individual plans to return to Australia. It is clearly that if an individual plans to return to Australia after the end of employment that indicates the domicile is in Australia (Hagen-Zanker et al. 2017).
The residential status of Smith is determined as per the description of the term resident under section 6-1 of the ITAA 97. Therefore, it can be concluded that Smith is a resident of Australia having a place of residence in Australia. He has plans to return to Australia and it satisfies the definition of resident as he has permanent place of adobe in Australia (Chan 2015).
The 183 days test
As per Australian Taxation laws and according to the 183 days test, it is clearly mentioned under Australian Taxation Office that that if an individual resides more than or equal to 183 days then the person shall considered as a practical resident of Australia. However, the fact is properly proved that the individual is a resident of any place or country other than Australia and also the person have so such intentions or willingness of becoming an Australian resident or otherwise. It is quite evident from the bank records of Smith that he was keeping with Australian Bank at Melbourne that before his departure for Hong Kong, Smith was present in Australia until July 1, 2013. Moreover, there was no intentions of Smith to become a resident of any other country found in the study. Therefore keeping a vigil on all the above matters it can be considered, as an Australian Citizen as far as 183 Days test is concerned (Tran-Nam et al. 2014).
Liability to tax:
Considering the present situation of Smith, his tax liability arises annually considering the elements those are applicable in relation to that income year which is considered in the case. In ordinary concepts the general question that arises is whether the person is considered as an Australian citizen when he leaves Australia. The term resident defines or rather tells that if a person doesn’t stays in Australia then he will also be considered as an Australian resident beneath the wide sketch of the word resident. Smith income from Hong Kong is prone to liability of tax as Australia never have the double taxation contract among themselves. The result of all this is that the income in Smith’s Melbourne Bank Account will fetch tax liability (Levitt et al. 2017).
Income From Primary Production:
The Guidance on the determination of the fact that whether income of the person who is carrying the business of the primary produces will be clubbed or included with the income of the primary producer or not is mentioned in the Taxation Rulings TR 97/11. The activity that can be regarded as activity for primary production under the Income Tax Assessment Act 1997 and the person who carries this activity, this ruling is relevant for those person(s). The meaning and definition of primary production business is stated or mentioned in the subsection 995-1 of the Income Tax Assessment Act 1997. It consists of processing or laying plants in a form of physical environment. Moreover, it is obvious from the study of Smith that he utilized the land that belonged to Smith for the purpose of growing olive trees from which oil was produced. Again, the actions of Smith clearly indicates that there were more than enough objective of Smith of getting involved into business activities. Furthermore, the main goal behind these above mentioned business activities was to make profit (Taylor and Richardson 2013).
As it was found in the case of Evan v. FC of T 89 ATC 4540; (1989) 20 ART 922 that it was not required by the Taxpayer to acquire every parts of the proceed that he constitute from the primary production activities. It might be possible that the taxpayer may be working in a kind of profession/ occupation (Obeng-Odoom 2014). The basic rule in order to define the activity of primary production is to carry on a business activity. From any other type of business or profession that the taxpayer carry, the above mentioned activity is normally treated as separate from all of those. Both the activities carried on by Smith i.e. the activity of Smith relating to primary production and the activities with the objective of making profit denotes an association with that of ordinary trade in Business.
Capital Gains Tax:
As stated in the subsection 104-10 (4) of the Income Tax Assessment Act 1997, an individual developing profits from the leftover of the subdivided land which is associated or in the form of primary production will be taken into account as capital gains. Thus with reference to the section 104-10 (4) of the ITAA 1997 it can be established that the subdivided part of the land that was utilized for the purpose of primary production shall be considered as capital gain in the current situation of Smith (Rankin 2016). Though moving out of Australia for job reasons Smith in the present case did not stop the activity of primary production as his brother looked at his business.
The verdict which was passed in the case of the Casimsty v. FC of T 97 ATC 5135; (1997) ATR 358 which demonstrates that in conditions when there is no objective of making profit is involved during the farming land is acquired. Then in such situations, the chance of profit making on the sale of land will be reduced from being taken into account for the income under the general conception. However, with reference to the section 6-5 of the ITAA 1997, profits from the sale of land that is further divided would be taken into account in the form of earning under the general thought (Bean et al. 2014). Through the application of present law/ rule in the current situation of Smith it can be indicated that trade of parts of the land that are further subdivided will be assessed as income under subsection 104-10 (4) of the Income Tax Assessment Act 1997.
Alternatively, according to TR 1999/67, the particular person can apply for the original residence to whatever area of land chosen by the taxpayer in which the living of the person is located. Smith can apply for the exemption under main residential as per subsection 118-B of the ITAA 1997. However, It must be stated also that amount of capital gains earned to the outstanding part must be sensible in accordance to the terms (Gitman et al. 2015).
In order to conclude briefly it can be mentioned that to define the consequences of tax liability of Smith, determination of his residential status is the primary and most important step. Moreover, according to the study which clearly institutes Smith’s tax liability it is quite evident that Smith will be regarded as a resident of Australia as per subsection 6 (1) of the ITAA 1936. In the same time the earning, which are made out of primary production and trade of subdivided parts of land will both be taken into consideration at the time of assessment.
Bean, C., McAllister, I., Pietsch, J. and Gibson, R.K., 2014. Australian election study, 2013. Computer file]. Canberra: Australian Data Archive.
Chan, C.K., 2015. Speaker.
Eccleston, R. and Warrnen, N., 2015. The devil is in the detail: the distributional consequences of personal income tax sharing in the Australian federation. Austl. Tax F., 30, p.713.
Gitman, L.J., Joehnk, M.D., Smart, S. and Juchau, R.H., 2015. Fundamentals of investing. Pearson Higher Education AU.
Hagen-Zanker, J., Vidal, E.M. and Sturge, G., 2017. Social protection, migration and the 2030 Agenda for Sustainable Development.
Highfield, R. and Warren, N., 2015. Does the Australian Higher Education Loan Program (HELP) undermine personal income tax integrity?. eJournal of Tax Research, 13(1), p.202.
Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.
Levitt, P., Viterna, J., Mueller, A. and Lloyd, C., 2017. Transnational social protection: Setting the agenda. Oxford Development Studies, 45(1), pp.2-19.
Markowitz, S., Komro, K.A., Livingston, M.D., Lenhart, O. and Wagenaar, A.C., 2017. Effects of State-Level Earned Income Tax Credit Laws in the US on Maternal Health Behaviors and Infant Health Outcomes (No. w23714). National Bureau of Economic Research.
Obeng-Odoom, F., 2014. Urban property taxation, revenue generation and redistribution in a frontier oil city. Cities, 36, pp.58-64.
Paxton, G.A., Tyrrell, L., Oldfield, S.B., Kiang, K. and Danchin, M.H., 2016. No Jab, No Pay—no planning for migrant children. Med. J. Aust, 205, pp.296-8.
Picard, R.G., Belair-Gagnon, V., Ranchordás, S., Aptowitzer, A., Flynn, R., Papandrea, F. and Townend, J., 2016. The impact of charity and tax law and regulation on not-for-profit news organizations.
Rankin, K., 2016. Prospects for a universal basic income in New Zealand. J. Soc. & Soc. Welfare, 43, p.51.
Schuster, R., Law, E.A., Rodewald, A.D., Martin, T.G., Wilson, K.A., Watts, M., Possingham, H.P. and Arcese, P., 2017. Tax Shifting and Incentives for Biodiversity Conservation on Private Lands. Conservation Letters.
Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), pp.12-25.
Ting, A., 2014. iTax-Apple's International Tax Structure and the Double Non-Taxation Issue.
Tran-Nam, B., Evans, C. and Lignier, P., 2014. Personal taxpayer compliance costs: Recent evidence from Australia. Austl. Tax F., 29, p.137.
Wu, Y., 2015. Evasion of Interest Withholding Tax: Evidence from Trading Volumes in Australian Government Bonds. J. Austl. Tax'n, 17, p.251.