Tax Residency Of Kit And Taxation Of Income

 Kit is a permanent resident of Australia. He was born in Chile and retains his Chilean citizenship. Kit spends most of the year working off the coast of Indonesia on an oil rig for a United States company. He was recruited for this job in Australia and signed a contract with the company here. For the last four years, Kit’s wife has lived in Australia with their two children. They purchased a home in Australia three years ago. Kit and his wife have a joint bank account with Westpac Bank. Kit’s salary is paid directly into his account. All of the family’s other investments, including a share portfolio that generates dividend income, remain in Chile. Kit gets one month off from work every third month and, on these occasions, he meets with his family either in Australia or on holidays around South America (usually in Chile where his parents reside).

Discuss whether Kit is a resident of Australia and how his salary and investment income would be taxed.

 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

1. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188
2. FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR
3. Statham & Anor v FC of T 89 ATC 4070
4. Casimaty v FC of T 97 ATC 5135
5. Moana Sand Pty Ltd v FC of T 88 ATC 4897
6. Crow v FC of T 88 ATC 4620
7. McCurry & Anor v FC of T 98 ATC 4487

Tax Residency in Australia

Issue

The issue in the given case study is to discuss whether Kit is considered to be a tax resident of Australia or not and to determine the relevant provisions of ITAA 1997 through which his derived income (salary and investment) would be taxed.

Different tax treatment exists in the Australian tax law for the earned income of the taxpayer for the respective assessment year depending on the tax residency of the taxpayer. A person who is designated as tax resident of Australia would be accountable to pay tax for the income earned from all available sources. It means, the income earned on the part of the taxpayer from Australia and from other countries would be taken into consideration for taxation as per the section 6-5(2) (Gilders et. al., 2016).  Further, if the taxpayer is designated as foreign tax resident that his income earned only from Australia would be accountable for taxation. It means that the proceeds earned from foreign land would not be accountable for income tax as per section 6-5(3).  Based on the above discussion it is apparent that the tax residency of the respective taxpayer is a pivotal factor to opine on the applicable taxation provision for the earned income (Sadiq et. al., 2016).

Section 6(1) of Income Tax Assessment Act 1936 is the leading section for tax residency in case of individual taxpayer. Further, in regards to examine the tax residency of taxpayer, TR 98/17 is used that advocates four residency tests for individual taxpayers. If taxpayer passes any of the tests, then the taxpayer would be deemed as tax resident of Australia (Barkoczy, 2016).  These tests and their essential clauses are as highlighted below:

1. Resides Test  - Applicable for foreign resident

There is no ruling or section that describes the exact meaning of term “Resides.” However, the judgements of related case laws are the main factors to test the tax residency of taxpayer. Additionally, it is noteworthy that this test is valid only for foreign resident and thus, the critical terms related to foreign resident are as outlined below (Deutsch et.al., 2016).

• Purpose to make visits in Australia especially during the assessment year
• Total number of visits by taxpayer  
• Different between actual and expected stay in both the place i.e. in Australia and in other country where the taxpayer has resided
• Presence of personal, professional bond of taxpayer in Australia

2. Superannuation Test  - Applicable for federal government employee serving abroad

The taxpayer must be an employee of federal government serving outside Australia in order to be designated as tax resident of Australia based on superannuation test. The other critical factor of this test is the investment on behalf of the taxpayer in the superannuation schemes as given below (Woellner, 2014).

• Commonwealth Superannuation Scheme
• Public Sector Superannuation Scheme

3. 183 day Test - Applicable for foreign resident

An individual is designated as tax resident of Australia only if he spent 183 days in Australia during the assessment year and has desire to settle in Australia in near future (Barkoczy, 2016).

4. Domicile Test – Applicable for Australian resident

Residency Tests for Individual Taxpayers

The validation of this test is mainly depends on the residency of the taxpayer. If the taxpayer is Australian resident then this test is employed to determine the tax residency (Gilders et. al., 2016).

• Possession of Australian domicile for assessment year
• Permanent abode location in Australia only

The other relevant factors associated with Domicile test specifically for determining location under the discussion of IT 2650 are as outlined below (Sadiq et. al., 2016).

• The extent of difference in real and expected stay
• Acts and purchasing of fixed assets in Australia that indicate the taxpayer’s intent to settle in Australia
• Different relations or bonds (educational, professional, personal) with Australia and their intensity  
• Presence or absence of will to settle elsewhere or taking an action that amounts to the same.

1. Resides Test  - Not applicable

It is outlined in the case study that taxpayer Kit is a permanent resident of Australia and resides test is valid for foreign residents only.

2. Superannuation Test –Not applicable

It is outlined that taxpayer Kit is entered into an employment agreement with a foreign company. According to the contract he has to reside in oil rig off coast of Indonesia. It is apparent that he is working for a foreign USA based company. Therefore, he would not be termed as an employee of Federal Government of Australia. Further, it is apparent that he has not invested in superannuation scheme. Hence, this test fails for taxpayer Kit.  

3. 183 day Test - Not applicable

According to the 183 days test, it can be seen that it is used to determine the tax residency of foreign resident but taxpayer is a ‘permanent resident’. Therefore, this test also fails to apply on taxpayer Kit.

4. Domicile Test

This is the only test that can be applicable to check the tax residency of taxpayer Kit because it is used only for residents of Australia and the taxpayer is permanent Australian resident. Now, the vital task is to check whether Kit has completed the terms of domicile test or not.

Term 1: Satisfied

It is apparent that Chilean citizen Kit has domicile of Australia. Therefore, the first term of domicile test is satisfied.

Term 2: Satisfied

Based on the information about the taxpayer Kit, it can be concluded that permanent abode of taxpayer is found in Australia only. Because he has fixed capital asset (home) in Australia, his beloved wife and kids are staying in Australia, his bank account is in Australia. US based company has extended the salary in his Australian bank account only. He does not make high number of visits to his country of origin. The leaves from the employment are also used against the holiday either to visit to South America or in Australia with family members.

Therefore, taxpayer Kit would be legally designated as tax resident of Australia under domicile Test.

Conclusion

Based on the above discussion, it is apparent that only domicile test is valid to test the tax residency of taxpayer Kit among the all four test. Also, Kit has successfully completed the terms of domicile test and hence, would be designated as tax resident of Australia. Therefore, the amount of income from employment and investment would be taxed as per section 6-5(2) of Income Tax Assessment Act 1997.

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

Domicile Test for Tax Residency

Company bought significant sized mine from borrowed capital. They were aware that they were not in the situation to start the mining and thus, liquidated the ownership to a well-known mining company with the consideration of significant number of shares in company. The saleable worth of shares was very high and it resulted in attractive gains to the Californian Company. Investors of the company claimed that the act of liquidation was mere conversion of capital assets and thus, the gains should be designated as capital receipts. Court overruled the claim and stated that company made an isolated transaction on the account of exchange of the mine land asset to shares assets. The activity was enacted for deriving high revenues that was already decided by investors at the time of purchasing. Therefore, the income from shares would be assessable income (Sadiq et. al., 2016).

According to Australian tax law, the income generated from realisation of capital asset would be believed as capital receipts. Company owned a land for coal mining. When the land became ripe (exhausted), then in line to realise the capital asset, company sold the land after constructing essential development so that it can be used for residential place. Court had cited that the action of shareholders to realise the capital asset was correct and the unshaped land could not be used as residential place and thus, development was required to be conducted. Thus, it would be fair to conclude that the proceeds generated through realisation of land asset through land sale would not be assessable for tax (Jade, 2017).

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

The utilization of an asset for business purpose would lead to ordinary income generation . Whit Fords Company was purchased by some land developing companies so that they can use the company owned beach land for their traditional land selling business. Same had been updated in the article of association of company. However, it was claimed on behalf of the company that as they owned a beach land, which was utilized for aerating the nets and fishing shacks by the earlier company and thus, would be designated as capital asset. Also the act of selling of beach land should be classified as realisation of capital asset. Court did not accept the claim of company and decided that land was used for their traditional business activity and the income from business would be known as ordinary income (CCH, 2017a).

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

Statham and Anor were the two taxpayers who started a small scale cattle business from their fund on the land. They did not have necessary skills and knowledge to run a business and hence, business closed in the primary stage only. They were facing serious financial crisis and thus, had to sale the section of land.  There was no focus present on part of the taxpayers to liquidate the land but this was the only feasible option to get down the crisis. The honourable court understood the crisis condition of taxpayers and decided that the income from land sale would not be accountable for taxation under ordinary income. Because, for ordinary income, the business motive of generating profit is essential and in the present case there was neither the land trading business motive nor to derive profits. Therefore, taxpayers were not liable to pay tax (CCH, 2017b).

5. Casimaty v FCof T 97 ATC 5135

Conclusion

Taxpayer received a part of land from his father and with the help of borrowed money, he started farming. Further, the farming did not make sufficient revenue to taxpayer and hence, he was unable to make the payment against the outstanding. This affected his health and he was facing severe health issues along with outstanding debt. In order to come out from these two issues, he divided the land and sold a big part. The income was consumed to pay the borrowed amount and in the treatment of his bad health. Court had agreed with the claim made by Casimaty and announced that the act of utilization of capital asset would not classify as business action. Therefore, it can be concluded that the income would be capital income not assessable income (CCH, 2017c).

6. Moana Sand Pty Ltd v FCof T 88 ATC 4897

Company developed the mine land which was employed for sand extraction initially till deposits lasted. Several attractive installations and improvements were performed on the land afterwards. The sale of the developed land resulted in huge profit to company. Court had considered the performed activities of the company and stated that the intention of company should be sand mining not land development and selling however, they systematically developed the land so that higher revenue could be generated. Therefore, the revenue received from sale would be designated as assessable income (Deutsch et. al., 2016).

7. Crow v FC of T 88 ATC 4620

Taxpayer started farming on the owned land. However, within 12 months, he stopped doing farming and started land division and selling. He completely devoted himself  to this business of land trading and made nearly fifty one small sized blocks from land and sold directly to customers.Moreover, he also purchased several blocks to sustain the land trading. Court had directed the verdict that the action on behalf of Crow was to conduct a land trading business. Also, in order to expend the business, he acquired more land blocks. Therefore, the nature of the income from land sale is considered to be an ordinary income and taxed (CCH, 2017d).

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

Taxpayers purchased an old property. They got loan at high interest rate from bank and started reconstruction on this property and marketing the new townhouses. Three designer buildings were constructed that were sold after a year by taxpayers. High revenue was generated through the sale. Taxpayers claimed that they owned a capital asset and hence, the proceeds would be capital income. Court refused the claim and cited that the income from isolated transaction with the act of making high revenues is considered as business and the income would be assessable in nature (CCH, 2017e).

References

Barkoczy, S. (2016), Foundation of Taxation Law 2016 (8^th ed.), North Ryde: CCH Publications,

CCH (2017a), FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR, Retrieved on April 24, 2017 from https://www.iknow.cch.com.au/document/atagUio549860sl16841994/federal-commissioner-of-taxation-v-whitfords-beach-pty-ltd-high-court-of-australia-17-march-1982 

CCH (2017b), Statham & Anor v FC of T 89 ATC 4070, Retrieved on April 24, 2017 from https://www.iknow.cch.com.au/document/atagUio544343sl16788832/statham-anor-v-federal-commissioner-of-taxation-federal-court-of-australia-full-court-23-december-1988

CCH (2017c), Casimaty v FC of T 97 ATC 5135, Retrieved on April 24, 2017 from https://www.iknow.cch.com.au/document/atagUio539843sl16716249/casimaty-v-fc-of-t-federal-court-of-australia-10-december-1997

CCH (2017d), Crow v FC of T 88 ATC 4620, Retrieved on April 24, 2017 from https://www.iknow.cch.com.au/document/atagUio545564sl16800674/crow-v-federal-commissioner-of-taxation-federal-court-of-australia-17-august-1988 

CCH (2017e), McCurry & Anor v FC of T 98 ATC 4487, Retrieved on April 24, 2017 from https://www.iknow.cch.com.au/document/atagUio539084sl16707683/mccurry-anor-v-fc-of-t-federal-court-of-australia-15-may-1998 

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

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T (2016), Understanding taxation law 2016 (8th ed.),  Sydney: LexisNexis/Butterworths

Jade (2017), Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188, Retrieved on April 24, 2017 from https://jade.io/j/?a=outline&id=64663 

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, & Ting, A (2016) , Principles of Taxation Law 2016 (9^th ed.), Pymont: Thomson Reuters,

Woellner, R. (2014), Australian taxation law 2014 (8^th ed.), North Ryde: CCH Australia