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By Water Investments Limited & OR’s

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Question:

Explain on about the Water vs. ORs?

 

Answer:

Introducation

In this case, the companies that were incorporated abroad were By water Investments Ltd, Chemical Trustee Ltd and Derrin Brothers Properties Ltd. The By water Investments Ltd was incorporated in Bahamas. The two companies Chemical Trustee Ltd and Derrin Brothers Properties Ltd was incorporated in United Kingdom. The parent companies are the two companies from Cayman Islands. In the two companies, one of the company is JA investment Limited. In both the Cayman island companies, the sole shareholder is Mr. Peter Borgas. He currently resides in Switzerland and has been a director of By water Investments Ltd, Chemical Trustee Ltd and Derrin Brothers Properties Ltd from 1998. The company Hua Wang Bank Berhad is a company that is incorporated in Samoa. This company has issued debentures that suspense the voting right of the bearer. The JA investment Limited holds debentures issued by the company (Dabner 2016).

The Hua Wang Bank Berhad, By water Investments Ltd, Chemical Trustee Ltd and Derrin Brothers Properties Ltd are the appellant companies of this case. The appellant company has made profits from trading shares that was listed in the Australian Stock Exchange. The Commissioner of tax is the respondent in this case. It was considered by the Commissioner that all the appellant companies were controlled by a Sydney based accountant Mr. Vanda Gould. It was deemed by the commissioner that all appellants was resident of Australia under the meaning provided in the section 6-1 of the Income Tax Assessment act 1936. The commissioner on the assumption that the control and central management of the company is in Sydney so deemed the appellants resident of Australian (Burnett 2015). The Commissioner separately assessed the appellant companies for tax for multiple years from 2001 to 2007. The total tax that was assessed by the Commissioner for all the appellant was more than 13 million dollars. The Commissioner for their respective assessments disallowed the objections raised by the appellant companies. The aggrieved parties then went for an appeal in the Federal court. The court dismissed the appeal of all the appellants. It was argued by the appellants that Mr. Borgas from countries other than Australia effectively controlled the companies (Renne et al. 2015). The court however found that all the directors of the company used to obtain advice from Mr. Gould. The directors used to adopt the advice provided by him in a mechanical fashion. Therefore, the court concluded that Mr. Gould truly controlled the company. The court further found Sydney to be the central place for control and management of the company. The court supported the argument of the Commissioner and treated the appellant as the resident of Australia for the purpose of tax (Bywaters et al. 2016).

The appellant further appealed to the full Court but it was dismissed. It was held by the court that there was no error of law in making the above conclusion. The appellant failed to provide evidence that the establishments for the purpose of tax was not the resident of Australia.

 

Section breached

In this case, the court had to decide whether the appellants were the resident of Australia for the purpose of income tax. The assessment was conducted by the court after evaluating the control and the place for central management of the organizations. The court also dealt with issue whether the profit from sale of shares should be regarded as revenue or capital income. The companies treated the shares as a trading stock (Sloan 2017). The court discussed the meaning of trading stock under the income tax act. This case required reference to various provisions of the income tax act. 

In this case, the sections of the Income Tax Assessment Acts that have been breached or referred to are provided below:

  • Section 6 of the Income Tax Assessment Act 1936;
  • Section 70-5 of the Income Tax Assessment Act 1997;
  • Section 70-35 of the Income Tax Assessment Act 1997;
  • Section 70-40 of the Income Tax Assessment Act 1997;
  • Section 70-45 of the Income Tax Assessment Act 1997;
  • Section 70-80 of the Income Tax Assessment Act 1997;

The section 70-5 of the Income Tax Assessment Act 1997 provides that the main purpose of accounting for trading stock is to provide a result that properly reflects the activity of the business with the trading stock during the income year. This section highlights three key features for tax accounting of trading stocks (Sloan 2017). These three key features are:

  • The information related to net profit or loss made from selling of trading stock should not be recorded in the accounts. The gross earning and outgoing should be recorded on accounts.
  • The earnings and outgoing should be of revenue nature.
  • The difference arising from the value of trading stock in hand at the beginning and at the end of the year should be recorded in the accounts.

The section 70-35 of the Income Tax Assessment Act 1997 provides that the taxpayer should include the value of the trading stock at the time of calculating the assessable income and deductions. That means the assessable income should include the excess in the value of trading stock at the end of the year than in the beginning of the year (Carrozza and Fantini 2016).

The section 70-40 of the Income Tax Assessment Act 1997 provides that the value of trading stock at the beginning of the year should be the same value of stock that was at the end of the last year.

The section 70-45 of the Income Tax Assessment Act 1997 provide that the trading stock at the end of the Year should be valued at cost, market value or replacement value.

 

Analysis of the decision of the court

In this case, the High Court dismissed The Appeal of all the four companies. It was held by the High Court that for the purpose of income tax the appellants was regarded as Australian resident and therefore they are liable to pay tax. It was seen that one of the directors of the appellant companies was a resident of Switzerland. The directors meetings were held in Switzerland. The other appellants were incorporated in Samoa and most of the directors of those companies are employees of Samoan international trustee (Odgers 2013). The Commissioner of tax made assessment for tax as they made profit in purchasing and selling of shares listed in Australian Stock Exchange. The appellant objected to the assessment made by the Commissioner of income tax. It was argued by them that they are not resident of Australia under section 6(1) of the Income Tax Assessment Act 1936. The Commissioner rejected the objection so the appellant appealed to the court against the decision of the commissioner.

 

The appeal had three issues that the court was required to determine:

  • Whether there has been an error of law in considering that the central management and the control of the organizations appealing was in Australia during the years of assessment.
  • Whether there has been an error of law in considering that, the income from sale of shares is of revenue nature.
  • Whether an error of law was made in considering the shares as a trading stock.

The court found that although the business located outside Australia but a resident of Australia Mr. Gould conducted the real business of the appellants. It was held by the court that as the control and central management of the business of the appellants is situated in Australia so the appellants should be regarded as an Australian resident for the purpose of tax under section 6(1) of the Income Tax Assessment act 1936. Therefore, the companies are liable to pay tax under the act. The appellant argued that as the board meetings were situated outside Australia so the central management and control of the company is in abroad (Carpenter et al. 2015). Hence, they contended that there is no liability to pay tax. On analyzing the facts, the federal court found no reason to doubt the findings that the appellants was resident of Australia for the purpose of tax. On further appeal by the appellant, it was held by the court that as per the principle the residency of a company is determined by the facts and degree (Carroll 2014). This requires determining where the control and central management of the company abides. It is determined by referring to the activity of the business and not based on the formal documents or organizational structures. It was held by the court that it is a fact that the board of directors is located abroad. However, the court found that the main decision making power for all the appellants lies in Sydney with an Australian resident. The reason for making the conclusion is that the directors of the appellant companies apply the decision taken by the Australian resident without revising or reconsidering them. The high court therefore dismissed the appeal (Foreman and Meisenheimer 2014).

It was also raised before the primary judge whether the profit that was made from the disposal of long-term investment shares is a capital nature or revenue nature income. The taxpayer argued that the profit were of capital nature. The court held that the profits that the appellant has made from selling of shares are of revenue nature. The main reason behind the decision is that the taxpayer made the profit in the ordinary course of business activity. The activity of purchasing and selling of shares was carried out with the intention of making profit. The court found that the intention of the taxpayer to make profit is the main reason for considering shares as a trading stock. It was also regarded by the court that the taxpayer are engaged in the business of purchasing and selling of shares (Coombs and Edwards 2013). The finding was challenged by the appellant that the profits are in the revenue nature. The appellant and the Commissioner both did not contested the fact that the shares are considered as trading stock. It can be seen that as none of the parties contested the fact on trading stock so it would be inappropriate for the court to question the judgment of the primary judge. Therefore, it was held that the profit from the selling of shares are of revenue nature (Ward 2016).

 

Conclusion

The discussion above has help in understanding the background of the case. The discussion also highlights the sections that have been breached or has been referred to in the current case. The report above also discusses the decision that has been given by the court. The reason for making the decision by the court has also been analyzed. After analyzing, the entire case it can be concluded that the residential status of an organization for the purpose of tax should be determined based on the place of actual activity and not based on the formal organization or documentation. In this case, the appellant's appeal was dismissed by the court and it was held that for the purpose of tax all the appellants are Australian resident under section 6-1 of the Income Tax Assessment Act 1936.

 

Reference

Burnett, C., 2015. When is a company incorporated outside Australia a resident of Australia?. Tax Specialist, 18(5), p.198.

Bywaters, P., Bunting, L., Davidson, G., Hanratty, J., Mason, W., McCartan, C. and Steils, N., 2016. The relationship between poverty, child abuse and neglect: an evidence review.

Carpenter, A., Mitchell, E. and Price, S., 2015. Blight remediation in the Southeast: local approaches to design and implementation.

Carroll, J.M., 2014. Confidential information sources: Public and private. Elsevier.

Carrozza, C. and Fantini, E., 2016. The Italian water movement and the politics of the commons. Water Alternatives, 9(1).

Coombs, H. and Edwards, J.R., 2013. Accounting Innovation (RLE Accounting): Municipal Corporations 1835-1935. Routledge.

Dabner, J., 2016. " It's the vibe of the thing": Esquire Nominees (re) considered by the High Court. CCH Tax Week, 2016, pp.1-3.

Doran, C.M., 2013. The costs and benefits of interventions in the area of mental health: a rapid review. An Evidence Check review brokered by the Sax Institute for the Mental Health Commission of NSW. Sax Institute: Haymarket.

Foreman, J. and Meisenheimer, G., 2014. The Evolution of the Class Action Trial in Ontario.

Gray, A., 2014. Why Scots Should Rule Scotland. Canongate Books.

Kemm, J., 2014. Health promotion: ideology, discipline, and specialism. OUP Oxford.

Odgers, W.B., 2013. The Principles of Pleading and Practice in Civil Actions in the High Court of Justice. Read Books Ltd.

Renne, J., Listokin, D., Tolford, T., Mosby, K. and Amdal, J., 2015. The Opportunities and Tensions of Historic Preservation and Transit Oriented Development.

Sloan, B., 2017. Borkowski's Law of Succession. Oxford University Press.

Vickery, K.K., 2014. Barriers to and opportunities for commercial urban farming: case studies from Austin, Texas and New Orleans, Louisiana (Doctoral dissertation).

Ward, A., 2016. Dimensions of poverty: An examination of quality of life, security, opportunities, and empowerment among New Orleans' tourism industry workers (Doctoral dissertation, Tulane University, Payson Center for International Development).

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