Unlocking Insights: Taxation Case Studies Demystified By Experts

Australian Residency Status for Taxation Purpose

Discuss about the Case Studies on Taxation.

A person who visits Australia for more than six months and resides in the same place for most of the time is considered as an Australian resident for taxation purpose. The behavior of a person also determines the residency status. If a person’s routine behavior is same to the behavior that the person had before entering Australia, than the person will be considered as an Australian resident for taxation purpose (Australian Taxation Office, 2016).

In the given case, Fred came to Australia to set up a branch of his company. He leased a residence in Melbourne for 12 months. This means he wanted to reside in Australia. Further, he was accompanied by his wife and his routine in Australia was same as it was in U.K. Fred stayed in Australia for 11 months and due to his bad health, he went back to U.K. By staying beyond 6 months and from his behavior, it is evident that he wanted to stay in Australia. And based on these reasons it can be deduced that Fred is an Australian citizen for the purpose of taxation. It does not matter if he holds a rental property in U.K. and if he earns interests from investments in France. For purpose of taxation in Australia, he fulfills the residency conditions (Prince, 2013).

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

In this case a syndicated had purchased a mining property for reselling it and making profits. He did not acquire this property for gaining income from mining operations. Later on, he sold the mining property for a profit. The judge in this case that that a wide known principle in the matters relating to queries of Income Tax states that when an ordinary investment acquired by the owner is realized and the amount realized is higher as compared to cost of acquisition, such enhanced amount is not the profit (Cassidy, 1994). And so it cannot be taxed under income tax. But he further added that another well known principle states that the enhanced amount gained by realizing or converting the securities has to be assessed. This has to be done in those cases where the transaction done is not just a realization or conversion of assets but actually it is done for carrying on or arising out of business (Australian Taxation Office, 2016). The judge agreed that determination of separation between the two cases was tough and the facts would have to be considered to give the final decision. The point that would clarify the decision would be whether the profit acquired from enhancement of values is just from the realization of security or from carrying out the business. Here, the syndicate had acquired the land for merely gaining profits and not for business purpose and so, it is not taxable.

Income from Mining: Californian Copper Syndicate Ltd v Harris

In this case, Judge William J opined that the facts of the case had to be very firm before the court can be persuaded to maintain that a company, which has not acquired, or in other manner purchased land, for the reason of making profit by selling, was actually engaged in business of sale of land and not just for realizing it. Further, where by such realization, all the company had done was taking the mandatory procedures for realization of the land for the utmost benefit, specifically the land which had been purchased and used for a distinct reason, which was not like carrying of a business (Smith, 2003).

The judge held that by engaging in the subdivision and other activities, the company had just taken the mandatory procedures for realization of land in the most beneficial way. As a result, the profit earned from the development did not form a part of assessable income and hence, was not taxable.

The judge in this case held that when the party does not do anything beyond the realization of asset, the profits could not be taxable. He also held that even if such realization is done in the course of business to acquire the best prices, it did not matter. He further held that just the size of realization would not convert the realization into a business. The judge further held that in case where the party did not participate in running the business than the proceeds would be considered as income and hence, taxable (Jade, 2016).

The verdict of this case is contradictory to the verdict of Scottish Australia Mining. To differentiate between the two cases the judge laid inference to the events of December 20, 1967. On the given date, a change in the company’s shareholding took place (Wolters Kluwer, 2016). The judge held that if the change in shareholding had not happened, this case would have been same as Scottish Australia Mining case. But the change in shareholding transformed the party from a company for domestic purpose to a company engaged in commercial activities.

The judge decided that in this case, the subdivision and development done on the property was to improve the business and hence was taxable. The taxability was given as per section 25(1) of the Income Tax Assessment Act, 1936. The commissioner wanted to assess such income under the section 26(a) of the act but this reliance was held as unnecessary by the judges.

In the given case, the commissioner had declared that the income be assessable under section 26(a) and 25(1) of the act. The Deputy President had given his ruling in this case which was challenged in the court. The judge in this case refereed to the Deputy President’s ruling which stated that the property was not attained for the reason of reselling it for a profit. The judge in this case held that just realization of assets does not mean that the realization has been done for business purpose. The judges further noticed that there was no proof to the fact that the parties were operating any business (Maither, 2016).

The judge further held that the size of subdivision could not be considered as commercial as the subdivision was carried on part time basis. It was proved to the satisfaction of judges that the transaction was just the realization of the land in the most fruit bearing manner. The judge concluded that by application of the laws referred in this case, it could be clearly held that the parties had not carried on the business of sale of land. And so, the profits derived from the sale of land could not be considered as income. And hence, they could not be taxable under the section 25(1) of the act.

To make the ruling in this case, the judge laid inference to the cases of Statham and Anor v FC and Casimaty v FC. Like these cases, the judge held that the party’s activities resulted just in realization of the asset. And that the realization of asset was not done for making profit in the course of business. The judge further referred to the history of the party. The party had been carrying on the farming and was bounded in partnership with his wife and son (CCH Australia Staff, 2012). Activities were undertaken by the party to gain approval for subdivision of property from time to time. Nothing other than this proves a purpose of business. Also, the party had not claimed the interest in borrowed money as a business expense. This proved that he had no intention of treating the transaction as business activity.

The judge held that the appeals had to be allowed and the party had to be reassessed on the basis of this decision. The judge concluded by stating that the profit derived from the sale was just a realization of asset and not a profit arrived during the course of business. Hence, the income was not taxable under section 25(1) of the act and also did not fall under the purview of section 25A (1).

In the give case, the judge held that the party had purchased the land for business purpose and to sale off the sand present on the land and that too for a profit (Garcia and Arthur, 1989). It would not matter that the party had not purchased the land with intention of sale in a given manner but with the intention to sale the land when it is ready for subdivision. The judge further held that such profit attained from resumption of land by CPB (Coast Protection Board) would be a taxable profit (Barkoczy, 2010). The main aim of the party was sale of land and this was attained here. It did not matter what resulted in the conclusion of the scheme.

The judge further held that the income was also taxable under section 26(a) of the act. The reason for the applicability of this section was that the income resulted by carrying on a profit making scheme. The judge disregarded the contention of the party that the profit making was not the major purpose (Prince, 2011).  Even though the profit gained by party was a result of one incident, the profit would be an income as per the general provisions and were taxable under the purview of section 25(1).

To give his decision in this case, the judge stated that in order to determine if a business was carried or not, a separate analysis of each transaction was not required (Federal Statue Annotations, 2003). The only thing that had to be determined was the overall circumstances of the party involved and of the applicable structure. The judge held that in this case, by repeatedly and systematically subdividing and selling the land, a business of development of land was being carried. It was proved to the satisfaction of the judge that the party had purchased and sold the property with the aim of attaining profits.

Further, the judge held that the actions of the party clearly proved that he was carrying on land development business to attain profits. And so, such profits would form a part of his income and would be taxable under section 25 of the act. The judge clarified that the application of section 26(a) would have been possible only if the proceeds from selling the land were not amounting to carrying of a business which was brought under the purview of section 25(1). The judge dismissed all the four appeals with the costs and declared the income as taxable.

In this case the Federal Court judge (Davis J) held that when a property is purchased in business and the purpose of the purchase is gaining profit by developing and selling it, such a venture cannot be termed as an investment (Barkoczy, 2010). So, the profits arrived from such income is to be considered as income and is taxable under section 25(1) of the Income Tax Assessment Act, 1936.

Where the tax payers do not carry any business, the profits to be taxable have to be the result of an arrangement that can be elucidated as a commercial dealing. The judge held that the parties had actually undertaken a commercial dealing in this case. And so this profit from the sale of land was taxable under section 25(1).

The judge held that the primary purpose of the scheme was important. Here, the probability of resale of the developed property at a certain profit was the primary purpose. To draw this conclusion, the judge drew inference upon the fact that the majority of money used was borrowed money. They did not apply their own money as the purpose was to attain profits and not invest.

References

Australian Taxation Office (2016) International tax for individuals. [Online] Australian Government. Available from: https://www.ato.gov.au/Individuals/International-tax-for-individuals/ [Accessed on 29/08/16]

Australian Taxation Office (2016) Taxation Ruling: TR 92/3. [Online] Australian Government. Available from: https://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR923/NAT/ATO/00001 [Accessed on 29/08/16]

Barkoczy, S. (2010) Australian Tax Casebook.10th ed. Sydney: CCH Australia Limited, pp 689

Barkoczy, S. (2010) Australian Tax Casebook.10th ed. Sydney: CCH Australia Limited, pp 751-752

Cassidy, J. (1994) The Taxation of Isolated Sales under Section 25 (1) ITAA: TR 93/2 v Joint Submission. Revenue Law Journal, 4 (1).

CCH Australia Staff (2012) Australian Master Tax Guide. Australia: CCH Australia Limited

Federal Statue Annotations (2003) Butterworths.

Garcia. and Arthur, E. (1989) Australian Current Law. North Ryde: Butterworths.

Jade (2016) Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. [Online] Jade. Available from: https://jade.io/article/67040?at.hl=+Whitfords+Beach+Pty+Ltd+(1982)+ [Accessed on 29/08/16]

Maither, L. (2016) The Federal Income Taxation of Partnerships and Joint Ventures, Precedents, Provisions and Materials. 6th ed. Montreal: Lyndon Maither

Prince, J.B. (2011) Property & Taxation: A Practical Guide to Saving Tax on Your Property Investments. Melbourne: Wrightbooks.

Prince, J.B. (2013) Tax for Australians for Dummies. 4th ed. Hoboken, N.J.: John Wiley & Sons.

Smith, A. (2003) Property Development: Land and Property. Western Australia: Taxation Institute of Australia.

Wolters Kluwer (2016) Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd., High Court of Australia, 17 March 1982. [Online] Wolters Kluwer. Available 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 [Accessed on 29/08/16]