Interpretation Of Residency Status Under ITAA 1936: Nida

1. Advise Nida on whether she would be regarded, for income tax purposes, as being a resident or a non-resident of Australia during the year ending 30 June 2018. Explain your reasoning using legal  precedent.

2. Explain how Nida’s Australian residency status would affect the assessability of her Vietnamese business and investment income in Australia. Advise Hassan on the alternatives that the proceeds of the sale of the town houses could be assessed on under the Income Tax Assessment Act.

3. Discuss which of those alternatives are likely to apply to Hassan.

Residency Status under ITAA 1936

The taxation ruling of 98/17 provides the interpretation of the commissioner relating to the ordinary connotation of the term resides that are inside the definition of the term resident under “subsection 6 (1) of the ITAA 1936”. The taxation ruling of 98/17 is associated with those people that are entering Australia and includes people that are migrants or workers that comes to Australia with the pre-arranged agreements of employment (Murphy and Higgins 2016). The “Income Taxation Ruling of IT 2681” relates to the determination of the residency status of people that are business migrants. The ruling usually takes account of people that are business migrants will be held as an Australian resident for taxation purpose under “subsection 6 (1) of the ITAA 1936” (Schenk 2017). The present circumstances of Nida provides that she is a native of Vietnam and carried business. Nida, arrived to Australia with her family originally to migrate here and being business. To live with her family and children Nida bought a house in Melbourne.

The residency question is considered as the degree of fact, forming the central criteria that ascertains a person’s income tax liability. The liability to impose tax is generally determined each year (Hoffman et al. 2014). As held in “FCT v Applegate (1979)” events following the year of income might help in determining a person’s status of residency. “Section 6-5 (3) (a) and 6-10 (5) (a) of the ITAA 1997” explains that tax liability arises for visitors of foreign residents or those individuals that are non-resident of Australia on the basis of their statutory or ordinary income generated from most of the Australian income sources.

According to the “section 995-1 of the Act”, “Resident of Australia” represents those persons that are Australian resident within the meaning of the ITAA 1936 Act (Hill and Mancino 2014). According to the “Income Taxation Ruling of IT 2681” a business migrant is held as the resident for assessment purpose under the following test stated under “subsection 6 (1) of the ITAA 1936”. The test includes

1. Resident under ordinary sense
2. Domicile Test
3. 183 Days Test

Denoting from the state of affairs of Nida, reference to “subsection 6 (1) of the ITAA 1936” is applied for to conclude whether Nida will be considered Australian resident within in the purpose of the ITAA 1936 Act.

The ordinary sense of the expression “reside” is held as large enough to include people that arrives in Australia as the migrant to live permanently and the person that are dwelling in Australia for a substantial time (Thomas 2018). A migrant that arrives here in Australia planning to live here permanently is held as resident from arrival. To help in determining during the income year whether the people migrating for business purpose is regarded resident under the ordinary sense certain factors must be accounted. This includes whether the persons return to the nation of origin, the frequency, regularity and duration of those trips along with the purpose forms the decisive factor (Woellner et al. 2016). This also include a person business ties and family relation in Australia and the native state. The factors also take account of whether the person abode is maintained in the state of origin or it is available for an individual use while away from there.

Tests Used to Determine Residency

The judgement of law court in “FC of T v Miller (1946)” stated that to question of fact should be determined necessarily that surrounds the situations (Bloom and Joyce 2014). The ordinary sense test also considers the behaviour of the person while they are present in Australia. The “taxation ruling of 98/17” explains that all the facts helps in explaining a person’s behaviour in Australia are relevant (Samansky and Smith 2017). This includes;

1. Purpose of presence in Australia
2. Employment or business relations
3. Living arrangements
4. Location and maintenance of assets

In determining whether the business migrant is living in Australia proper weightage must be paid to each of the above defined factors. Denoting from the current situation of Nida, the primary purpose of migrating was to commence business in Australia. Indications from the case study explains that she purchases house to live with her family. The taxation commissioner in “Macrea v Macrea (1949)” explains that migrants arriving in Australia with the possible purpose of settling with their family is regarded as Australian resident from the time they came to Australia (McDaniel 2017). The federal court in its decision explained that a person’s business ties or private interest may require to be out of Australia for certain time. Furthermore, a person that performing business activities in the country of their origin and coming to Australia is regarded as the resident of Australia.  

The case study of Nida provides that she came with the original purpose of migrating in Australia in order to start business and eventually live with her husband and children. She returns to Hanoi as the active business partner in her business that forces her to be out of Australia for a certain time in 2018/17. Conclusively, Nida under the ordinary sense is not an Australian resident for the year 2017-18. The residency taken in Australia was not on permanent basis. Nida and her family residence status is a separate and independent matter. It would appear that she and her family are Australian resident but they are not a resident for assessment purpose.

According to the “Income Tax Ruling of IT 2681” a business migrant is regarded as the Australian resident in respect of the domicile test given that person has the place of residence in Australia unless it is content that a person perpetual place of residence is out of Australia (Schmalbeck, Zelenak and Lawsky 2015). Within the “Domicile Act 1982”, an individual that acquires the domicile of the respective choice in Australia given the individual undertakes the decision of making their residence in Australia for indefinite purpose (Burke 2016). The commissioner in “Henderson v Henderson (1965)” held that a person retains the domicile of their origin until the person obtained the domicile of their choice in another nation or by the operation of law.

Case Study of Nida

The case study provides Nida’s permanent place of dwelling is in Vietnam. Nida actually arrived in Australia with the purpose of living in Australia and start a new business. Nida, to live with her family purchase a house in Melbourne nevertheless the time of existence in Australia was irregular and in breaks (Raabe et al. 2015). Referring the leading case of “Applegate v F.C of T (1979)” Nida has not abandoned her place of residence in Australia and returns to Australia after performing the business in Hanoi.

The commissioner in “Bell v Kennedy (1868)” explained that a person retains the residence of the country in which they are born except in the circumstances of acquiring the domicile in another country or by the operation of law (Willbanks 2015). Evidently, Nida case study provides the evidence that Nida is not an Australian resident under the Domicile Test. It would appear that Nida and her family is an Australian resident but the status of Residency for Nida and her children is regarded as the independent and separate subject for the income year 2017-18. With respect to “Domicile Act 1982” Nida would not be held as Australian Resident for income tax purpose.

The taxation ruling of IT 2681 provides that a business migrant that are present in Australia for greater than 183 days, usually speaking is held as the Australian resident under the 183 days test. According to the 183 days’ test if a person is living in Australia then irrespective of the nationality, citizenship or domicile the person is considered as the Australian resident within the purpose of the act (McNulty and McCouch 2015). To be held as Australian resident a person should be in Australia for 183 days or more. As evident from the current situation of Nida she has been present in Australia for only 120 days. Consequently, Nida will not be held as the Australian resident since she only remained in australia for 120 days. Her status of residence is held as independent and separate matter.

According to the decision of court in “FCT v Nathan (1918)” stated that determining the actual income sources is regarded as the practical and hard question (Handelman and Ellis 2016). The commissioner in “United Aircraft Corp (1943)”, explained that business income constitutes the place from where the business is performed or selling of goods is carried on.       

As evident from the current situation of Nida, on performing the above stated test it was noticed that she was not regarded as the resident of Australia based on the relevant test during the income year of 2017-18. Nida is a foreign resident since the amount of time that has elapsed is only for 120 days and the behaviour of her stay does not reflects a habit of continuity. The income or the profits that are obtained from the business activities of Hanoi would be accounted for the taxation purpose. Nida, being the overseas resident is under the obligation of paying income tax for the sum of earnings derived from the Australian sources.

Domicile Test

Numerous instances have been bought forward where the owners of land have the opportunity of subdividing the land and selling the land which they own for long time period. This kind of occurrence is regarded as the common phenomenon where the land owners owns the land out of the town and the expansion of land constitute a better use of the land by building residential property for the purpose of residency rather than using it for farming (Smith et al. 2014). There are circumstances, the property developments are held as substantial in getting large amount of profits from the construction on land.

The case study Hassan provides a small family farm was inherited that valued $600,000. The evidences suggest that Hassan undertook the decision of permanently retiring from the farming activates and use the land that is inherited by him for construction of town house. The prevailing issue of Hassan is relatively related with ascertaining whether the revenue that is obtained from the sale of the town house is regarded for assessment with respect to ITAA provision.

The discussion from the preceding paragraph provides that small and medium subdivision complies with the requirement of realisation of land when the project is used for deriving profit. According to the decision in “Commissioner of Taxation v Westfield Limited (1991)” explains that the sale of asset that is not acquired for the purpose of resale at profit or development of land fulfils the obligation of capital receipt (Miller and Oats 2016).

Denoting from the circumstances of Hassan subdivision of land used for agriculture and construction of town house on the land and selling it possess significant relation in derivation of huge amount of profit from building townhouse. Considering the example of Hassan, certain alternatives provides that revenue that are obtained from the sale of townhouse is regarded as the assessable income under the provision of ITAA. They are as follows;

• Capital asset which is regarded as the mere realisation on the event when the land meets the requirement of subdivision.
• The degree to which the carrying the business represents the way that the property was held for the purpose of development by the taxpayer.
• The land development go further than the sense of mere realisation of the land (Barkoczy 2016). However, the activities of land development may be short of circumstances of conducting the business of land development. Consequently, this may be categorized as the profit derive undertakings.

Denoting from the alternatives that has been provided above, the alternatives can be implemented to understand the consequences of taxes from the sale of townhouse by Hassan under the provision of ITAA 1997. The alternatives that is explained above the mere realization of capital asset alternative is applied in the situation of Hassan.

The court of law in “Allied Pastoral Holdings v Commissioner of Taxation (1983)” evidently explained the fundamental principles that governs the concept of mere realization of capital asset (Cao et al. 2015). The judgement handed by the court to the taxpayer that had the land is observed as the capital asset and construction on the land in a profitable manner is regarded as the mere realisation of asset to derive profit.

183 Days Test

Prior to developing a thorough examination of the situation of Hassan in obtaining a better understanding that construction of the townhouse on the land establishes the mere realisation of the land whether the land is purchased by Hassan with the intent of reselling and making profit. Notwithstanding, of the situation that the sale of land, the profit that is generated from the sale of land will be held for taxation (Davison, Monotti and Wiseman 2015). At the time of providing advice to Hassan it is necessary to understand whether any purpose of acquiring the property was to derive profit.

The court of law in the “Commissioner of Taxation v Reiger” reckoned the comparable issue of the mere realisation of the capital asset. A disagreement was bought forward by the taxpayer that explained the purpose of acquiring the land was to perform the work of plantation (Saad 2014). The taxpayer asserted that the purpose of fixing palm tree was to carry out the activities of plantation but did not executed any business activities. The declaration of intention of related to subdividing the land for sale is viewed as the vital reason for introducing the argument that described the intent of commercially realising the land.

The “taxation ruling of TR 92/3” explains the necessary issue that is related to the determination of whether the individual is held for assessment relating to the activities undertaken for the mere realisation of the capital asset (Robin and Barkoczy 2018). An explanation of the mere realisation of the capital asset has been explained by taxation commissioner in the case of “Californian Cooper Syndicates v Harris (1904)”. A detailed explanation is provided in the determination of income tax where the taxpayer investment was undertaken for mere realisation of land and deriving huge sum of profit from the land was held as the mere realisation of the land as taxable income.

Another reference to the judgement was “Commissioner of Taxation v Westfield” the verdict of the court stated that once it is clear that activities of the purchase and sale that derived profit was not considered as the activity of ordinary business course (Robin 2017). Alternatively, as the matter of ordinary incident of some other business activities constitutes that the profit that is in question would be held as the portion of taxable income of the appellant given the purpose of profit making was existent while making acquisition. In the later judgement the commissioner held that that the profit deriving scheme might have deficiency regarding the specific detail or the mode of attaining the profit should be contemplated by the taxpayer by a minimum of one profit making scheme that could be realised.

Income Source Determination

Under the “Taxation Ruling of TR 92/3” the profit must ought to have from at least one of the means of contemplated at the time of acquiring the property and the Australian taxation office expressed inconsistent with the decision stated in the “Moana Sand Pty Ltd v Federal Commissioner of Taxation” (Blakelock and King 2017). The position of the taxation rulings provides that a taxable profits originates given the taxpayers enters into the transition or operation with the objective of generating profit by one single means but actually gains the profit through a different means.

As evident from the case study of Hassan it states that the whether the activities of the land development that is undertaken by the owner of land contains the constituent of business in or has the character of generating profit. By taking into the approach undertaken by the “taxation ruling of TR 92/3”, the opinion of the ATO has remained dependent on the viewpoint cited under “Miscellaneous Taxation Ruling of MT 2006/1” (Robin and Barkoczy 2018). In ascertaining whether the profits generated through a solitary subdivision of land, it is detained as the mere realization of the land or the profit generating scheme. The views cited by the Australian taxation office bought forward number of factors with respect to “Miscellaneous Taxation Ruling of MT 2006/1” that are enumerated below;

1. Whether there are any other purpose involved in holding the land?
2. Is there any form of arrangement made relating to the subdivision of land?

As stated by the “Australian Taxation Office” no solitary factor is held as the decisive component. Opinions may vary that the subdivision of property into small pieces of land may be considered as the mere realisation of the land (Davison, Monotti and Wiseman 2015). Conversely, under the case study of Hassan this is not the situation in applying the alternative of mere realisation of land. The verdict of the court should be valued under some cases as it demonstrates that the construction of building on land results in the mere realisation of the capital asset.

The judgement of commissioner in “Casamity v FC of T (1997)” stated that the subdivision of land into number of plots is regarded as the mere realisation of the capital asset (Cao et al. 2015). The commissioner in its view stated that the property was used for farming for several years and the decision of subdividing the land was primarily because of the increasing amount of debt.

In other example of “Federal Commissioner of Taxation v McCorkell” the judgement of the federal court denoted that the land that was earlier used for the farming and subdividing the land into plots for sale constitutes a mere realisation of land (Smith et al. 2014). Alternatively, in “Federal Commissioner of Taxation v Statham (1989)” the taxpayer constructed the 105 lands greater than four stages was not held as the mere realisation of land. Considering the judgement of the court in numerous cases a decision can be arrived at that subdividing the land by Hassan to construct townhouse is regarded as the mere realisation of the land. The proceeds that is generated by Hassan from the sale of land is regarded as the capital account and not under the revenue account.

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