Tax Residency And Ordinary Income Case Studies

Kit is a permanent resident of Australia. Ile 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. Ile was recruited for this lob in Australia and signed a contract with the company here. For the last four years. Kits wife has lived in Australia with their two children. They purchased a home in Australia three years ago. Kit and his wile have a joint hank 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 olf from work every thinl month and, on these, he meets with his family either in Australia or on holidays around South America (usually in Chile when' his parents resole). 

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

Ex plan.at to h. of tlir ieslns outcomes reached by the courts in the following cases which all invoking sales of land:

1. Californian Copper Syndicate lad v Mims (Suiveyor of Taxes) (1904) 5 IC 159

2. Scottish Australian Mining Co lad v FC of T (1950)81 CLR 188

3. FC of Tv

4. Statham & Anor v FC of 789 ATC 4070

5. Custmaly v Ft of T97 ATC 5135

6. Moama Sand Pty Ltd v FC of 7' 88 ATC 4897

7. Crow v PC of i88 ATC 4620

8. McCurry&Anory FT of 1' 98 ATC 4487 

The central issue is to decide the tax residency position of Kit and the relevant tax provisions applicable to determine the assessable income of Kit.

The tax treatment is related to the tax residency position of the taxpayer. The Section 6(1) ITAA, 1936 provides the various aspects of tax residency of individual taxpayer. The leading tax ruling in this regards is TR 98/17 that highlights four essential tests that are applied on the taxpayer for the given financial year to determine tax residency (Gilders et. al., 2016). Taxpayer need to satiate minimum one test to be termed as an Australian tax resident. These four tests are as outlined below.

Domicile test is having two major conditions that need to be satiated on the part of taxpayer (CCH, 2013).

• Taxpayer must hold Australian domicile as per clauses of Australian Domicile Act 1982.
• Location of permanent abode must present within Australia land.

The other aspects that are equivalent imperative are location of stay, visiting to other countries, purpose of visits, levels of private, social and professional relations with Australia and with overseas country. Any set of action that indicates the plan on behalf of taxpayer to create permanent abode rather than Australia (Woellner, 2014).

This test has very specific application and is applied only for officers of Australian government, who are residing in other places of the world. As per this test, it is essential that taxpayer must invest in superannuation scheme of Australian government (Barkoczy, 2015).

A taxpayer would pass this test only if the below listed conditions are met (Sadiq et, al., 2016).

• Resided in Australia for minimum 183 days in the financial year under assessement.
• Hs plans to reside in Australia for long run and settle here permanently.

There is no direct definition given in law to describe the word residency. However, case laws and their judgements are considered to check the tax residency through resides test. It is applied to foreign residents only. The social arrangements of taxpayer in Australia, purpose of visits, frequency of revisits to native country, different ties with Australia are imperative factors that are checked by tax commissioner (Nethercott, Richardson and Devos, 2016).

Kit is permanent resident of Australia and holds Australian domicile. He signed an employment contract with a company and hence, resides at the oil rig based on the coast of Indonesia. He has close relationship with Australia because he owns a home, where his wife and kids are residing. He and his wife also opened a joint bank account in Australian bank. He gets his salary in this account only. It can be stated based on the information that he has resided in overseas to complete the contractual obligation but his permanent residence is in Australia only. Further, despite being a Chilean citizens, he makes very limited visits to Chile. There is no evidence present that indicates that he has any plan to migrates from Australia permanently either to Indonesia or Chile. After considering the above aspects, it can be said that he passes domicile test and thus, would be termed as Australian tax resident.

It does not indicate from the information provided that Kit is a government officer and therefore, this test cannot be used to check the tax residency of Kit.

Kit is working and residing in other country. He does not stay in Australia for 183 days and thus, this test has not been qualified by taxpayer Kit.

Case study 2: ordinary Income

Kit is a permanent resident of Australia and this test is applied for foreign residents only. Therefore, this test is not applicable for taxpayer Kit.

Conclusion

Kit successfully passes the conditions of domicile test and therefore, he would be termed as Australian tax resident for given financial year. Further, the income received from domestic as well as international sources would be assessable for taxation under section 6-5(2) of Income Tax Assessment Act 1997.   Thus, his salary obtained from the US employer along with the dividends obtained from company abroad would be considered taxable income in Australia (Deutsch et. al., 2015).

Company acquired a copper enriched land situated in New Zealand using borrowed money. Company also took permission for mining from government but did not start digging on the land because of no operating capital and subsequently sold the land. The compensation for the land was in terms of significant shares in the respective buyer company (Sadiq et. al, 2016). Commercial worth of the shares was very high and thus, company received reasonable benefits. Court announced that company acquired the land from the onset so that they can liquidate it to earn profit. There was no intent of investors to start mining which in wake of limited finances was not feasible. Hence, the profit would be termed as assessable income and taxed as per the provisions of section 25(1), ITAA, 1936 (Gilders et.al., 2016).

Company purchased land and start mining in 1860s and same had been operated until the land become exhausted in reserves and cannot use for additional mining. In 1924, company started surface smoothing and development actions on the land to make it appropriate for residential purpose. After completion of work, plots and houses were sold at exceptionally high rate and huge profit was received by investors. Tax commissioner decided that the receipts were to be considered as revenue receipts. However, the decision landed into court where it was announced that the proceeds earned via sale was through the realisation of capital asset because the purpose for which the land was acquired was fulfilled by company. Therefore, the receipts would not be liable for taxation under assessable income concepts (Jade, 2017).

A land which was used for aeration of fishing shacks was purchased by land developers when they bought the company holding the land. Various land development actions were performed on the land to enhance the commercial worth and same had been updates in the Article of Association to reflect the underlying intent. Later on, land was liquidated to buyers that caused handsome profits to the companies. Company claimed that as they purchased a capital asset and thus, the receipts would be capital receipts. However, court did not accept the claim and provided the verdict that the company used the land for their business purpose i.e. they developed the land and sold it to prospective buyers. Therefore, the income would be assessable in nature and considered for taxation (Barkoczy, 2015).

Taxpayer received a deceased land on which they started a small cattle business. However, the business failed in initial days. They were facing monetary distress and required fund in order to resolve the distress. Hence, they sold a part of the land and used the income against the monetary distress. The remaining land was used for farming by taxpayers. Court took the aspects related to the taxpayer’s situation and decided that there was no intent of taxpayers to make handsome gains and the sale was conducted merely to resolve the monetary distress. Therefore, the income from sale would not be termed as assessable income (CCH, 2013).

Issue

Taxpayer borrowed fund from bank at high interest rate in order to start farming on gifted land. However, due to drought, farming did not bring the expected gains. Therefore, he was unable to pay the interest amount and decided to sale a substantial section of land. Tax Commissioner had cited that the sale was for profit and hence would result in assessable income. Casimaty did not agree with the decision and took the case into court. Honourable court decided that the adverse condition and increase in interest was the reason behind the sale of land. Also, he again started the farming on the residual land. Therefore, it would not be recognized as business activity and not termed as assessable income (Nethercott, Richardson and Devos, 2016).

Company conducted sand extraction on the acquired land for a few years. After a period of time, further extraction was not feasible and thus, company believed to liquidate the land. They wanted to enhance the returns and therefore, started division and land improvement process. Various services were also installed and finally, they received attractive prices for the land. Federal Court announced that the action of investors to enhance the profits was of business action through isolated transaction. Therefore, the revenue receipts would be termed as assessable income (Woellner, 2014).

Taxpayer bought a land for farming but conducted farming only for initial days. He then mainly got involved in the land division and selling process as the returns were higher than farming. Crow made nearly fifty one blocks from the land and sold it to prospective buyers at different times. There was no intention on Crow’s part to start the farming again. It was decided on behalf of the Federal Court that the Crow was mainly doing land subdivision and trading business. The repetitive nature of land subdivision and selling is the testimony of this aspect. Hence, the income earned through liquidation of the land blocks would be assessable income (Deutsch et. al., 2015).

Taxpayers purchased an unstructured property and borrowed fund to reconstruct the property. Three two story buildings were constructed on land. They could not found any prospective buyers and therefore, did not sell the buildings. However, within a year, the buildings were sold to different buyers and resulted in handsome profits. It was appealed by taxpayers that they just realised the capital asset but it was overruled by honourable court. It had been announced that the purpose property purchase was purely with profit intention. Hence, the income would be termed as assessable income and taxed as per section 25(1), ITAA 1936 (Barkoczy,2015).

References

Barkoczy, S. 2015, Foundation of Taxation Law 2015, 7^thed., North Ryde: CCH Publications

CCH 2013, Australian Master Tax Guide 2013, 51^st ed., Sydney: Wolters Kluwer

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. 2015, Australian tax handbook 8th ed., Pymont: Thomson Reuters,

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. 2016, Understanding taxation law 2016, 9^th ed., Sydney: LexisNexis/Butterworths.

Jade 2017, Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188, Available online from https://jade.io/j/?a=outline&id=64663 [Accessed April 20, 2017]

Nethercott, L., Richardson, G. and Devos, K. 2016, Australian Taxation Study Manual 2016, 4^th ed., Sydney: Oxford University Press

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 8^th ed., Pymont:Thomson Reuters

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