Case Study 1: Residence and Source
Australians are generally taxed based on their residential status and income derived by them. As defined under the Domicile act 1982 the residential status of an individual is considered as a legal concept of assessing the residential status. The existing study determines the Kit status of residency together with his employment income and the investment made with the objective of deriving income tax (Thampapillai, 2016). The case study brings forward the issue of Kit who has been residing in Australia after taking into the consideration that he was originally born in Chile. The study evidently puts forward that Kit despite living in Australia maintains his Chilean citizenship. According to the Australian taxation law a resident of Australia are levied based on their universal earnings generated from all the sources.
A person living in Australia on temporary basis with foreign inhabitants will be considered for taxation for their income derived. For example, an individual earning income for working in Australia shall be considered for taxation. The study takes into the consideration the taxation situation of Kit in order to determine the residential status for taxation (Vann, 2016). As understood in the current scenario Kit in spite of permanently being a resident of Australia will not be considered as an Australian resident because he was born in Chile and maintains his Chilean citizen test. The study considers the primary test of residency to determine the domicile of Kit. The below stated criteria for determining the domicile test are as follows;
According to the Domicile Act 1982, the lawful theory of common law defines that a person can acquire the birthplace as their own domicile concerning their place of origin. However, it is worth mentioning that the rule of common law is subjected to few exceptions as well. A person can retain the domicile of their own origin given the person takes the decision of obtaining the domicile according to their own choice in different country. The existing scenario defines that three years ago Kit had purchase a house so that he can live with his family (Woellner et al., 2016). This ultimately lays down the intention of Kit in choosing the domicile of his own choice, which is in Australia with the purpose of making his place of residence indefinitely in Australia. As held in the case of “Henderson v. Henderson  1 All E.R.179” the intention of an individual forms an important which needs to be in order to get hold of domicile according to their own choice in nation where they intentionally decides to make their home indeterminately.
“Section 6 (1) of the taxation rulings 2650” defines that in order to determine a person’s domicile it is noteworthy to consider the intention of the person as where that individual intends to make their home indefinitely (Morgan et al., 2016). A person having Australian domicile however residing outside of Australia will be able to retain that domicile given that the person comes back to Australia on clearly foreseeable circumstances. Hence, under the given situation Kit is employed with Australian firm and was sent to Indonesia to work in a oil rig. Being employed in the Indonesian coast he returns to Australia once in every three month to spend time with his wife and children. Kit will retain the Australian domicile despite being out of Australia due to the following reasons;
- As defined under “section 6 (1) of the ITAA 1936” Kit place of abode is in Australia and satisfies the criteria that his permanent place of residency is in Australia (Barkoczy et al., 2016).
- Kit has been living in Australia either continuously or intermittently for more than half of the income year before being transferred for employment purpose to an Indonesian oil rig and ultimately satisfies that his normal place of abode is in Australia.
183 days test:
As stated by Barkoczy (2016), the 183 days test states that if a person is living in Australia no less than half of the income year either in break or for a continuous period shall be regarded as Australian resident. Kit in spite of being employed in the Indonesian oil rig comes during holidays to Australia once in every three months to spend time with his family. This merely sums up an approximate of 120 days of his stay in Australia. However, bearing this figure one cannot ignore the fact he is an Australian resident. He will be regarded as an Australian resident because he owns a house in Australia in order to stay with his wife and children. As defined under “F .C. of T. v. Applegate (79 ATC 4307; (1979) 9 ATR 899” that in spite of Kit non-existence in Australia his domicile was in Australia (Braithwaite & Braithwaite, 2016). Consequently, the intention of Kit in taking up the Australian residence satisfactorily meets the criteria of 183 days test.
Evaluation of tax:
The liability to hold a person accountable for tax originates with the question of determining the residency of taxpayer, which is applicable in the income year under considerations. Given that the taxpayer satisfies, the residential test in accordance with the ordinary income concept will be held liable for taxation due to his or her status of residency (Lombard, 2017). The receipt of employment income by Kit in his Westpac bank account forms an Australian income because he is employed with Australian company. Kit also has investment in share portfolio and the income generated from such investment from overseas source is required to be included while lodging tax return.
Referring to the case of Applegate per Franki J 79 ATC” an individual’s tax liability originates depending upon the residential status. Kit can overcome the circumstances double taxation by claiming exemption on his share portfolio income because Australia has signed tax treaties with numerous nations (Miller & Oats, 2016). The liability to tax originates for Kit because he has satisfactorily met the criterion applicable for residential test and will be considered permanent resident for the purpose of taxation.
Case study 2 – Ordinary Income
I. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159
The case study deals with the issue where the taxpayers had spend a large part of income in the acquisition of copper bearing land with no adequate sum of capital left with him to commence the work on land. The taxpayer sold off the land in considerations of shares and derived substantial sum of profit (Sadiq & Jones, 2016). The rulings provides that whether the income earned from Isolated transaction by the taxpayer is assessable under “subsection 25 (1)” of ITAA 1997. The court in its decision stated that the taxpayer will be taxable for income earned from selling of land since the original intention of the taxpayer was to generate profit from disposal of land. The decision ruled that selling of land was not a substitution of one investment for another and disposal of land was regarded as trending transactions.
II. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188
The argument of this case is based on the business of mining of 1771 acre of land near New Castle, which was bought in late 1860. The taxpayer continued the business of mining until the coal had been exhausted from the land. The taxpayer ultimately sold the land after incurring development expenditure (Fernandes & Sadiq, 2016). The court referring to the “Section 108-5 (1) of the ITAA 1936” stated that sale of sub-divided land would be considered as an assessable income since it constituted realisation of capital asset. The court in its decision stated that realization of asset was enterprising on the capital account of the taxpayer.
III. FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR
The current case study is based on the argument that whether or not business income generated from the sale of subdivided land constituted capital in nature. The rulings concerning this case provide direction in assessing whether the profits derived from Isolated transaction will be treated for tax under “Section 25 (1) of the ITAA 1936”. The taxpayer bought forward his argument by stating the selling of land does not constitute realization of capital and his proceeds are not taxable (Fenech et al., 2016). However, as per Gibbs CJ, Mason, Murphy and Wilson JJ tax payer would be held taxable under section 25 (1) for the proceeds generated from the sale of land. The decision passed declared that the taxpayer will be taxable in conformity with the general accounting principles.
IV. Statham & Anor v FC of T 89 ATC 4070
The following case study is concerned with the issue whether the sale of subdivided land can be considered taxable either under section 25 (1) or 26 (a). The taxpayers in this case were the trustees of estate that was acquired in 1970 in order to raise his family by indulging in desultory farming. However, the trustee of estate died and the deceased decided to subdivide and sell the land. The taxpayer argued that the land was never used for business and the deceased had never entered into any profit-making scheme (Silver et al., 2017). The court in its decision stated that the manner in which the subdivision of land took place reflected that they were not engaged in any business or profit-making scheme.
V. Casimaty v FC of T 97 ATC 5135
The current case study is based on the determination of the sale of portion of property which is assessable under section 25 (1) or 25 A. The taxpayer had purchase a 988 acre of land to perform activities of farming a fence under action view (Russell, 2016). The federal court in its declaration stated that taxpayer cannot be held for tax since he had acquired action view with the purpose that no profit shall be held for assessment from the sale of land under first limb of section 25A (1). Nor did the second limb have any kind of implication since there was no such sales in the due course of business activity with the motive of making profit.
VI. Moana Sand Pty Ltd v FC of T 88 ATC 4897
The issue in this case is with the taxpayer that had acquired the land with two-folded purpose of working and selling the surplus until the land is suitable for sales. The taxpayer sold off the land for $500,000, which led the commissioner to include the value of sale in his assessable income (Burnett, 2015). The taxpayer bought forward the argument that no part of the land could be held for assessment under section 25 (1) or 25 (a). The federal court referring to concepts of ordinary income and decision passed under “FC of T v The Emporium Ltd 87 ATC 4363 stated that the taxpayer is assessable for profits derived under “section 25 (1) of the ITAA 1936”.
VII. Crow v FC of T 88 ATC 4620
The following issue raises question whether the sale of subdivided land obtained for farming and income generated shall be considered for assessment under “Subsection 25 (1) or sec 26 (a) of the ITAA 1936” (Silver et al., 2017). The taxpayer had acquired the land and generated a net profit of $388,288. The court in its judgement declared that the taxpayer will be considered for assessment under ITAA 1936 since the transaction were of repetitive in nature and possessed the characteristics of continuous business of land development.
VIII. McCurry & Anor v FC of T 98 ATC 4487
The current case study is concerned with the taxpayer who was brothers and had made the use of funds obtained from bank to build a townhouse. The taxpayer had sold off the land which resulted in net profit of $75,811. The outcome of the case stated that the taxpayer were taxable under “section 25 (1)” for income generated from profit making scheme in commercial undertakings (Chang, 2016). The revenue constituted venture and the taxpayer were engaged in the activities of developing land.
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