Kit is a permanent resident of Australia. He 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. He was recruited for this job in Australia and signed a contract with the company here. For the last four years, Kit’s wife has lived in Australia with their two children. They purchased a home in Australia three years ago. Kit and his wife have a joint bank 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 off from work every third month and, on these occasions, he meets with his family either in Australia or on holidays around South America (usually in Chile where his parents reside).
Explanations of the respective outcomes reached by the courts in the following cases which all involving sales of land:
Case study 1: Residence and Source
According to 9995-1 ITAA95, an Australian resident is considered to be a person who resident for the purpose of tax which for individuals should encompass these four characteristics; domicile and permanent place of abiding test, resident test, 183-day teas and Commonwealth superannuation test (Baldwin, Cave, and Lodge, 2012). Income tax is mainly income source within the Australian tax system that can be charged on three sources for individuals, personal income that encompasses capital gains, salaries and business income. In this case, residential status in Australia is determined by calculating the personal tax liability of individual on the earned income by Kit during the financial year (Barkoczy, 2016). In this case, if the person is residing in Australia then he will be considered as resident for the purpose of tax and all his income will be taxed in Australia as no other test are needed to be applied.
Now we will determine the residential status of Kit through the following table;
Although Kit is citizen of Australia but he is not residing or physically present in Australia for the significant period as required (Wilkins, 2014). So the purpose of Taxation, he will not be considered as resident under this test.
This test relates to the permanent residence of an individual. If the permanent residence of an individual is situated in Australia then he will be considered as resident of Australia (Norbury, 2014). In the given case Kit is having his permanent residence in Australia, which he has purchased three years ago. So under this test he is considered as Resident.
Residing day test
According to this test, an individual must be resident for at least 183 days in Australia (Norbury, 2011). Kit dose not satisfy this test as Kit dose not reside for 183 days regularly or in breaks in Australia.
Under this test if the individual is employed by Australian government and he is posted outside Australia then also he will be treated as resident of Australia. Although Kit is recruited in Australia but the employer is not the Australian Government. So this condition is not satisfied by Kit and he will be considered as non-resident under this test.
Even though Kit does not satisfy the basic conditions for residency, but he has satisfied the domicile test, so he is considered as a resident of Australia. Under this particular test, although Kit was born in Chile and holds the Chilean citizenship there is no information that regards his permanent residence in Chile.
In this case, there is a rational argument that Kit is a resident of Australia since this the place where he seems to be loving or has abode with some specific degree of performance. His immediate family lives in Australia as his accounts are also maintained in the country (Moretto, Kendall, and Comans, 2014). They also have a home in the country which basically makes him qualify to be the resident of Australia. These particular factors basically outweigh other diverse factors like the aspect that Kit preserved his Chilean citizenship and also preserves his portfolio of shares in his native country, Chile. He also spends most of his time in Chile and has some other member of his family there; these issues are not enough to make Kit a resident of Chile. Basing on the relevance of this aspect, it seemed that the intention of Kit and his close family is basically to live and make Australia their home because the physical existence in Australia is the factor that can be deliberated (Wilkins, 2014). The aspect that Kit devotes much of his time on a rig off the coast of Indonesia does not make him not an Australian resident.
The basic assumption made from this point is that under the source rule, the source of his salary and the wage income overseas that is Indonesia does not affect the argument that Kit is not a resident of Australia (McGee, 2011). He is only in Indonesia because of employment perspective that he signed with the general rules of employment for Australia. Generally, the source of service income is the place where the services are performed. The contract was made and signed in Australia which basically makes Kit income to be assessed in Australian Tax laws as it is assumed that the income was sourced in Australia. As a resident of Australia, he is assessable on the income from all sources that included the investments in Malaysia and any other incomes from Indonesia.
Taxability of investment income and salary for Kit
Kit received his salary from an Australian Company directly into his bank. He also has a joint account with his wife in Australia. Consequently, he has made some investments in Chile and he earns interest and dividends income from the same (Oats, 2012). For the purposes of taxation, salary and investment income are considered to be the two types of income. Being a resident of Australia, all income earned during the financial year in any particular place of the world will be required to declare in the tax returns form of Australia. By applying this particular rule of taxation or a resident individual, the following conclusion was drawn
As per the residency test, Kit is being considered as a resident for the purposes of taxation, so all his income will be liable be taxed in Australia. Salary income received by him from an Australian employee is liable for taxation in Australia irrespective of the fact that it is received directly in the bank because the banking perspective does not matter for taxation in Australia.
Secondly, Kit is receiving the investment income from an investment in his country in Chile. But being a resident of Australia, his worldwide income is liable to be taxed in Australia irrespective of the fact that it is earned, received from an investment outside the country. Kit being a resident of Australia, he will be eligible for threshold limit that is often allowed under the Australian Law, so his overall income will be assessed after providing benefits of threshold limit.
Case study 2: Ordinary income
Californian Copper Syndicate Ltd vs. Harris (Surveyor of Taxes) (1904) 5 TC159
The main objective of the company was to acquire land that contained copper. Conversely, it has not ever extracted the copper (Whiteford, 2010). In consequence, the firm sold the plot to another firm and obtained shares as consideration in the firm. The high court held that the land sale was basically revenue in nature because the intention of the firm was to make an income from the land sale. Furthermore, this aspect was an ordinary case of the taxpayer’s income and business in nature.
Scottish Australian Mining Co Ltd vs. FC of T (1950) 81 CLR 188
Basing on the case, the firm carried out mining coal business on land that it possessed, but after a long period, the entire coal was mined. The firm decided to sell the plot. In order to make it more salable, the firm basically partitioned and constructed roads and other diverse infrastructures on the land (Yuan, 2016). The law court held that the profit from the land sale was not accessible because the firm was not in the trade of selling lands and was only realizing the capital asset to its greatest benefit since the profit was capital in nature.
FC of T vs. Whitfords Beach Pty Ltd (1982) 150 CLR
Basing on the case, the tax paper was a firm incorporated with the sole aim of obtaining a zone of an undeveloped plot at Whitfords Beach. The land has an accessibility to the beach, and a group of persons created the firm so as to obtain the parcel and have entrance to the coastline for fishing. After some years, consequently, an offer that was too good to be refused raised and all the allotted share capital of the firm was traded (Whiteford, 2010). The new investors purchased the stocks only to attain control of the plot and with the intent that the taxpayers would subdivide, improve and sell the housing sites at a return. After the partitioned land had been sold, the taxpayers contended that the revenue obtained was not an ordinary revenue but capital in nature and the transaction was a mere realization of the capital asset. The law court held that the taxpayer was conducting a transaction of land development and income from the land sale was quantifiable as ordinary income. The high court also held that at the period the new investors obtained the firm, the intent changed to subdividing, developing and land selling rather than non-commercial venture intention. Therefore, the land sale was a normal event of the business transaction and thus quantifiable income.
Statham & Anor vs. FC of T 89 ATC 4070
In this particular case, the taxpayers were considered to be executors of a deceased estate. The dead had obtained a portion of land several years before with the intent of increasing his family and engaging in certain farming doings. Several years later, the dead sold part of the plot to a firm controlled by the members of the family. At this particular time, there was no intent to resell the land at a return, and the new proprietors then decided to partition and vend the property. The deceased passed away during the period that the partitioned lands were sold out and some were basically vended after his death. The court contended that the auction of some of the land was an ordinary income because there was an existing consent from the owner.
Casimaty vs. FC of T 97 ATC 5153
In this particular case, the taxpayer purchased a farming assets from his father and carried on a prime production trade for the subsequent twenty years. Conversely, because of the increasing ill health and debt, the taxpayer consequently decided to partition and vend a big part of the land. There were eight portions over a time of eighteen months, and the taxpayer builds roads, fence sewages facilities, and water as part of this portions (Woellner, Barkoczy, and Pinto, 2011). The court contented that the profit from the sale of the distinct portions was ordinary revenue and therefore quantifiable on the basis that the taxpayer was doing land subdivision business. Conversely, on appeal, the commissioner held that the income from the subdivision was a mere realization of the capital investment and the taxpayer was not conducting the business of land partitioning as he had initially obtained the parcel for the intention of farming thus no evidence that this purpose had changed.
Crow vs. FC of T 88 ATC 4620
Basing on this case, the farmer had borrowed a large sum of money so as to procure five blocks of land over a period of ten years. Over some time, the land had been used for grazing, farming and growing crops but eventually, it was subdivided. Two years after the purchase, the taxpayer eventually sold fifty-one blocks making an overall net revenue of US$388,288. The federal court held that the taxpayer was quantifiable on the revenue as he was conducting the business of development the land. Even though the court acknowledged that there was some time at the beginning where the land was used as a farm, it was found out that there was evidence the taxpayer knew at the outset because the debt size entered into, some part of the land had to be sold to offset the loans.
Moana Sand Pty Ltd vs. FC of T 88 ATC 4897
In this particular case, parcel in Adelaide was obtained by a firm. After some time, the parcel was purchased by a firm with the definite intent of conducting the business of working and selling sand. The taxpayer obtained a beachside parcel for business, it then partitioned the land and sold to interrelated parties where the board of the coast protection approved it ensuing to income (Miller, and Oats, 2016). The court held that the ordinary income attained came from a remote business operation that it is a profit of nature where the parcel was vended thus fulfilling the vital goal of making a profit thus taxable.
McCurry & Anor vs. FC of T 98 ATC 4487
In this particular case, the taxpayer purchased land that had an old house. The taxpayer eliminated the house and constructed three townhouses on the land. The townhouses were advertised for sale before completion; however, this was unsuccessful. Subsequently, the taxpayers and their family moved into two of the houses and lived there for about a year then sold in a total net revenue of about US$150,000. After some time, the taxpayer bought the second block of land, constructed some houses then sold them. The court held that the profit from the auction of the houses was ordinary quantifiable revenue as they resulted from a profit-making transaction. The taxpayer argued that the sale of the townhouses was a mere realization of a capital asset and thus nor ordinary income as the houses were residential and were sold because of financial difficulties (Ferraro, 2013). The commissioner contented that the sale of the townhouses was an ordinary revenue because the land was obtained with a commercial aim and a view to obtaining a profit from the sale.
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