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
To ascertain the tax residency of taxpayer (Kit) and the relevant tax treatment that would be applied on the amount of the proceeds received by him during the financial year.
Tax Treatment and Tax Residency
The tax treatment of the total income would be different for foreign tax resident and Australian resident. Section 6-5(3) and section 6-5(2) of ITAA 1997 would be considered for the tax treatment (Barkoczy, 2016).
In the accordance of the section 6-5(3) of Income Tax Assessment Act 1997, the total income that is received from Australian sources only is taken into account for taxation if the taxpayer is classified as foreign tax resident. It means no part of income would be considered for taxation if it is derived from foreign sources. Further, in accordance to the section 6-5(2) of Income Tax Assessment Act 1997, the total income that is received from foreign sources and from Australian sources both would be taken into account for tax purposes (Sadiq et. al., 2016).
It is apparent that the tax treatment relies on the tax residency of taxpayer and hence, the section 6 (1) of ITAA, 1936 and Tax Ruling TR 98/17 would be used to find whether the taxpayer is an Australian tax resident or foreign tax resident. Residency tests which are listed in the TR 98/17 provide an appropriate mechanism to find the tax residency of taxpayer. The taxpayer would be classified as Australian tax resident if taxpayer has completed the essentials of any of the below highlighted residency tests (Gilders et. al., 2015).
Residency Tests - Domicile test, 183 days test, superannuation test, resides test.
Domicile test – Two major conditions that are essential to be completed by taxpayer are highlighted below (Sadiq et. al., 2016).
- Australian domicile in the accordance of “Australian Domicile Act 1982.”
- Location of permanent residence of the concerned taxpayer must be situated within Australian territory only.
It is noteworthy that if taxpayer is permanent resident of Australia but have permanent abode outside of Australia, then also the taxpayer would not be considered as tax resident of Australia. The critical factors with regards to the permanent residence location determination are highlighted in IT 2650 and summary is given below (Woellner, 2014).
- Fixed Asset of taxpayer located in Australia land coupled with frequency of visits
- Taxpayer has strong social arrangements with Australia
- No intention of taxpayer to settle in other places of world but not in Australia
- Deviation in the duration of abode between intended stay and actual stay on the part of taxpayer in foreign land
- The relationship (private/ professional/ social/ educational) of taxpayer with Australia and with foreign country
183 days Test - Foreign resident would be classified as tax resident of Australian only if he/she has intention to permanently settle in Australia besides staying on Australian land for 183 days or more in financial year under assessment (Barkoczy, 2016).
Superannuation test - This is used to find the tax residency position in case of government employees or executive, who are staying out of Australia due to obligation extended by Australian Government. The imperative condition of superannuation test is the investment on behalf of the respective taxpayer in selected Australian Superannuation Schemes (Coleman, 2011).
Resides test - The taxpayer who is not an Australian resident but is residing in Australia, then the essential aspects of resides test would be taken into consideration. Main reason for which the taxpayers has made visits to Australia, the duration of total abode, frequency, any personal relation or professional commitment are the key factors for consideration (Deutsch et. al., 2016).
It is apparent from the above rules that taxpayer Kit is a PR of Australia and hence, the valid residency test is domicile test only. The superannuation test is not valid because Kit is not an executive of government and not staying in other country due to government duties. Further, resides test and 183 days test not valid because they are valid for foreign residents and Kit is permanent resident of Australia. The essentials of domicile test need to be discussed in order to find whether Kit is designated as Australian tax resident or not.
- Have domicile of Australia because Kit is a permanent resident of Australia.
- Permanent residence is in Australia because of the following factors given below:
- He has fixed capital asset (house) in Australia which he owned three years before.
- His wife and children are living in this house only.
- He has salary account in Westpac Bank in Australia.
- He is living in foreign land because of the employment contract with US Company which he signed in Australia.
- The one month leaves (in every third month) from the service are utilized either in holiday in South America (mainly Chile) or in Australia with family.
- No intention or aim to settle in any other place rather than Australia.
- He would be permanently returned back to Australia after the employment period.
From the discussion it is apparent that Kit is tax resident of Australia based on the domicile test. Therefore, all his income from various sources would be counted for taxation in Australia only. It means employment income and the income derived as dividend from shares from Chile would be subject to tax in accordance with the applicable Australia tax statute.
Case Study 2 (Ordinary Income )
Company had registered for mining copper from the copper mine purchased. However, due to insufficient capital, company did not begin mining and after some time transferred the ownership. In return, investors received a significant number of shares in the buyer company. The commercial worth of these shares was high and resulted in sizable profits. It was demanded by the investors regarding the income that it would be capital income because selling of land to acquire the shares is conversion of capital assets. Court overruled the statement made by investors and opined that the main profession of company was copper mining but they never start mining. Further, after being cognizant of the insufficient budget, company still went ahead with the purchase of mine as it was executed with the intention of liquidation to make higher profits. Therefore, the pre-planned profit intention behind the isolated transaction would lead to assessable income (Barkoczy, 2016).
Investors were generating revenue proceeds through coal mining operation on the purchased land. Later on, the land got exhausted in coal because of continuous and efficient operation. It was agreed by the investors that the land could not be utilized for more mining and hence, deemed to make it fit for residence purpose. The condition of land was not suitable for the purpose and hence, necessary development and actions were performed on the exhausted land. Finally, the plots were sold and investors received significant amount of proceeds. Court provided the verdict that the investor’s actions of development were not with the intention of profit as these were conducted because a mine land could not be used any further. Further, the mining for which the land was purchased had been conducted for almost six decades and would have continued if the land was capable for more mining. Therefore, proceeds from sale would be categorised as capital proceeds from realisation of capital asset (Jade, 2017).
Initially a company acquired land for fishing purposes mainly for aeration of fishing shacks and equipment. Later on, the ownership was sold to estate land developer companies. The company acquired land for selling only and same was updated in the article of association of the company after ownership change. Moreover, various division and essential installation under the estate development were constructed and subsequent plots were sold to buyers. Court opined that capital asset was acquired to be used in the estate state development business purpose. Therefore, the new shareholders would be liable to make payment on the assessable income derived through the sale of beach land (CCH, 2017a).
Both the taxpayers wanted to establish a cattle business on the received land through estate. However, during the initial days the business could not flourish because of lack of experiences and requisite knowledge of cattle business.They invested a significant part of their money to start the business and thus, had no money to start a new business or to sustain the living expenses when it failed. Hence, they believed that the only option was to raise money from land liquidation. However, they did not want to establish a land sale business and hence, sold only the portion required to improve the financial situation. Honourable court opined that the intention was neither to make profits nor to start a land trading business. They sold land due to failure of business and because they needed money for living. Therefore, the income would not be taxed under assessable income tax treatment because it was realisation of capital asset (CCH, 2017b).
Casimaty received land from father to conduct their family occupation (farming). He took loan at significant rate of interest to conduct farming. The farming produce got adversely affected from drought and did not result in expected proceeds to Casimaty. The debt amount kept on growing on him and it affected his health. Moreover, he did not have enough fund to resolve these issues. Hence, he made partition on land and liquidated a large part. The received income was consumed against paying the interest and outstanding amount and for undergoing health treatment. Court considered the non-profit intention of taxpayer and decided that the income was held under capital income from realisation. Sale of land without development and advertisement was a concrete evidence of non –profit motive of Casimaty (CCH, 2017c).
Company conducted sand mining and sand selling business. The land was acquired for mining only however, investors agreed to make land development operations on the land because the sand level decreased considerably. Moreover, with the intention of deriving more profit, they made several installations and constructions so as to enhance the market value of the plot. These included parks, roads, Church, hospital, water, electricity supply, sewage treatment plant, bus and railway station, parking and so forth. Company wanted to derive huge profit and hence, sold to different buyers at premium prices. From the sale, significant profit was received. Court considered the nature of investors of deriving profit from development and sale. Hence, it provided the judgement that income from isolated transaction would be assessable income and liable for taxation (Sadiq et. al., 2016).
The land block that was acquired for farming was later on subdivided for making profit. Crow (taxpayer) subdivided the farm –land to make plots. These plots were sold to various buyers at premium prices in different time periods. Moreover, he stopped doing farming completely and acquired more and more land blocks to expand the land trading business. Federal court gave the judgement that the land should have been used for farming. However, the taxpayer systematically divided the land and liquidated to different purchasers. Therefore, the nature of investors action was purely business with intent of deriving high income. Also, the purchase of additional blocks was the evidence of long term plan of land trading businessand hence, the net income would be held as assessable income from ordinary concepts (CCH, 2017d).
Taxpayers with the motive of getting high revenues purchased a land that contained dilapidated houses. From the loan amount, new townhouses were constructed on land and the rest of the loan amount was used against advertisement regarding the sale of new houses. They could not receive any premium prices for the houses initially and hence, decided to retain the houses for some-time. In between the holding time, they start residing in one of te house. Finally within 12 months, the townhouses were liquidated at premium price. The taxpayers claimed regarding the nature of the income that it was from realisation of asset. Court discarded the claim and opined that property was purchased with profit intention of taxpayers and hence, the profit would be assessable income via isolated transaction (CCH, 2017e).
Barkoczy, S 2016, Foundation of Taxation Law 2016, 8th eds., North Ryde: CCH Publications,
CCH 2017a, FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR, Available online 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 May 1, 2017]
CCH 2017b, Statham & Anor v FC of T 89 ATC 4070, Available online from https://www.iknow.cch.com.au/document/atagUio544343sl16788832/statham-anor-v-federal-commissioner-of-taxation-federal-court-of-australia-full-court-23-december-1988 [Accessed May 1, 2017]
CCH 2017c, Casimaty v FC of T 97 ATC 5135, Available online from https://www.iknow.cch.com.au/document/atagUio539843sl16716249/casimaty-v-fc-of-t-federal-court-of-australia-10-december-1997[Accessed May 1, 2017]
CCH 2017d, Crow v FC of T 88 ATC 4620, Available online from https://www.iknow.cch.com.au/document/atagUio545564sl16800674/crow-v-federal-commissioner-of-taxation-federal-court-of-australia-17-august-1988 [Accessed May 1, 2017]
CCH 2017e, McCurry & Anor v FC of T 98 ATC 4487, Available online from https://www.iknow.cch.com.au/document/atagUio539084sl16707683/mccurry-anor-v-fc-of-t-federal-court-of-australia-15-may-1998 [Accessed May 1, 2017]
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