Determining Tax Residency Status And Relevant Tax Treatment - Case Analysis

Issue

The main issue in the given case is to determine whether Kit is an Australian tax resident for the given income year and to comment on the relevant tax treatment on the received income during the tax year.

Rule

In order to compute the tax treatment on the derived income of an individual, it is essential to determine the tax residency status of that concerned individual. It is because, if the individual is Australian tax resident then the amount derived from both the sources (i.e. foreign sources, Australian sources) would be assessable for taxation. While, if the individual is a foreign tax resident, then the part of income derived from Australian sources only would be liable for taxation. Therefore, it is imperative to determine the tax residency (Barkoczy, 2016). The relevant subsection and tax rulings in this regards is Section 6 of ITAA, 1936 and TR98/17. There are primarily four tests that are highlighted in the TR 98/17, which determine the tax residency status of the concerned individual. These tests are known as residency tests and it is essential on the part of the taxpayer to pass at least one of the residency tests in order to be classified as Australian tax resident (Gilders et. al., 2015). A brief discussion about these residency tests are as highlighted below:

1. 183 days Test

This test is applied on the foreign residents and comprises two main essentials that must be fulfilled by the taxpayer in order to pass this test (Sadiq et. al., 2016).

• It is pivotal that the concerned taxpayer must reside in Australia for at least 183 days in a given tax year.
• Intention to make permanent abode in Australia in the future.

If the taxpayer fulfils both the conditions above, then the taxpayer is classified as Australian tax resident and his derived income from all the respective sources would be accountable for taxation under Australian tax law.

2. Domicile Test

This test is applied to those individuals who are Australia residents and staying in other countries in order to complete their professional duties or private commitments. It also comprises two main conditions that must be satiated by the taxpayer (Woellner, 2014).

• Taxpayer must have Australian domicile under the legal provisions of Domicile Act 1982.
• Permanent residence of the taxpayer must be located within Australia for the given assessment year as per the verdict given in Levene v. I.R.C. (1928) A.C. 2017 case.

If these two conditions are fully satisfied by the taxpayer then he/she would be considered as Australian tax resident and his received income would be liable for taxation. Further, there are some imperative aspects are highlighted in IT 2650, in regards to the determination of the location permanent residence of the taxpayer that are listed below (Coleman, 2011).

• The difference in the actual and intended period of stay in foreign land.
• Reasons or purposes of residing in other countries.
• Strength of personal or professional bonds on behalf of the taxpayer with Australia.
• Actions on taxpayer’s part that indicates the future plan or intention of taxpayer to reside in foreign land or in Australiaon permanent base.

These are the aspects that are considered on behalf of the tax commissioner, while arguing the tax residency status of the taxpayer through domicile test (Barkoczy, 2016)

3. Superannuation Test

This test is valid and applied for the taxpayers who are usually officers of Australian government and working outside Australia to fulfil their duties. It is pivotal that the taxpayer must participate in either Public Sector Superannuation Scheme or in Commonwealth Superannuation Scheme to be classified as Australian tax resident (Deutsch et. al., 2016).

4. Resides Test

There is no direct ruling or provisions are available, however, the verdicts of relevant case have been taken into consideration to determine the factors which determine residence. These factors are given below (Sadiq et. al., 2016).

• Frequency of visits, duration of dwell in other country would be vital aspects if that place is country of origin of the taxpayer.
• Purpose of visit to Australia
• Personal, social or professional bonds of taxpayer with Australia or with country of origin.
• Final aspect that would be considered if required is the nationality of the taxpayer. 

Rule

Application

1. 183 day Test

Kit does not pass this test because he did not stay in Australia for 183 days in the assessment year.

2. Resides Test

This is applied for foreign residents and would not be applicable for Kit who is an Australian PR.

3. Domicile Test

It is apparent that Kit has satisfied both the essentials of domicile test i.e.

• He is having Australian domicile as per the provisions of Domicile Act 1982.
• He has a permanent abode in Australia only

It has highlighted in the case that taxpayer Kit is having a Chilean citizenship. However, he is an Australian PR.  In order to complete his professional duties, he resides in an Indonesian oil rig. Moreover, he owns a house in Australia where his wife and children reside. Also he has a bank account located in Australia, where his salary is credited. It indicates that Kit is having strong relation with Australia. Moreover, on holidays he visits either South America, with his family or comes back to Australia. He has limited visits to his country of origin and does not have any future plan to migrate there. Therefore, it can be said that he has satisfied this test and would be recognised as Australian tax resident based on domicile test.

4. Superannuation Test

Kit is not an officer or employee of federal government who is working outside Australia. Hence, this test is not relevant for determination of the tax residency.

Conclusion

It can be concluded that Kit is an Australian tax resident for the given tax year because he has satisfied the essentials of domicile test. Therefore, his income derived from various source would be assessable for taxation under the rulings of Section 6-5 (2) of ITAA, 1997. As a result the foreign salary and dividend income would be assessable in Australia as these would constitute ordinary income as per Section 6-5 (Gilders et. al., 2015). 

1. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159

Any isolated transaction with the focus of generating profit would result in assessable income, which is taxable under Australian tax law. In this case, company had insufficient working capital but still purchased the land in the name of mining but they did not start mining and sold it to other leading mining company in the exchange of the share in other company. As a result, company received huge profits. It was argued on the part of the company that there was conversion of land capital asset to share capital asset and thus gains would not be termed as assessable income. The honourable court decided that the act of owning and selling of the land was with profit intention and thus, the proceeds would be assessable for income tax (Deutsch et. al., 2016). 

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

In this case, company operated coal mining on a particular land for years. After decades, when the land was completely exhausted in coal, company decided to sell the land. As the mine land could not be used in the present state thus, they commenced several necessary construction activities such as surface smoothing, roads, parks and installed other facilities. They invested a significant amount in the improvement process and it resulted in huge profits to the company from the sale.  It was claimed on behalf of the company that it was realisation of a capital asset. The court considered various aspects and claims of the company and stated that the liquidation of capital asset was realisation of capital asset and thus, the income would not be assessable for taxation under ordinary income concept (Jade, 2016).

Application

3. FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR

Three land development companies owned a beach side land that was earlier used for fishing purposes mainly for drying of fishing nets. After acquiring the land, companies started the subdivision and started selling them to different buyers. They also made respective alteration in the Article of Association of the company so as to alter the business of the company. It was claimed on behalf of the companies that they acquired a capital asset in the form of beach land which they realised by selling. However, court rejected the claim and ruled that the purpose behind the sale was to earn profit and same was reflected in the AOA alteration and thus, the proceeds would be termed as revenue receipts and assessable for taxation (CCh, 2016a).

4. Statham & Anor v FC of T 89 ATC 4070

Taxpayers Statham and Anor were doing farming on the acquired land and there was no intent on their part to liquidate the land in future. However, they got caught up in some financial crises and hence, the only viable option was to sell a portion of the land. Therefore, they made division on the land and sold it. Court took notice of the situation of the taxpayers and decided that the intention of sale was to overcome the financial crises and not to derive profit. Therefore, the earned receipts would be capital in nature and not assessable for taxation (CCh, 2016b).

5. Casimaty v FCof T 97 ATC 5135

Taxpayer Casimaty received a land as a gift from his father. He used the land for farming purpose but later on he sold a significant portion of the land. The reason behind the sale was loan burden and health issues and there was no plan of Casimaty to start business of land selling to derive profits. Therefore, it was stated on behalf of honourable court that the action of sale of land was not a business action and thus, would not to lead business income. Hence, the proceeds would not classify assessable income and thus, would not be taxed under tax law  (CCh, 2016c).

6.Moana Sand Pty Ltd v FC of T 88 ATC 4897

In this case, the sand enriched land was acquired by the company and after a period of time when sand deposits depleted, the company made subdivisions on the land and constructed various amenities with the intention of liquidating the same. Significant profits were obtained from the sale. The court ruled that the purpose of making divisions and amenities were of profit intention and hence, would not be classified as realisation of capital asset. Therefore, the profit would be categorised as business income and would be subject to tax (Barkoczy, 2016).

7. Crow v FC of T 88 ATC 4620

Taxpayer Crow owned a large sized farm land and commenced farming. However, soon he quit farming and made subdivisions on the land and started selling subdivided block as he received premium prices. He made total 51 blocks from 5 blocks and at different time intervals sold the blocks. It had been found by that the action of the taxpayer of subdividing the block and selling was repetitive in nature, which indicates business action. Further, he was no more involved in farming business and completely involved in land business. Therefore, court decided that income earned from the repetitive course of action of selling land with profit motive was business income and thus, would be ordinary in nature and liable for tax under Section 25(1), ITAA, 1936  (CCh, 2016d).

8: McCurry & Anor v FC of T 98 ATC 4487

Taxpayer McCurry and Anor issued loan from bank in order to construct the three townhouses on the acquired land. In the first year, they could not find any premium buyer and hence, townhouses were not sold by the taxpayers. Further, they started residing in one of the townhouse. After a year, the three townhouses were sold at premium prices and huge profit was received. The argument made by the taxpayers includes the facts that the selling of the townhouses was in the line of realisation of the capital asset and there was no profit motive. However, court overruled the argument and decided that the acquiring of land and construction of the townhouses was with profit motive. Moreover, they also searched for the premium buyer which indicates the purpose of deriving high returns and thus, the proceeds resulted from isolated transaction were held assessable for tax  (CCh, 2016e)

References

Barkoczy, S 2016, Foundation of Taxation Law 2016, 8^th eds., North Ryde: CCH Publications,

CCh 2016a, 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 April 17, 2017]

CCh 2016b, 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 April 17, 2017]

CCh 2016c, 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 April 17, 2017]

CCb 2016d, 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 April 17, 2017]

CCh 2016e, 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 April 17, 2017]

Coleman, C 2011, Australian Tax Analysis, 4^th eds., Sydney: Thomson Reuters (Professional) Australia

Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2016, Australian tax handbook 9th eds., Pymont:Thomson Reuters,

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2015, Understanding taxation law 2015, 7th eds.,  Sydney: LexisNexis/Butterworths

Jade 2016, 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 17, 2017]

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 9^th eds., Pymont: Thomson Reuters,

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