Case Study 1
The issue in the present case is to comment on the tax residency status of taxpayer Kit and the tax accessibility of the received income under the highlights of Australian tax law.
The essential aspects regarding the taxpayer Kit are listed below:
- Kit is a Chilean citizen and also PR of Australia.
- He has been working and residing at an oil rig based off the coast of Indonesia due to his job commitment with a US based company.
- He has a house in Australia in which his wife and two children are staying.
- He and his wife have a joint bank account in Australian bank and in the same bank he receives his salary.
It is imperative to decide the tax residency of the taxpayer for the given tax assessment year because the tax treatment on the received income depends on the tax residency status. Residents who are classified as foreign resident are not responsible to pay tax on the income derived from other countries even though the income received from the sources located in Australian are liable for taxation (s. 6-5(3)) (Woellner, 2014). Further, when taxpayer is classified as Australian tax resident then the income received either from foreign sources or from domestic sources would be accountable for taxation under Australian tax law (s. 6-5(2)) (Gilders et. al., 2016).
According to the s. 6(1), ITAA 1936, there are mainly four tests that are applied to check the tax residency of the taxpayer and same has been reflected in TR 98/17. Domicile test, 183 days test, resides test and superannuation test are the four tests which are applied to the taxpayer to check the tax residency. It is pivotal to note that if the taxpayer has successfully satisfied the essentials of any of the above highlighted four tests, then he/she would be classified Australian resident for taxation purpose for the respective income tax year (Barkoczy, 2016).
Description and Application
A person who satisfies the essentials of this test would be considered Australian tax resident, irrespective of the aspect that he/she is staying in other country for any particular commitment. These essentials are furnished below (Deutsch et. al., 2016).
- A taxpayer who has permanent abode in Australia for the given assessment year (IT 2650)
- Possesses domicile of Australia as per the provisions of Domicile Act 1982.
A person who fails to complete any of the above essential condition would not be granted the status of Australian tax resident.
In the present case, it is apparent that Kit is a permanent resident of Australia even though he has Chilean citizenship. Further, he has a house in Australia where before his current job he used to stay with his family. However, he has job commitment for which he has to stay at the coast of Indonesia in an oil rig. From every three months of job, Kit takes leaves and visits his family in Australia or goes out to holidays with them to South America. He also has domicile of Australia. Therefore, it can be believed that he is an Australian tax resident because he satisfied the essentials of domicile test.
There is no specific statute that outlines the contours of the word residence in Australian legal context. Hence, the judgements of relevant case laws are the factors which are used to check the status of tax residency of taxpayer. Further, the relative factors that are checked by the tax commissioner are duration of stay in Australia and in foreign land, purpose, duration of abode in other countries, presence of any private or professional tie with Australia or with foreign country and intention to settle in other country are vital factors. Social arrangements made by taxpayers with in Australia are also imperative in this test (Gilders et. al., 2016).
Kit is bound through professional tie to stay in other country. However, he has strong personal ties in Australia (his wife and children reside) and also he has made frequent visit to Australia in every three months. He has an account in Australian bank and received the salary on the same account. Therefore, it can be concluded that main reason to stay in foreign land is due to professional tie and his family also resided in Australia only. There was no plan of Kit to reside in other place rather than Australia. Hence, Kit is considered to be an Australian tax resident based on resides test.
183 day Test
It is important that taxpayer must stay in Australia for 183 days or more and must have intention to reside in Australia permanently in near future (Sadiq et al., 2016). If resident has resided in Australia for minimum 183 days in one tax year and have strong intent to make permanent dwell within Australian land in future, then the foreign resident is considered Australian tax resident.
As per the given information, it is apparent that Kit does not stay in Australia for 183 days and thus, he does not pass this test.
Superannuation test is deployed for taxpayers who are serving for Australian government and residing in other country to complete employment duties. Moreover, it is imperative that taxpayer must contribute in superannuation fund scheme under superannuation test (Woellner, 2014).
This test fails to check the tax residency status because Kit is not an employee of Australian government.
On the basis of the above discussion it is concluded that Kit successfully passes the domicile and resides tests, and would be classified as Australian tax resident. The income of Kit from salary or from other investment would be accountable for taxation under tax law in line with s. 6-5(2) and would include foreign salary along with dividends on foreign shares (Barkozcy, 2016).
Case Study 2
Case I - Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159
According to the clauses of Australian tax law, the proceeds resulting via isolated transaction enacted with profit motive is classified as assessable income. Californian Copper Syndicate purchased a copper mine. They also took the licence for mining from Australian Government. However, the company was aware that they were short on requisite working capital and cannot even commence the mining on the land. Later on, company transferred the ownership of land to other company against the shares. The shares resulted in sizable gains to the company and it was claimed by the company that the transfer of the ownership was selling of a capital asset resulting in tax exempt capital proceeds. The court rejected the claim and ruled that company purchased the land in order to maximize the earning by selling it to other company and not to conduct the copper mining. Therefore, the income from the shares was classified as assessable income (Gilders et. al., 2016).
Case II - Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188
Company purchased a land for coal mining which they continued to use for many decades. Later on, it was found that no mining is possible because the land got exhausted in coal. In order to utilize the land area, company made essential developments on the land such as buildings, parks, roads, hospital, schools church, bus and railway stand and sold it. Company received sizable profit from the sale. Tax Commissioner decided that the land development on behalf of the company was purely business activity and thus, the profit is assessable. Company had taken the decision of tax commissioner to court and requested that the land was primarily acquired for mining that was carried for decades and when the land was exhausted in coal, then only the land development had started to realise the land capital asset. Court accepted the claim and decided that the act of transformation of exhausted mine land to residential place was with the intention of realisation of asset and therefore, the profit was not classified as assessable income (Jade, 2017).
Case III - FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR
Income received through business course of action is considered as assessable income. In this case, a beach land was purchased by the companies. The business of the companies was land development and selling and same was performed on beach side land. To facilitate the same, the AOA of the company was modified. The companies stated that as the purchased beach land was initially used for fishing and they purchased a capital asset and hence, proceeds cannot result in assessable income. Court overruled the claim of the companies and decided that the beach land was purchased for making higher returns. Further, they made value added developments on the land to increase the market worth and modification in AOA that reflected business action of the companies. Hence, the income was categorised as assessable income (CCH, 2017a).
Case IV - Statham & Anor v FC of T 89 ATC 4070
Taxpayers purchased a land mainly for farming and same had been operated for many years. There was no future plan of taxpayers to use the land for land trading business to earn profits. However, they had to sell a large section of the land because they needed fund to discharge the debt. It was requested by taxpayers that sale of land was to discharge the loan and not to make profits. Court considered the position of taxpayers and ruled that the action of sale was not a business deed. Hence, the receipts would not be classified as assessable income (CCH, 2017b).
Case V- Casimaty v FC of T 97 ATC 5135
A large sized farm land was gifted to Casimaty mainly for agriculture. There was no future plan of Casimaty to start a new business or to sell the land. Despite this intention, he made subdivision on land and sold a large part because he had issued loan from bank and he had to pay the interest amount. Therefore, he chose to sell the part of land because it was the only way to create incremental to get out of the debt trap. Hence, it was decided by court that the sale of part of the land was to pay the interest amount and there was no plan of taxpayer to commence the business of land trading. Therefore, the receipts would be recognized as capital receipts not assessable income (CCH, 2017c).
Case VI - Moana Sand Pty Ltd v FCof T 88 ATC 4897
Company had liquidated the land which was earlier used for sand extraction. In order to receive higher returns, company made essential value addition installations such as water, park, public facility and so forth. The company claimed that the profit earned from the sale was mere realisation of land capital asset. However, court rejected the claim and announced that the act of value addition installation was to increase the profits and thus, the derived receipt would be revenue receipts and hence assessable income (Barkoczy, 2016).
Case VII -Crow v FC of T 88 ATC 4620
Crow subdivided a land which was previously used for agriculture. He divided the land into small sized block and sold to customers directly. He quit his agriculture business and sold only land blocks to the premium buyers. Taxpayer claimed that land selling was realisation of asset. However, court discarded the claim and decided that the activity of selling land via systematic and repetitive subdivision is a business action. Moreover, he searched for the premium seller and made the subdivision based on the demand that indicates the business perspective of taxpayer. Therefore, the income was classified as assessable income (CCH, 2017d).
Case VIII - McCurry & Anor v FC of T 98 ATC 4487
In this case, taxpayers purchased a land on which an old house was constructed. They did not have sufficient funds to renovate the house and thus, took the loan from bank. From this amount, three designer houses were constructed on the land and a part of amount was utilized for the advertisement for the houses. After a year, all the three houses were liquidated by taxpayers. A significant profit was earned from the houses. It was announced on behalf of the court that the prime intention of taxpayers was to make high returns. In order to maximize the returns they also invested in advertisement. Therefore, the income would be revenue receipts and termed as assessable income (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 April 20, 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 April 20, 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 April 20, 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 April 20, 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 April 20, 2017]
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 2016, Understanding taxation law 2016, 8th eds., 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]
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 9th eds., Pymont: Thomson Reuters,
Woellner, R 2014, Australian taxation law 2014, 8th eds., North Ryde: CCH Australia,
Relevant Law & Rulings
Income Tax Assessment Act 1997
Income Tax Assessment Act 1936
Taxation Ruling TR 98/17
Taxation Ruling IT 2650