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).
Discuss whether Kit is a resident of Australia and how his salary and investment income would be taxed.
Explanations of the respective outcomes reached by the courts in the following cases which all involving sales of land:
I. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159
II. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188
III. FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR
IV. Statham & Anor v FC of T 89 ATC 4070
V. Casimaty v FC of T 97 ATC 5135
VI. Moana Sand Pty Ltd v FC of T 88 ATC 4897
VII. Crow v FC of T 88 ATC 4620
VIII. McCurry & Anor v FC of T 98 ATC 4487
Case study 1: Residence and source
In the given case kit has permanent resident of the Australia and also retain his Chilean citizenship as he was born in Chile. He spent most of the time in Indonesia on the oil rig for the United States Company and entered into the contract for the same in Australia.
In the given case the dual residency applies to the earning of the Kit and is considered as resident of Australia and his global income whether earned from Australia or investment made in Chile is taxable in Australia. Also he was recruited for the current role in Australia and enters into the contract in Australia thus his income is liable for taxation in Australia.
The issue of the residency is pretty much complicated and highly depends over the circumstances and failure to address the same will incredibly be the expensive mistake. The Kit will be consider residential of Australia if he resides in Australia within the ordinary meaning of the word reside and is pretty much different from nationality and domicile. Although the Kit was mostly living outside Australia and visited the country as a regular order of his life but his income will be liable for taxation in Australia. As per the guideline provided by ATO the individual who goes temporarily and do not set the permanent home in other country may continue to be treated as an Australian residence for the purpose of taxation. Also the person who is migrates to Australia and intent to reside here permanently is considered as resident for the purpose from date of the arrival.
To identify that the individual is tax resident or not comes under the taxation liability of ATO. There are four test of residency containing within the definition of the resident in sub section 6(1) of the income tax assessment act 1996 and the individual fulfilling any of the below liability is liable for tax.
Residency as per ordinary concept- The test helps in identifying that the individual person residing in Australia is the question of fact and depends over the circumstance of each case. As per the regulation the reason for the person absence from the Australia due to job doesn’t support the claim that the person is not resident thus kit consider resident. Also the Kit was maintaining the personal effect in Australia as he has purchased home three year ago in Australia and his salary is also paid directly in his account. Also the individual is considered as resident if he acquires any assets and bank account is maintained in Australia and country of origin. Kit is receiving whole of is salary in Australia except earning from investment in Chile and is holding the property in Australia thus is considered resident and his income is liable for taxation in Australia.
Domicile test – kit is considered as the residential of Austria as per domicile test unless the commissioner is satisfied with the condition that his permanent place of stay is from outside Australia. As specified in domicile act 1982 an individual is considered domicile in Australia if he intend to make his or her home indefinitely in Australia (ATO, 2016). The rule in relation to the domicile is discussed under Taxation ruling IT 2650 which specify condition under which individual is considered domicile. The domicile means you migrate to the country other than that where you were born and adopt the citizenship of the country by your choice. Kit has adopted citizenship of Australia and is receiving major part of his earning in Australia thus is considered resident of Australia and his income is liable to taxation in Australia.
Case study 2: ordinary income
183 days test-As specified in the condition the person who is in Australia for more than 183 days continuously or intermittently in the tax year is considered as resident of Australia. This rule applies unless the commissioner is satisfied that the permanent resident of the individual is outside Australia and is not intending to take up residency (ATO, 2016). In the given case kit was spending major of his time at the coast of Indonesia but was meeting his family either in Australia or Chile where his parents reside as he was offered one month leave after every three month. The maximum possible stay of Kit in Australia could of 90 days so he doesn’t meet the condition specified in 183 days test.
Superannuation test – For the purpose of identifying the residence status of the individual the statutory test is the alternative to the alternative test of residency. As per the test the individual is considered when they do not in any way reside in Australia in the ordinary sense (ATO, 2016). The test specifies that the individual is deemed to be considered resident if they are eligible employee for the purpose of superannuation act 1976 and is the spouses or child under 16 year of age of such person. The act applies to the individual who is working for the Australian government overseas. This condition does not applies to kit as his he is working for united state company at the oil rig company situated at the coast of Indonesia.
So as per the residence test kit has met the condition specified as ordinary concept and domicile test thus is considered resident of Australia and his income received from working in Indonesia is liable for taxation in Australia. Although the income which the kit generates from the investment made in Chile is not received in Australia but is liable for taxation as he is considered as a resident of Australia. The kit is receiving his salary in the account which is maintained in Australia and he has enter into the contract of the employment in Australia thus is considered as residential of Australia and his income is liable for tax.
Kit is liable for deduction as the ATO specifies that the individual is liable for deduction if his income has been received in other country and he has already paid tax over it. As the dividend received by Kit from investment in Chile is taxable on source thus liable for deduction when the taxable income is calculated.
The case law was over the issues that is the taxpayer assessable for the profit arising from the sale of land and discusses about the realization of capital assets and whether or not the profit from sale of property to be exploited for its mineral will be considered as ordinary income or capital gain. The outcome from the case was that the profit arising from the sale of land was of the income nature. The case was that the two fold test applies at time of determining the nature of the income firstly the nature of the business and secondly the gain in question arose from as a result of business activity. The decision was framed that the capital available to the taxpayer indicates that it does not have sufficient fund to further mine the land and profit from the sale of land was the trading transaction rather being substitute of investment.
Determination of tax residency
The issue in the case was whether the profit is liable to tax as income from carrying a development of business land or as a profit arising from carrying out of a profit making undertaking and scheme. The case determines that the sales of the subdivided lots were the mere realization and indicates that to sale the land in the sub divided states require building of roads. The case also indicates that the size of the sub division was not the significant issue. The decision explains the fact that the substantial commercial exercise will be treated as realization of the capital assets (Jade, n.d.).
The judgment in the case was that the land was acquired as a security for original shareholder and not for profit making by sale or any business purpose. The profit will be regarded as an income for ordinary usage and is assessable as income tax within section 25 (1) of the act. The outcome of the case was that the profit from sale of the land will be assessable under the second limb of section 26(a) as a profit arising from carrying out or profit making undertaking and scheme. The taxpayer will be assessable on the profit from sale of land and is considered beyond realizing capital assets and the activities consist of carrying on of a business of land development. It is necessary to determine the purpose of taxpayer whether it was carrying on the business of development of land. The profit from the sales land determines in accordance with the general accounting principle is included in the taxpayer assessable income (Jade, n.d.).
The case study is over the issue that the sale of the subdivided lot constitutes assessable income under section 25(1) or 26(a). It is over determining the taxable income acquired and used for farming and whether the proceeds derived from carrying the business and represent the realization of the capital assets. The outcome of the case was that the proceeds which are received from sub-divided land is not considered as assessable income under section 25(1) or 26(a). The profit will be not liable for taxation not only because the co-workers decided not to persist the farming but sold the land for sub division. The way in which subdivided lots are sold indicates whether the taxpayer was not engaged in the profit making undertaking (ATO, 2005).
The case study is over the issue that whether the sale of the parts of the property assessable under either 25(1) or 26(a). The decision over the case was that the profit from the sale of the part of the property is not assessable under tax as the profit was derived from mere realization of the capital assets of the taxpayer (ATO, 2002).
The case study was over the issue that whether the isolated transaction is considered as income and taxable under section 25(1). It includes the transaction which are of the ordinary course of business of the taxpayer carrying the business and those which enters non- business taxpayer. The outcome of the case was that the taxpayer is assessable for taxation under 25(1) or 26(a) and include the amount received by the taxpayer in that year 370000$ less than the profit arising from the sale of land. The income will be assessable for tax as an ordinary concept although the amount was received by the taxpayer as the single and in sense isolated transaction.
This case law refers about the issue in which the taxpayer purchased a certain piece of land near the region of Hobart. He took heavy amount of loan to purchase the piece of land. He did farming activity on the land for the short duration and later on sold the land at considerable amount of profit while involving into the activity of land development. Here the scenario is quite different with the Scottish Australian Mining Company case as the tax payer knew at the earlier stage that he would be unable to pay the increasing debt incurred due to purchase of land, no sooner he has to get himself involved in the land development activity. The court favoured the contention of ATO in the current case law and stated that the taxpayer intention of getting himself involved in the activity of land development was clear at the time of purchase of land, so it shall be treated as a normal income earned in the ordinary course of business (ATO, 2001).
This case law refers to the situation where in assesse in the year 1986 purchased a certain piece of land while taking a bank loan. The assesse constructed three units on that with prime motive to ascertain profit out of it while selling them. Even after making various efforts the taxpayer is not succeeded in selling out those units. The taxpayer then utilised it for its own residential purpose for some time and then later on transferred those units while later on selling them to the external parties. The department contended it as income earned in the ordinary course of business. The court of law held the decision in favour of the ATO on the ground that the prime motive of the taxpayer was to construct the units and earn profit; mere utilising the units for some period will not change the nature of the income.
ATO, 2001. ATO Interpretative Decision ATO ID 2001/55 (Withdrawn). [Online] Available at: https://www.ato.gov.au/law/view/document?docid=AID/AID200155/00001 [Accessed 3 May 2017].
ATO, 2002. ATO Interpretative Decision ATO ID 2002/273 (Withdrawn). [Online] Available at: https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2002273/00001 [Accessed 3 May 2017].
ATO, 2005. ATO Interpretative Decision ATO ID 2005/157. [Online] Available at: https://www.ato.gov.au/law/view/document?docid=AID/AID2005157/00001 [Accessed 3 May 2017].
ATO, 2016. Residency tests. [Online] Available at: https://www.ato.gov.au/individuals/international-tax-for-individuals/work-out-your-tax-residency/residency-tests/ [Accessed 3 May 2017].
Jade, n.d. Federal Commissioner of Taxation v Whitfords Beach Pty Ltd. [Online] Available at: https://jade.io/j/?a=outline&id=67040 [Accessed 3 May 2017].
Jade, n.d. Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation. [Online] Available at: https://jade.io/j/?a=outline&id=64663 [Accessed 3 May 2017].
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