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Integration Of Corporate And Shareholder Taxes

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Question:

Discuss about the Integration of Corporate and Shareholder Taxes.
 
 

Answer:

Introduction:

In the present scenario, Kit is residing in Australia, but he spends most of the time in an oil rig of Indonesia; where he was recruited for his job in Australia. He is living in Australia from last four years with him family in his own house. The salary is remunerated directly into the bank account with Westpac Bank Ltd. in Australia. All the investment comprising dividend income remains in Chile. One month off is provided to him after every two months, and after these occasions, he meets with his family members either in Australia or at some other place for holidays.

The primary test which is conducted for tax residency is known as a resident test. In case  a person resides in Australia the same is considered as resident for tax purpose,and there is no need to apply another resident test. In case the person does not satisfy the resident test, he or she is still considered as Australian resident if any one of the three situations is satisfied by him. The prescribed three situations are as follows:

  • Domicile Test: In case the person in domicile, i.e. your permanent home is in Australia, and the taxation officers are satisfied that your permanent place of abode in not Australia. Thus, it can be said that the onus of proof remains on those who assert a new domicile choice and appeals that their domicile of origin is lost (Graetz, and Warren, 2016).
  • 183 Day Test: In case the person is actually present in Australia for more than half of financial year without any break or with breaks than it is assumed that you have a constructive residential house in Australia. The same is deemed to be assumed unless it can be proved that the person is usually outside Australia and having no purpose of taking up residence in Australia.
  • Superannuation Test: The test assures that the Australian government employees employed outside Australia are treated as a resident for the taxation purpose (Harding, 2013).

An explanation is also provided by the Commissioner relating to residency provisions that the length of time for which a person is present in Australia does not itself ascertain whether he or she is resident or not. Though, importance is given to continuity or habit consistent with someone residing who resides in Australia. The other factors which are considered are:

  • Family and Employment/ business ties.
  • Social and living arrangements
  • Purpose of presence
  • Social and living arrangements (Tax residency for individuals – the domicile test. 2013/)

Analysis of the case

In the present case as Kit has a permanent house is Australia, according to the facts provided and his family is living there; he will be deemed to be a resident of Australian for taxation purpose. Thus if a person is deemed to be a resident of Australia has to provide details regarding his income from all the resources and has to pay tax liability on the same.Income earned through all direct and indirect sources is included in assessable income, and the tax is payable on same. However, Kit is an Australian resident according to provisions available in Domicile test as well as in accordance with the explanation provided by the commissioner.

Taxation of Salary and Investment Income

Salary is taxable as per provision of Sec 6-5 ITAA 1997. The present tax-free threshold for resident individuals in $18200 and the same will be available to Kit. The other provisions of specified sections will also apply accordingly.The dividend received on share portfolio will be taxed in accordance with provisions available in Section 6-10 of ITAA 1997 (Dividend Income, 2017). As per these provisions usually, a dividend is paid as money or credited with bonus shares. In case the company pays or credits the dividend the same would be applicable for franking tax offset.According to Steen and Peel, (2015), the same is also called imputation credit, and it is to be appropriately shown on the return for the purpose of availing this benefit. In case the same information is not in accordance with the amount declared on the return of taxpayer. It will prescribe the details with comparison with information which the department is having,and rectification is done accordingly.

Explanation of Outcome: The high court concluded in specified case that the nature of gain produced from a business i.e. whether it is of income nature of relating to capital character it is majorly dependable on the character of existing transaction and business and relationship between the transactions through which gains have been produced (ATO Interpretative Decision. 2014). The same provisions were pertained for ascertaining conclusion in the case of AA Finance Ltd v CIR (1994)16 NZTC 11383.

 

Explanation of Outcome: The decision which was provided through this case was that the authority for the ordinary realisation of an asset in an enterprising way was on capital account. The taxpayer was having the intention of availing maximum benefit as the available land was no more suitable for original business, and thus he was selling off the same. Thus the court provided a decision in favour of the taxpayer as he was not engaged in the business of developing and selling, but he was merely disposing of the capital asset in best possible manner.

Explanation of Outcome: It was unanimously held by High Court that the steps were taken by the taxpayer were for more that advantageous realisation of a capital asset; thus the activities deemed to be assumed as constituted a business of land and development (Taxation Ruling,2014) . The same gave rise to assessable income. The decision was taken by considering three issues:

  • Whether business of land and development exist (ordinary usage vs.concept of income)
  • Application of section 26a and its relationship with section 25 of ITAA97

Explanation of Outcome: It was concluded in the above case that for the purpose of satisfying taxable purpose requirement it is necessary that the project of the taxpayer must be an income- producing activity (Capital Gains Tax-Subdivision. 2015). In the present scenario, the project of the taxpayer was subdividing and trading capital asset which was available as capital land.  Thus, according to the provision of paragraph 36 of Taxation ruling, it was concluded by the court that gain realised on investment will be not treated as income even in the case the individual present the same recognition in an enterprise way. In the present case as provision available in paragraph 40-840 (2) (c) of Income Tax Assessment Act 1997 were not satisfied; therefore no transactions are being conceded with a profitable objective in accordance with provisions of Subdivision 40-I of ITAA 1997.

Explanation of Outcome: It was decided in above case by Federal Court that the profit from the subdivision and sale of property proportions is not assessable under the provision of section 25 (1) as well as 25A of ITAA 1997.It was argued by the taxpayer that subdivision and trading of property proportions, thus the same is the realisation of the capital asset and not a transaction of profitable business (Capital Gains Tax-Subdivision., 2015). Further,in the present, the profit which is derived is not from the conduct of the business of selling and subdividing land mere represent the realisation of the capital asset.

Explanation of Outcome: In above-specified case, the income was received by the taxpayer as a result of isolated transaction i.e. acquired land for working and sold the sand subsequently. Thus the income was treated as ordinary income by the High Court in accordance with provisions of section 25 (1) of ITAA 97. The profit arise from the resumption of land was treated as assessable profit as the ultimate purpose of the taxpayer was to make a profit and the same was assessable under section 26 (a).

Explanation of Outcome: The decision in the present case was distinguished on the basis that the property was used as a mine for a longer period in comparison to farming. Thus the proceeds received from the sale of subdivided land which was acquired for the purpose of farming were treated as a realisation of a capital asset.

Explanation of Outcome: It was concluded by Federal Court in above case that the sale of land was assessable under section 25(1) (Taxation Ruling, 2014). In the present case, the person enters into a business which was for the purpose of profit making. Thus as the property was attained with the objective of receiving profit the venture is not regarded as investment and profit from the same is treated as income for the purpose of section 25 (1).

 

References

Steen, A. and Peel, V., 2015. Economic and Social Consequences of Changing Taxation Arrangements to Working Holiday Makers. J. Austl. Tax'n, 17.Pp.225-230.

Harding, M., 2013. Taxation of dividend, interest, and capital gain income.

Graetz, M.J. and Warren, A.C., 2016. Integration of Corporate and Shareholder Taxes.

Dividend Income. 2017. [Online]. Available through <https://www.ato.gov.au/individuals/data-matching-letters/types-of-letters/dividend-income/>. [Accessed on 2nd May 2017]

Tax residency for individuals – the domicile test. 2013. [Online]. Available through <https://talktoataxpert.wordpress.com/2013/03/10/tax-resdidency-for-individuals-the-domicile-test/>. [Accessed on 2nd May 2017]

ATO Interpretative Decision. 2014. [Online]. Available through <https://law.ato.gov.au/atolaw/view.htm?docid=aid/aid2002483/>. [Accessed on 2nd May 2017]

Taxation Ruling. 2014. [Online]. Available through < https://law.ato.gov.au/atolaw/view.htmldocid=TXR/TR923/NAT/ATO/00001>. [Accessed on 2nd May 2017]

Capital Gains Tax-Subdivision. 2015. [Online]. Available through < https://austaxpbr.com.au/document/PBR>. [Accessed on 2nd May 2017]

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