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LAW 6001 Taxation Law Case Study

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  • Course Code: LAW 6001
  • University: Laureate International Universities
  • Country: United States

Question:

Specific learning outcomes
 
a) Explain ethical and professional responsibilities of tax agents under the including obligations under the Tax Agent Services Act 2009 (TASA) and Tax Agent Services Regulations 2009 (TASR).
 
b) Interpret and apply selected sections of the Income Tax Assessment Act ITAA36 and ITAA 97.
 
c) Identify and analyse the tax treatment of various types of income and deductions.
 
d) Effectively apply taxation law in determining tax outcomes in variousscenarios and structures.

Question 1
 
With reference to the UK Australia Double Tax Agreement explain:
 
a) the meaning of the term Permanent Establishment.
b) how the business profits of an enterprise incorporated in the UK are taxed in Australia.
c) whether contracts made through an independent agent would result in a Permanent Establishment
 
Question 2
 
Andrew McSwington is a highly regarded MLB prospect born in Adelaide. During the Australian off season he first travelled to Mexico to play in the Fall League for 2 months and then went to America to play in the minor leagues for 15 months. He signs the contract stipulating he is to be paid $145 000 for the 15 months in Adelaide and joins the minor league team shortly after. The contract states he is to be paid monthly into a bank account in the Turks and Caicos Islands Andrew decides to purchase a home in America to use it as a base during the home and away series and rent it out for the remainder of the income year when he returns to Australia.
 
Discuss with reference to relevant case law:
 
1. Whether Andrew a resident of Australia for tax purposes
2. The source of the $145 000 paid for his baseball skills
3. Whether he is liable for taxation in Australia on the $145000 for his baseball skills
4. Whether Andrew is liable for tax on the rental income received from America during the balance of the year
 
Question 3
 
What is the “first strand” of the decision in FC of T v The Myer Emporium Ltd 87 ATC 4363? Did the courts apply the first strand in Westfield Ltd v FC of T 91 ATC 4234 ? Compare and contrast the decisions in FCT v Myer and FCT v Westfield and suggest an explanation for the difference in the Court’s decisions. Comment on whether the decision support the distinctions made between income and capital in the Australian taxation system.
 
Question 4
 
a) With reference to Softwood Pulp and Paper v FCT 1976 explain whether a deductionn is available for interest paid on a loan during the preparatory stages of a business.
 
b) With reference to Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47 explain the importance of the ‘incidental and relevant test” in determining whether interest paid on loans in deductible.
 
c) With reference to FC of T v. Brown 99 ATC 4600; (1999) 43 ATR 1 explain whether interest paid on loans can be deductible after business activities have stopped
 
d) Comment, with reference to the Tax Agent Code of Conduct, on the role the tax advisor has in ensuring their client’s compliance with all relevant taxation laws, particularly in terms of interest deductions after business activities has ceased.
 
 

Answer:

Answer to question 1: 

Answer to A:

A permanent establishment refers to the fixed place of business that usually results in increase income for the value added liability of tax in a specific jurisdiction (Sadiq et al. 2013). The concept of permanent establishment explains that the profit of a company of one contracting state is considered for taxation purpose in other state.

Answer to B: 

Profits derived by the company of a contracting nations would be considered taxable only in that state except when the company is performing the business in other contracting nations through the permanent establishment that is located in the other nations. If the company performs the business in such manner, profits derived by the company would be considered taxable in other state but only to that extent that is attributable to the permanent establishment (Coleman et al. 2013). The UK and Australia “Double Taxation Agreement” explains that profits made by a company which is incorporated in UK would be liable to taxation in Australia based on the company tax rate of 30%.

Answer to C: 

According to the article 5 (5) of the OECD, an independent agent activity cannot be termed as Permanent establishment given the activities are performed in the ordinary business course (Coleman et al. 2013). The general view of OECD MC Article 5 (6) explains that on noticing that the independent agent is closing the contract which not in the ordinary course of business then such contracts may not give rise to permanent establishment of the enterprise with the exception that the independent agent possess the authority of concluding such contract. On noticing that the contract is mere preliminary or auxiliary in nature, then it may not lead to permanent establishment of enterprise.

 

Answer to question 2: 

Answer 1:

The current situation highlights that Andrew McSwington was born in Australia and during off season he went Mexico and America for playing minor leagues relatively for 2 and 15 months. Andrew returned to Adelaide later to sign contract for a period of fifteen months to play a minor league team. According to “Section 995-1 of the ITAA 1997” an individual is held as Australian resident if the person resides in Australia or consist of persons that have their domicile in Australia except when the commissioner is satisfied that the person’s permanent place of dwelling is outside Australia (Cao, Chapple and Sadiq 2014).

As per “Taxation ruling 98/17” an individual’s residency status forms the main source in ascertaining whether the person is liable for taxation under Australian tax structure. The “Domicile Act 1982” under the “Domicile Test” explains that a person acquires the domicile in the country of origin by birth (Basu 2016). The high court in “Applegate v F.C of T (1979)” held that permanent does not represents everlasting or forever and it is judged factually every year. The intended and the actual span of a person’s stay in overseas nation is a substantial factor. Additionally, the intention to return to Australia at some definite time or to travel to another nation.

Preceding from above explanation the duration and continuity of Andrew’s stay in Mexico and America was only for 2 and 15 months respectively. Andrew acquires the Domicile of his origin and the duration of 2 & 15 months is not a sufficient evidence of his intention to acquire a new domicile of his choice. Andrew stay in overseas nations was only transitory in nature. Andrew would be held as Australian resident for taxation purpose within the meaning of “section 995-1 of the ITAA 1997”.     

The 183 days explain that an individual that has been in Australia for a minimum of six months either continuously in breaks is held as Australian resident. Similarly, for Andrew he has been present in Australia for a period of six months under the 183 days test he would be held as the Australian resident.

The superannuation test is applicable to employees that are public servants or foreign diplomats that are living abroad. Similarly, for Andrew he is not eligible under the superannuation test and cannot be held Australian resident under this test.

As understood from the above stated test Andrew would have held as Australian resident since he has satisfied the criteria of Domicile and 183 days’ test.

Answer 2: 

The “taxation ruling 99/17” lay down the view of commissioner whether the benefits are received by a person from the involvement in sport is taxable under the ITAA 1997. Payment received by a sportsperson is taxable income given the income is ordinary meaning of the expression ordinary income. As per “subsection 6-5 (1) of the ITAA 1997” money received is taxable given the income is under the ordinary concept (Braithwaite 2017). The court of law in “Reuter v F.C. of T (1993)” explains that payments from sign-on fees is taxable (Tan, Braithwaite and Reinhart 2016). The case study provides that Andrew received $145,000 for agreeing to play for minor league in Adelaide. The source of $145,000 represents the commercial exploitation of skills which is used in pursuit of sporting excellence. Therefore, the sum of $145,000 amounts to revenue in nature that is received from carrying on of the business of participation in sports and are taxable income under section 6-5 of the ITAA 1997 as income from ordinary concepts.   

Answer 3: 

Tax liability for a person arises yearly.  As a matter of fact, the residency status of a person must be judged annually depending upon the circumstances that are applicable in a relevant income year under considerations. Andrew received a sum of $145,000 which is assessable under “section 6-5 of the ITAA 1997” as the commercial exploitation skills from sporting involvement (Woellner et al. 2016). The amount constitute revenue in nature that is received from conducting the business of sportsperson and taxable under ordinary concept.

Answer 4: 

An Australian resident is levied tax for income derived from all the sources. Andrew purchased a house in America and have rented out the property when he returned to Australia for the remaining part of year. Considering the verdict of full federal court in “Adelaide Fruit and Produce Exchange Co Ltd (1932)” income derived from rental properties constitute the overall amount of payment which is received by a person when the property is rented out (Robin 2017).

Similarly, in the situation of Andrew the amount received from the rental property in America constitute periodic receipts. The sum of rental income should be included into his tax returns and will be held liable for taxation as under “section 6-5 of the ITAA 1997” as ordinary income.

 

Answer to question 3: 

In “Myer Emporium Ltd v F.C of T (1987)” the taxpayer was the parent company that mainly performed the business of retail trade and property development. In March 1981 a loan of $80 million was made by the taxpayer to the subsidiary company for the time period of 7 years and charged interest at the rate of 12.5% annually. As it was intended, the taxpayer consigned to one finance company for the rights of receiving the interest that was payable over the rest of the loan period (Blakelock and King 2017). Based on the consignment considerations, a single sum of loan was paid to the taxpayer which totalled $45.37 million by the finance firm. The sum was calculated on the basis of the unpaid sum of interest was payable based on the discounted rate of 16% annually.

According to the commissioner of taxation the total sum of $45.37 million which was received by the taxpayer was assessable income for the year ended 30 June 1981. After making the appeal, the Supreme Court of Victoria and Australian Federal Court held that the value was non-assessable capital receipt.

A successful appeal bought by the commissioner to the Full High Court held stated that the value received stood income based on the ordinary concepts of “subsection 25 (1)” and profit derived from executing the profit deriving arrangement was taxable under the second limb of paragraph 26 (a).   

First Strand:

The first strand of “Myer Emporium Ltd v F.C of T (1987)” is related with income and profits obtained from transactions that are isolated in nature (Roe 2017). The foundations of first strand constitute proceeds from business having income character. Profit made by the taxpayer from isolated transaction is regarded as income based on condition that the purpose of entering such transaction was to make profit with the transaction carrying commercial business transaction.

In “Myer Emporium Ltd v F.C of T (1987)” three extensive proposition was submitted relating to the first strand where any profits or receipts from ordinary course of business represents income (Maley 2018). The decision by the Full High Court explained that profit derived from such transaction was income based on the first strand of the case. The decision of court stated that the profit was assessable as income under second limb of “Section 26 (a)”. 

The findings from the case reveals that the sum in issue was held as the profit originating from the transaction even though not inside the ordinary business course of taxpayer’s business. Findings from the case reveals that the motive for entering the transaction was to generate profit and was in the business course of taxpayer. The high court spoke regarding the profit or gains that was made in Myer’s case during the ordinary business course. The high court even stated that the business was performed with the view of investing in profit making scheme and the same was marked with the character of income.    

On the contrary, in “Westfield Ltd v FCT of T 91 ATC” in spite of making profit in the ordinary course of business it was regarded as income but did not followed the decision made in the case of “FC of T v Myer Emporium Ltd 87” where every amount of profit generated was taxable as income (Caratti et al. 2016). Explaining such proposition would eliminate the difference amid the income and profit that are capital in nature. The judgement of federal court explains that payment that are income based on the ordinary concept is considered chargeable under “section 25 (1)”. Additionally, no single or dominant purpose is necessary to enter into the profit making scheme. Whereas in “Westfield Ltd v FCT of T 91 ATC” the disposal of land was beyond the ordinary course of business for the taxpayer and amount was capital instead of income in nature.  

The disagreement overemphasizes the principle of Myer’s case. In “Westfield Ltd” case every business receipts cannot be held as having income character, even though it might appear opposing to the Act and simple impression of difference between capital and profit (Buenker 2018). The principle of Myer is applicable where the taxpayers intends to make profit and engage in selling of commercial transaction.

 

Answer to question 4:

Answer A: 

Expenses or losses which is preliminary in nature or before the commencement of the income deriving source or business is held as “not in the course of” and under general provision of “section 8-1 of the ITAA 1997” no deductions are allowed. Similarly, in “Softwood Pulp & Paper v F.C of T (1976)” feasibility expenses were incurred by the company and some other costs for understanding whether a new production mill can be set up (Oishi, Kushlev and Schimmack 2018). The commissioner of taxation stated that the expenses were preliminary to income producing scheme and no allowable deduction is allowable.

Answer B: 

The incidental and relevant test provides an explanation that for an expense to be allowed as deduction in the form of outgoings taking place in deriving assessable income, the expense should be incidental and relevant to that extent. According to judgement of commissioner in “Ronpibon Tin NL v FC of T (1949)” legal expenses will be considered as allowable deductions given the expenses are relevant or incidental in deriving the assessable income of taxpayer’s business (Frey and Feld 2018). To fall within the purview of subsection the expenses should be necessarily or sufficiently incurred in the event of loss or outgoing and should be in generation of any form of assessable income.

Preceding from above discussion interest on loans carries the necessary and sufficient instances of outgoing in deriving assessable income. Therefore, the interest on loans is an allowable deduction.

 

Answer C: 

Interest amount that is paid on loan taken for the purpose of making investment in the investing assets is allowed as deductible expenses up to a level that the expenses are incurred in producing assessable income. Expenses of post cessation nature might be allowed as deduction if the event of loss or outgoing is found in business activities which was carried on earlier for generating assessable income (Buenker 2018). Corresponding to the judgement in “FCT v Brown (1999)” the taxation commissioner held that interest will be allowed for deductions continuously despite the income generating source is not existing, however the interest that is referred must be for income generating activities.

Answer D: 

The tax agent is under obligation of ensuring that reasonable attention is paid in matters of taxation law while deducting the interest even though the business activities does not exist (Frey and Feld 2018). These are as follows;

  1. The duty of tax agent is to maintain the duty of care by keeping the written record of the expenses.
  2. The agent is under obligation of advising the client relating to rights and obligations under the taxation laws that is materially related to taxation services rendered by the agent.
  3. The agent of taxation is under obligation of acting in the best interest and lawfully advising clients for maintaining the ceased business records for a minimum time of five years.
 

References:

Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.

Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18.

Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Buenker, J.D., 2018. The Income Tax and the Progressive Era. Routledge.

Cao, R., Chapple, L.J. and Sadiq, K., 2014. Taxation determinations as de facto regulation: private equity exits in Australia. Australian Tax Review, 43(2), pp.118-141.

Caratti, S., Pinto, D., Scully, G. and Perrin, B., 2018. An analysis of the Tax Practitioners Board outsourcing exposure draft. Tax Specialist, 21(3), p.106.

Coleman, C., Hanegbi, R., Hart, G., Jogarajan, S., Krever, R., McLaren, J., Orbist, W. and Sadiq, K., 2013. Principles of taxation law. THE AUSTRALIAN TAFE TEACHER. 

Coleman, C., Hart, G., Bondfield, B., McLaren, J., Sadiq, K. and Ting, A., 2013. Australian Tax Analysis. Thomson Reuters.    

Frey, B.S. and Feld, L.P., 2018. Illegal, immoral, fattening or what?: How deterrence and responsive regulation shape tax morale. In Size, causes and consequences of the underground economy (pp. 27-50). Routledge.

Maley, M.N., 2018. Australian Taxation Office Guidance on the Diverted Profits Tax.

Oishi, S., Kushlev, K. and Schimmack, U., 2018. Progressive taxation, income inequality, and happiness. American Psychologist, 73(2), p.157.

Robin, H., 2017. Australian taxation law 2017. Oxford University Press.

Roe, A., 2017. The doctrine of sham in Australian taxation law. AUSTRALIAN TAX REVIEW, 46(2), pp.99-119.

Sadiq, K., Coleman, C., Hanegbi, R., Hart, G., Jogarajan, S., Krever, R., McLaren, J., Obst, W. and Ting, A., 2013. Principles of taxation law 2013. Thomson Reuters.

Tan, L.M., Braithwaite, V. and Reinhart, M., 2016. Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), pp.329-344.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.

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