LAWS20060 Taxation Law Of Australia

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Course Code: LAWS20060
University: Central Queensland University
Country: Australia

Questions

1. Australian citizen and tech genius, Marty Goodson, set up “Planks Pty Ltd”, a tech business in Silicon Valley USA in 2012 developing new platforms for web designers and companies throughout the world. He incorporated the company in the USA and issued five shares to himself and five shares to five of his friends. His friends now reside in the US, Europe, Asia, Australia, and New Zealand. Each share was worth $100,000. Marty and his team used the $1,000,000 equity capital to develop a successful tech company in only a few years.

During the 2012/2013 financial year, Marty’s income was $100,000, and he did not return to Australia. During the 2013/2014 financial year, Marty’s income was $200,000 and he returned to Australia during the Christmas period for four weeks to spend time with his mother, father, and sister. His sister and her husband live in his residential home rent free. He met with his accountant to discuss the status of his three commercial investment properties in Brisbane, Sydney, and Melbourne. He also attended a friend’s birthday party and fell in love. During the 2014/2015 financial year, Marty’s income was $400,000 and he returned to Australia from the 1^st September to the 1^st April to spend time with his girlfriend. During the 2015/2016 financial year, Marty earned $100,000 before he returned to Australia permanently to marry the love of his life and start a family.

During the 2012/2013 financial year, Marty was the sole director and made all the management decisions for the company. The company made $1,000,000 profit. During the 2013/2014 financial year, the company expanded and the shareholders appointed a board of directors who all reside in the USA. However, it was widely assumed by the staff that Marty still made all the important decisions. The company made $10,000,000 profit. During the 2014/2015 financial year, Marty was appointed managing director. From 1^st September to the 1^st April, Marty made all his management decisions from Australia, and carried out all associated business activities such as signing contracts, and trading Platforms from Australia. The company made $25,000,000 profit. During the 2015/2016 financial year, Marty resigned as managing director, sold his shares to another tech company for $50,000,000, and returned to Australia a very rich man. The company made $50,000,000 profit.

Solve the following issues:

a. Is Marty an Australian resident for tax purposes? (5 marks)

b. Is Planks an Australian resident company for tax purposes? (5 marks)

c. If any, calculate the Australian tax liability relating to Marty’s employment income? (5 marks)

d. If any, calculate the Australian tax liability relating to Planks’ company profit? (5 marks)

2. Rommy bought a country property in rural New South Wales in 2000 for $500,000. Initially it was used as a weekend retreat and later as a weekend hobby farm producing a relatively small quantity of grapes which made a few crates of reserve quality wine.

Rommy ultimately drank 5 boxes throughout the year, gave 10 boxes away to friends, sold another 20 boxes at the local market on the one occasion he had a stall, and sold another 20 boxes on the side of the road outside his property with the assistance of an honesty box. Each bottle was worth $20. In 2015, Rommy subdivided his property and sold it for a total price of $1,500,000.

Solve the issue as to whether Rommy should include any financial amounts in his assessable income.

Answers

1: The present case study is associated with the assessment of the residential status of Marty as an individual and Planks Pty Ltd as a company. As per the Australian taxation, the first test of assessing the residential status of an a person is performing the Resides Test. If a person living in Australia will be regarded as the Australian inhabitant if the person satisfies the domicile test and 183 days test. From the existing case study it is understood that Marty in spite of being an Australian inhabitant is engaged in the development of web platform and designs for organisations across the world (Laidlaw et al., 2014). It is understood from the case study that to consider the residential status of Marty from the below stated test are as follows;

Domicile test:

The domicile test is performed to in order to determine that if an individual has permanent place of abode within Australia will be taken into the considerations as the Australian resident upon satisfying that if a person has a permanent place of abode outside Australia. As defined under the rulings of IT 2650 an individual living on temporarily or working outside of Australia and leaves Australia will not be considered as the Australian resident for the purpose of taxation during his or her stay outside Australia (Sharkey, 2015).

The summary of Domicile Test is stated below;

The original intention and length of stay outside Australia
Expressing intentions of coming back to Australia at a particular point of time
The establishment of home is out of Australia
The length and continuity of presence outside of Australia

It is found from the case study that Marty is an occupant of Australia and keeps his Australian residency even after being engaged in the creation of web designs in Australia. The domicile test states that the intention and original length of stay out of Australia for Marty is considered at the time of determining the residential status under the domicile test. In addition to this, the domicile test states that Marty on his return to Australia has expressed his intention of marrying his love to settle permanently in Australia with his wife. The duration along with the length of stay in Australia was two years ranging from 2012/13 and 2014/15. Nevertheless, Marty had returned to Australia in order to live permanently and will be considered as the Australian occupant for the purpose of taxation (Trakman, 2015).

The 183 days test:

As defined under the 183 days test if a person is, living in Australia for greater than half of the income year either continuously or with breaks will be considered as the occupant of Australia. The 183 days lays down that unless it is ascertained that an person had a permanent place of dwelling outside of Australia and the person does not had any such intentions of taking up the Australian residency (Sharkey, 2016). The assumptions are made below which are as follows;

It is understood from the case study that Marty did not lived in Australia spanning from 2012/13 and will not be regarded as the Australian resident for the period
In 2013/14 Marty only returned for Christmas and had spent four weeks with his family. Marty’s length of stay was short and could not be considered as the Australian resident concerning that period (Thampapillai, 2016).
Marty returned to Australian in 2014/15 for a period spanning from 1^stSeptember to 1^st April with the intention of spending time with his girlfriend. Marty length of stay consisted of seven months and was more than 183 days. Therefore, Marty under this circumstances will be considered as the Australian resident for the period spanning 1^st September to 1^st April and his income will taken into the considerations for taxation.
Marty again returned to Australia from 2015/16 so that he could marry his girlfriend and commence family. Thus, Marty effectively fulfils the 183 days criteria ranging from the period of 2015/16 and he would be declared an Australian resident for the given year (Thampapillai, 2014).

The above stated 183 days test successfully establishes that Marty is an Australian resident because he lived in Australia for more than 183 days. He further returned to Australia during 2015/16 in order to marry his girlfriend and decided to live permanently. As defined under the 183 days an individual will be considered to be an Australian resident unless it is found that his permanent place of domicile was out of Australia and the person had no intention of taking up the Australian residence (Barkoczy, 2016). Marty on his return to Australia has stated his intentions of living in Australia by taking up the Australian residency and he will regarded as the Australian resident.

Residential summary of Marty:

Taxable Period	Domicile Test	183 Day Test	Residential Status
2012-13	Did not had permanent place of domicile in Australia	Residing out of Australia	Non-Resident
2013/14	Did not had a permanent place of residency in Australia	Came back to Australia for 4 weeks	Non-Resident
1st September 2014 to 1^st April 2015	Had an impermanent place of abode outside Australia	An Australian inhabitant because he lived in Australia for more than six months or 183 days	Resident
2015/2016	Expressed his intention to live in Australia permanently	A permanent Australian occupant	Resident

B: To be considered as the Australia resident company, companies, corporate limited partnerships and trust must fulfil the relevant criteria in order to be regarded as the Australia resident (Ismer, & Jescheck 2017). From the existing case study, it is understood that Planks Pty Ltd, which is a technical business, located in Silicon Valley was incorporated in USA. To assess the residential status of Planks Pty Ltd it is understood that from the year 2012/13 Marty was the solitary director of the company and as per the residential test performed on Marty he will not be considered as the Australian resident since he had not returned to Australia. Therefore, Planks Pty Ltd cannot be regarded as the Australian resident company because no business proceedings took place from Australia. In the subsequent period 2013/14 Marty had returned to Australia merely for the span of four weeks and as per the residential test conducted Marty’s length of stay was considered to be short and all the decisions related to management was taken outside of Australia.

Furthermore, from the period of 2014/15 Marty on his stay in Australia ranging from 1^st September to 1^st April Marty took all the management decision from Australia. Therefore, Planks Pty Ltd will be considered as the Australian resident company for the purpose of tax. According to the taxation rulings of 2004/14W in order to determine the residency of company which is not incorporated or formed in Australia however carrying on the business in Australia or its central management is located in Australia then the company will be treated as the Australia resident company (Taylor & Richardson, 2013). Even though Planks Pty Ltd was not incorporated in Australia but Marty on being appointed as the director of the company from 1^st September to 1^st April took all the managerial decisions from Australia. Therefore, Planks Pty Ltd will be considered as the Australia resident company. Furthermore, the company had five shareholders and one of its shareholders lived in Australia which had voting power. Therefore on account of such circumstances Planks Pty Ltd will be treated as the Australian company (Evans et al., 2015).

Computation of Taxation for the year 2012/13
In the Books of Marty
Particulars	Amount ($)
Income from Employment	100000
Tax on taxable Income	33400
Medicare Levy	0
Total income tax Payable	33400

Computation of Taxation for the year 2013/14
In the Books of Marty
Particulars	Amount ($)
Income from Employment	20000
Tax on taxable Income	72000
Medicare Levy	0
Total income tax Payable	72000

Computation of Taxation for the year 2014/15
In the Books of Marty
Particulars	Amount ($)
Income from Employment	400000
Tax on taxable Income	153921
Medicare Levy	8000
Total income tax Payable	161921

Computation of Taxation for the year 2015/16
In the Books of Marty
Particulars	Amount ($)
Income from Employment	100000
Tax on taxable Income	24947
Medicare Levy	2000
Total income tax Payable	26947

Computation of Taxation for the year 2013/14
In the Books of Marty
Particulars	Amount
Base Income	1000000
Tax on Income (30%)	300000
Medicare Levy	0
Total tax Payable	300000

Computation of Taxation for the year 2014/15
In the Books of Marty
Particulars	Amount
Base Income	2500000
Tax on Income (30%)	750000
Medicare Levy	0
Total tax Payable	750000

2: Computation of Capital gains tax:

Computation of CGT of Rommy for the year 2015
Particulars	Amount ($)	Amount ($)
Sales Price of the property	1500000
Less: Cost of sales	0
Adjusted selling price		1500000
Purchase Price	500000
Add: Cost of purchase and Ownership	0
Adjusted purchase price of asset		500000
Capital gains / (loss)		1000000
CGT under old Regime
Indexed capital gains / (loss)		1000000
Tax payable under old regime (marginal tax rate * Indexation factor * capital gains)		472865

Assessable income:

At the time of carrying on the business activities income generated from the business undertakings will be considered for taxation. A person with an investment property used for building or renovating with the objective of generating profit will be considered for taxation (Cao et al., 2015). From the existing scenario, it is understood Rommy carried on the hobby of selling wine that was made from farming of grapes of small quantity at weekends. Rommy had sold 20 boxes in the local market and disposed another 20 boxes outside his property with the help of honesty box. It is worth mentioning that it is important to understand the difference amid the hobby and business with the objective of taxation and other purposes (Newman 2016).

From the following case study, it is evident that Rommy had regularly engaged in the activities of farming of grapes at weekends. The activities conducted by Rommy does not results in regular business activities however selling of wine made of grapes attracts liability of tax. Usually, while determining the taxable income a person is under the obligation to consider the gross amount of his earnings or proceeds derived from the ordinary course of business together with the profit (Saad, 2014). Earnings generated from the activities of farming of grapes and converting the same into wine of reserved quality is required to included into the assessable income of Rommy.

Assessment of capital gains:

Capital gains or capital loss, which is generated from the sale of assets, consists of the difference amid the purchase price and the selling price on its disposal (Lang, 2014). A person paying tax on their capital gains will be considered as the income tax and it will not be taken into the considerations as the separate tax despite being regarded as the capital gains tax. As evident from the following case study Rommy had bought the land in the year 2000 for $500,000 and the land was subdivided and disposed for a sum of $1,500,000 which constituted in the form of capital gains from such sales. As stated by the Australia taxation office, an asset, which is acquired on or after 20 September, will be treated as the capital gains tax if not specifically excluded (Woellner et al., 2013). As evident from the case study, it is understood that Rommy had bought the land in the year 2000 and capital gains generated from the sale of property represents capital gains tax.

Profit generated from the disposal of subdivided land may be treated as the capital gains or ordinary income depending upon the circumstances. If a person subdivides the block of land and sales the land with the purpose of generating profit from the sale of land leads to capital gains and will be treated as capital gains tax (Mishra & Anwar, 2017). As noticed from the case study the sale of subdivided land and earnings in the form of profit will be treated as the ordinary income and will be treated for tax assessment. According to the case study, the objective of Rommy on entering the transaction to generate profit from the disposal of subdivided land will be treated as the capital gains and will be considered for assessment.

Reference list:

Barkoczy, S. (2016). Foundations of Taxation Law 2016. OUP Catalogue.

Buckley, C. and Jackson, T., 2014. Dividend access shares: The ATO clarifies its position. Taxation in Australia, 49(2), p.74.

Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., ... & Wende, S. (2015). Understanding the economy-wide efficiency and incidence of major Australian taxes. Treasury WP, 1.

Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: an alternative way forward.

Ismer, R., & Jescheck, C. (2017). The Substantive Scope of Tax Treaties in a Post-BEPS World: Article 2 OECD MC (Taxes Covered) and the Rise of New Taxes. Intertax, 45(5), 382-390.

Laidlaw, M. A. S., Zahran, S., Pingitore, N., Clague, J., Devlin, G., & Taylor, M. P. (2014). Identification of lead sources in residential environments: Sydney Australia. Environmental Pollution, 184, 238-246.

Lam, D. and Whitney, A., 2016. Taxation and property: Practical aspects of the new foreign resident CGT witholding tax. LSJ: Law Society of NSW Journal, (21), p.84.

Lang, M. (2014). Introduction to the law of double taxation conventions. Linde Verlag GmbH.

Mishra, A. V., and Anwar, S. 2017. Foreign portfolio equity holdings and capital gains taxation. International Review of Financial Analysis, 51, 54-68.

Newman, S., 2016. The new CGT withholding regime: More than meets the eye. Proctor, The, 36(5), p.18.

Saad, N. (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, 1069-1075.

Sharkey, N. (2015). Coming to Australia: Cross border and Australian income tax complexities with a focus on dual residence and DTAs and those from China, Singapore and Hong Kong-Part 1. Brief, 42(10), 10.

Sharkey, N. (2016). Departing Australia: a complex tax situation with possible benefits and hidden traps. Tax Specialist, 19(5), 180.

Taylor, G., & Richardson, G. (2013). The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), 12-25.

Thampapillai, D. J. (2016). Foreign Employment Income and Double Tax Avoidance Agreement: Australia's Possible Governance Failure. Browser Download This Paper.

Thampapillai, J. (2014). The Income Tax Assessment Act 1936-S23AG and Double Tax Avoidance Agreements.

Trakman, L. (2015). Domicile of choice in English law: an Achilles heel?. Journal of Private International Law, 11(2), 317-343.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2013). Australian taxation law. CCH Australia.

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LAWS20060 Taxation Law Of Australia

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