UK-Australia Double Tax Agreement, MLB Prospect Andrew McSwington

Question 1

With reference to the UK Australia Double Tax Agreement explain:

1. the meaning of the term Permanent Establishment.
2. how the business profits of an enterprise incorporated in the UK are taxed in Australia.
3. whether contracts made through an independent agent would result in a Permanent Establishment

Question 2

Andrew McSwington is a highly regarded MLB prospect.  During the American off season he first travelled to Mexico to play in the Fall League for 2 months and then decides to come to Australia and play in the Australian Baseball League in December, January and February to play for the Adelaide Chomp.  He signs the contract stipulating he is to be paid $45 000 for the 3 months in Adelaide and joins the team shortly after. The contract states he is to be paid monthly into a bank account in the Turks and Caicos Islands

Andrew is impressed with Australia and decides to purchase a home unit at Glenelg.  His plan is to use it as a base during the home and away series and rent it out for the remainder of the income year.  

Discuss:

• Whether Andrew is liable for taxation on the $45000 for his baseball skills
• Whether Andrew is liable for tax on the rental income received during the balance of the year

Question 3

Explain how the principle from the Myer Emporium v FCT case is used to determine whether a receipt is assessable as ordinary income or as a capital gain.  Illustrate the principle with reference to relevant case law.

Question 4

1. With reference to Softwood Pulp and Paper v FCT 1976 explain whether a deduction is available for interest paid on a loan during the preparatory stages of a business.

In your opinion when would a business advance from a preparatory stage?

1. 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.

1. 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

Question 5

With reference to at least three (3) different sources and the indicators of good tax policy explain whether or not you think the 50% general discount for individuals on the disposal of CGT assets is good tax policy.

Permanent Establishment and its Taxation Implied in International and Domestic Tax

Answer to A: 

Permanent establishment is referred as the concept that is implied both in the international as well as domestic tax. The concept of permanent establishment was first used in Australia as the tax treaty with UK that was singed during the year 1946. With reference to “subsection 6 (1) of the ITAA 1936” Permanent establishment refers to the commercial functions that is executed by an Australian resident company through fixed business place in alternate nations (Miller & Oats 2016).

Answer to B: 

According to the definition of the permanent establishment stated under “subsection 6 (1) of the ITAA 1936” the major emphasis has been placed on the double taxation agreement between United Kingdom and Australia (Gormley, 2018). An important consideration of the UK permanent establishment is that it does not have any fixed place of business or territorial restrictions. The concept permanent establishment with reference to “subsection 6 (1) of the ITAA 1997” defines that permanent establishment is applied on both the business that performing the business in Australia or outside the boundaries of Australia (Woellner et al., 2016). Similarly, the profits that a UK based business generates by performing business functions in Australia thorough another branch will be considered for assessment.

Answer to C: 

According to the Article 7 of the Permanent Establishment profits of a company of a contracting nation will be considered taxable in the state unless the enterprise carries executes the business in other contracting nation through the permanent establishment located therein. According to Article 5 (5) an individual apart from the independent agent that habitually exercises the contracting nation with the authority of concluding a contract in the name of the enterprise the enterprise would be considered to have permanent establishment in that nation (Pinto, 2013). A business agents carrying out the functions with help of broker or agent would constitute the status of independent agent.

“Section 6 of the ITAA 1997” defines that income from personal exertion will be considered as the income from the ordinary concept. According to the “section 6-5 of the ITAA 1997” majority of the income derived by taxpayer is viewed as income from ordinary concepts (Barkoczy, 2016). The taxation ruling of TR 1999/17 accounts for receipts and other benefits that is obtained from the involvement in sport. According to this ruling an individual receiving payment from the sporting will be considered taxable income under the ordinary concepts.

As evident McSwington was regarded as the MLB Prospect that formed an agreement by signing a contract of $45,000 with the Adelaide Chomps. As held in the “Fitzroy Football Club Ltd v Commissioner of State Revenue (2016)” payments that are received in respect of the sporting involvement are regarded as the assessable income (Braithwaite, 2017). This usually involves the exploitation of the personal skills in the commercial manner with objective of gaining reward.

The Principle from Myer Emporium v FCT Case as Determinant of Assessable Income

With regard to the present state of affairs of McSwington the payment that is received by him from his sporting participation is an income from ordinary concepts. The payment that is received by him is in respect of connection with employment which includes the exploitation of the personal skills in a commercial manner with the objective of gaining reward.

Conversely, as per “Adelaide Fruit and Produce Exchange Co Ltd (1932)” rental receipts constitute the overall sum of rent and the associated payment derived by an individual from the rental property (Blakelock & King 2017). Occurrences, from the case study suggest that Andrew McSwington bought a house for his base usage however he decided to use house by renting out in the later half of the year income year. The receipts that is earned from the rental property in the balanced part of the year is a periodical receipt. With respect to section 6-5 of the ITAA 1997 Andrew will be held liable for assessment for income derived from the rental property.

The expression of the term profits from the isolated transactions constitutes income and therefore they are held taxable under the subsection 25 (1) of the ITAA 1936. The court has expressed its view in “Federal Court of Taxation v The Myer Emporium Ltd (1987)”. The taxpayer of the company made an interest bearing loan to a subsidiary company (Robin & Barkoczy, 2017). As it has been intended by the taxpayer, the taxpayer allocated the right of receiving the income through the interest for the loan in respect of the lump sum. The court of law depended on 2 elements for reasoning in determining that the amount received by the taxpayer was income.

The commissioner held that the amount that was issued as the profit from the transaction even though that are not within the ordinary business course of the taxpayer. The transaction that was entered into the taxpayer was with the objective of making profit during the course of taxpayer’s business (Blakelock & King 2017). Furthermore, the taxpayer had merely sold the right to receive an interest for the lump sum. The lump sum for the taxpayer constituted receipt in exchange for loan and similar to the current value of the future interest that the taxpayer would have received.

Preceding from the above explanation profits and gains are usually classified under two categories. Referring to “FCT v Commercial and General Acceptance Ltd (1997)” profits derived from the business transactions are included for assessment in the ordinary course of taxpayer’s business (Barkoczy 2016). The court in “FCT v Rotherwood (1994)” applied the principles of Myer policy to recognize that the long lease incentive paid through cash are held as ordinary income. The taxpayer in case of Myer merely changed future income to the current income.

When a Business Advances from Preparatory Stage

Losses and outgoings that are preliminary in nature relating to the commencement of the income generating activities that are not incurred in the course of business are not considered for deductions under the general provision of the “section 8-1 of the ITAA 1997”. As held by the high court of Australia in “Softwood Pulp and Paper vs Federal Commissioner of Taxation (1976)” the company occurred a feasibility study and other costs to ascertain whether it should establish a new production mill for paper (Gormley, 2018).

The taxpayer of the company was determined to start the paper mill company for the conidian company, however the taxpayer did not start the operations because of the lack of funds and the company did not make ever any substantial amount income. The high court of Australia held that they were not carrying on the business largely because there wasn’t any form of business operations during that time. The commissioner of taxation further held that the costs that were occurred by the business were not considered deductible since everything which was done was in the preliminary course of preparatory business stage or income generating activities.

As per the section 8-1 of the ITAA 1997 a person is allowed to claim an allowable deduction for expenses incurred in generating taxable income. As held in “Federal Commissioner of Taxation v Ronpibon Tin NL (1949)” there must be a connection between the expenses incurred and assessable income. The outgoings are held as secondary and incurred in gaining taxable income (Miller & Oats, 2016). Interest expenses for paying loan are held as expenses held for deriving taxable income and same will be allowed as deductions.

As held in section 8-1 of the ITAA 1997 a person is allowed to claim deductions for expenses sustained in generating taxable income. With reference to “Brown v FCT (1999)” interest must be held as allowable deductions if the source of income is not existent (Braithwaite, 2017). The interest expenses were held as rational in generating assessable income. As understood from the case cited above business incurring outgoings will be held deductible expenses under section 8-1 of the ITAA 1997 or under section 51.    

The 50% CGT discount is usually applied for capital gains relating to sale of CGT asset. The 50% CGT rule is applied only when the assets are held for a period of 12 years before ultimately selling the asset. A discount of 50% on the CGT asset is held as good taxation system since an individual taxpayer can lower their tax liabilities. The CGT concession rule is applied on the event only when the asset is held for 12 months-time based on the status of residency of a taxpayer.

According to (Braithwaite, 2017) CGT discount helps in escaping the higher tax instances for capital gains that is derived from the rising prices. However, an argument has been forward by Miller & Oats, (2016) where CGT is as bad policy of tax because there are some discounts that is very general and exposed to misuse. The CGT 50% rule is though viewed as modern system of taxation because it helps in lower the tax burden on the taxpayers. Therefore, it can be concluded that 50% discount is held as good system of taxation and reduces the taxpayers tax liabilities.

Reference List:

Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.

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

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

Gormley, L. (2018). EU taxation law. OUP Catalogue.

Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.

Pinto, D. (2013). State taxes. In Australian Taxation Law (pp. 1763-1762). CCH Australia Limited.

Robin & Barkoczy woellner (stephen & murphy, shirley et al.). (2018). Australian taxation law 2018. OXFORD University Press.

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