Residency Status And Taxation Of Migrants In Australia: A Case Study

Why Do Small Business Taxpayers Stay With Their Practitioners?

Residency Status of Migrants in Australia

As defined under the “taxation ruling of 98/17” the taxation commissioner explained its interpretation relating to ordinary meaning of the word resides under “subsection 6 (1) of the ITAA 1936”. As per the ruling persons arriving at Australia consist of people that are namely migrants or visitors on work contracts visiting Australia with the pre-arranged agreements employment contracts (Woellner et al. 2016). According to “taxation ruling of IT 2681” an interpretation of residential status of people that are migrants are held as Australian resident. The ruling is associated with the visitors that business migrants and within the meaning of the “subsection 6 (1) of the ITAA 1936” are held as Australian resident. Nida is a Vietnamese and has business in her native country. She actually visited Australia with the objective of migrating in Australia and start business. In order to reside with her husband and children Nida purchase house in Melbourne.

The liability of applying tax is usually ascertained each and every year. The judgement made in “FCT v Applegate (1979)” explained that events after the income year may assist in determining the residential status of a person (Barkoczy 2016). Explanation provided in “Section 6-5 (3) (a) and 6-10 (5) (a) of the ITAA 1997” states that the liability to impose tax on the migrants or overseas visitors based on their ordinary or statutory income derived from the sources in Australia.

Explanation stated in “section 995-1 of the Act”, considers a person to be Australian resident that inside the meaning of the ITAA 1936 (Basu 2016). As per the “taxation ruling of IT 2681” migrants are considered resident for taxation purpose upon conducting the following test under “subsection 6 (1) of the ITAA 1936”.  

1. Resident as per ordinary meaning
2. Domicile Test
3. 183 days Test

To determine whether Nida is an Australian resident for taxation purpose an understanding of “subsection 6 (1) of the ITAA 1936” is necessary to arrive at the decision within the meaning of the ITAA 1936.

The ordinary meaning of the expression Reside refers to the people that originally have the residency in Australian. The term is sufficiently extensive in considering those people that come to Australia to reside on permanent basis as migrants. From the first day of the arrival in Australian an individual with the intention of living here permanently is an Australian from their entry (Tan, Braithwaite and Reinhart 2016). There are some important factors that must be considered to declare an individual to be an Australian resident. One such factor include if the person goes back to their native country, regularity, and the time span of those trips together with the purpose is regarded as the relative factor.

Determining the Residency Status of Nida, a Vietnamese Business Migrant

The taxation commissioner in “Miller v FC of T (1946)” explained the degree of fact that must be ascertained in determining the residential status. This comprises people’s business and family ties both in Australia as well as in their nation of origin (Cao et al. 2015). The ordinary test takes into the account an individual behaviour during their stay in Australia. The “Taxation Ruling of 98/17” lay down the facts in clarifying an individual behaviour during their stay in Australia. Namely, this comprises of;

1. Societal and living plan
2. Intention of being in Australia
3. Business or occupation ties
4. Location and preservation of assets

Sufficient amount of weightage should be provided to each of the above mentioned factors. As evident from the existent position of Nida the objective of migration from Vietnam to Australia was to begin her business. Circumstantial evidences obtained from the case study suggest that Nida purchase residence in Melbourne so that she could live with her husband and family. The views of law court in “Macrea v Macrea (1949)” stated that migrating individuals with the probable objective of settling here in Australian permanently is held as Australian upon their arrival (Davison, Monotti and Wiseman 2015). Conversely, an individual business or family ties may require people to be out of Australia for a specific period.

As under stood from Nida’s situation the purpose of migration was to start business in Australia with ultimate intention of residing with her husband and children. She often went back to Hanoi to fulfil her business commitments for a certain time during 2017/18. As a result, Nida is not an Australian under the ordinary concept test during for the income year of 2017/18. The family and the residency status of Nida would be viewed as the separate and independent matter. It may appear that Nida along with her husband and children are Australian resident but they cannot be held as resident for the purpose of tax.

According to the “Domicile Act 1982” a person acquiring the place of residence based on their own choice in Australia is regarded as the Australian resident. A person obtains the domicile in their native nation in which they are born or by the operation of law (Saad 2014). The “taxation ruling of IT 2681” is associated with the domicile test of a business migrant if those persons has their domicile here in Australia except when the commissioner is content that their place of residence is out of Australia. The taxation commissioner in its view explained in “Henderson v Henderson (1965)” that people usually retain the domicile of their choice in their nation either by their choice or by the process of law.

Taxation Implications for Non-Residents

The native place of residence for Nida is in Vietnam and arrived to Australian for starting business yet her span of stay was inconsistent with breaks. Evidently in the situation of Nida she is not considered as the Australian resident based on the domicile test conducted. It can be concluded by stating that though it may appear that she is Australian resident but her residence would be considered as the separate and independent subject for 2017/18.

Generally speaking the “Taxation ruling of IT 2681” considers a business migrant living in Australia for 183 days or more is considered as the Australian resident based on the 183 days test (Sawyer 2016). If a person is found to be living in Australia for 183 days or more a person is held Australian resident regardless of their citizenship, originality or domicile. Taking into the consideration the existing situation of Nida she only remained in Australia for 120 days. Therefore, under the 183 days Nida did not meet the criteria of staying 183 days or more therefore she would not be held as Australian resident for taxation purpose. Therefore, the residency status of Nida is an independent and separate matter.

The federal court in “FCT v Nathan (1918)” expressed its opinion that in deciding the actual sources of income it is held as the practical and difficult subject (Murphy and Higgins 2016). Judgement held in “United Aircraft Corp (1943)”, expressed that for a business income to be held assessable it is necessary to determine the place from where the business is performed.

The circumstances of Nida provides that her residency status in Australia is held as independent and a separate matter. Preceding from the test conducted above provides that Nida and her family are not an Australian resident. A non-resident are only held taxable for their income derived from Australian sources. Nida income from Vietnamese business would not be subjected to tax liability however her investment income from Australian would be held for assessment. Nida is held as the foreign resident and would be required to lodge income tax return. Therefore, the earnings from her investment in Australian sources is taxable.    

Several examples have been noticed where an opportunity has been prevalent with the land owners to subdivide the land and sell the same that is owned by the owners for the long time period (Yagan 2015). Generally this happens commonly where the land owners having land at the suburbs and looks to expand the land for the better use such as by constructing the residential property instead of using the land for farming purposes. Numerous instances suggest that property development is usually carried out for the purpose of deriving substantial amount of profit from the development of land.

Capital Gains Tax Consequences of Property Development Activities

Evidences obtained from the situation of Hassan suggest that he inherited a small family that had the worth of $600,000. Hassan decided to cease the activities of farming by retiring permanently from the activities of farming and use the land inherited for the construction purpose. Hassan sought the advice of the local builder and decided to construct town house on the land to derive huge amount of profit. The issue surrounding the situation is determining whether the revenue generated from the sale of townhouse would be considered for taxation purpose under the provision of the ITAA provision.

Gaining evidences from the situation Hassan, it is understood that he subdivided the land that used for farming to construct townhouse on that plot and latter selling it for profit represents that there is an existence of generation of large sum of profit from the construction of townhouse. Citing the situation of Hassan, there are alternatives that provide whether the revenue that is derived from the sale of townhouse can be will be considered for assessment based on the provision of ITAA (Baines 2017). The alternatives are stated below;

1. Asset that are capital in nature are viewed as mere realisation of the asset when the requirement of subdivision of land is fulfilled.
2. The extent to which the business is carried on constitute mere realisation of land that is held for construction by the taxpayer.
3. The development of land is such that it goes further than the meaning of mere realisation of land. Nevertheless, the actions of land development might fall short of the situations of performing the business of construction (Becker, Reimer and Rust 2015). Thus, the same can be held as profit generating undertakings.

Preceding from the above stated alternatives that can be applied in the case study of Hassan is the mere realisation of the capital asset. The alternatives is applied to gain a better understanding of the outcomes of levy originating from the sale of townhouse by Hassan. Citing judgement of the federal court in “Allied Pastoral Holdings v Commissioner of Taxation (1983)” held that there are essential philosophies that administers the principles of mere realisation of the asset that are capital in nature (Faccio and Xu 2015). The decision of the law court held that land is viewed as the capital asset and construction on the land in the profitable way can be considered as the mere realisation of the capital asset for generating profit.

An in depth understanding of the circumstances surrounding Hassan has been considered for better understanding the development of land for mere realisation of capital asset. The land was originally purchased with the intention of the resale and generating profit. Irrespective of the situations the sale of land and generating profit from the sale of land is liable for taxation (Auerbach and Hassett 2015). To provide advice to Hassan it is necessary to understand that whether the property was acquired with the objective of generating profit.

Citing the reference of “Commissioner of Taxation v Reiger” the commissioner identified comparable issue relating to the mere realisation of the capital asset (Stantcheva 2017). An argument of disagreement was stated by the taxpayer enumerated that the objective of purchasing the land was to carry out the farming. The intention of the taxpayer in subdividing the land held is of utmost importance in ascertaining the objective of realising the land commercially (Bloom and Joyce 2014).

Conclusion

Citing the reference of “Californian Cooper Syndicates v Harris (1904)” where the commissioner have explained that the mere realisation of the capital asset. As defined in “taxation ruling of TR 92/3” the relevant issue of mere realisation of asset for assessment can be determined by understanding the activities undertaken by the taxpayer (Fairfield and Jorratt De Luis 2016). The taxation commissioner states that in determining the tax consequences, the activities of investment for mere realisation of land and generating large sum of profit from the merely realising the land is held as assessable income.

Another instances can be cited where the verdict of the court in “Commissioner of Taxation v Westfield” held that once it is obvious that the intention of indulging in the activities of purchase the land and selling it for generating profit was not held as the activity in the ordinary business course and profit that is in question would be held assessable (Schenk 2017). The profit of the apparent was held as the taxable income by virtue of being income in compliance with the ordinary meaning of the mankind given the apparent possess the objective of deriving profit at the time of acquisition (Oishi, Kushlev and Schimmack 2018). In the later judgement to commissioner held that while the scheme of making profit might not contain specific detail however the medium of generating profit must be the one to contemplate the taxpayer as the one minimum alternatives through which profit may be realised.

The commissioner held that it is not easy to consider the case where the taxpayer may be said to have derived profit from executing the profit making scheme where the taxpayer may be thought to have derived profit from the acquisition or resale of land (Bankman et al. 2017). In the “taxation ruling of TR 92/3” the ATO has argued that the taxable profit originates when the taxpayer entered into the transaction or operations with the objective of deriving profit through one particular means but eventually obtains the profit through a different means (Hill and Mancino 2014). In this situations, the issue originates whether the land the development activities undertaken by the landowners possess the character of the business or commercial transaction.

In actual this is not the case for Hassan as at time of advising in this area it is vital to appreciate the decisions of the federal court in “Casimaty v Federal Commissioner of Taxation” that the development of land that involves significant number of lots might yet qualify as the mere realisation of the land (Thomas 2018). Citing the reference of court in “Casimaty v Federal Commissioner of Taxation” it was held that the subdivision of land into 80 lots for more than eight stages was held as the mere realisation of the farmland. The court in its decision held that the profit was used for the purpose of farming for several years and the objective of subdividing the land for the purpose of resale was because of the increasing debt and ill-health of the taxpayer.

Similarly in the case of “McCorkell v Federal Commissioner of taxation” the judgement of the court held that the subdividing the land in 15 plots that was earlier employed for orchard farming constitute a mere realisation of asset (Samansky and Smith 2017). As understood in the situation of Hassan the subdivision of land into twenty plots can be held as the mere realisation of the capital asset and the proceeds generated from the asset will be based on the capital account and not in the revenue account.      

Reference List:

Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. American Economic Review, 105(5), pp.38-42.

Baines, D., 2017. Selling your primary residence?. Tax Breaks Newsletter, 2017(377), pp.7-7.

Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2017. Federal Income Taxation. Wolters Kluwer Law & Business.

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

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

Becker, J., Reimer, E. and Rust, A., 2015. Klaus Vogel on Double Taxation Conventions. Kluwer Law International.

Bloom, I.M. and Joyce, K.F., 2014. Federal Taxation of Estates, Trusts, and Gifts. LexisNexis.

Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major Australian taxes. Canberra: Treasury working paper, 2001.

Davison, M., Monotti, A. and Wiseman, L., 2015. Australian intellectual property law. Cambridge University Press.

Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), pp.277-300.

Fairfield, T. and Jorratt De Luis, M., 2016. Top income shares, business profits, and effective tax rates in contemporary Chile. Review of Income and Wealth, 62(S1).

Hill, F.R. and Mancino, D.M., 2014. Taxation of exempt organizations.

Murphy, K.E. and Higgins, M., 2016. Concepts in Federal Taxation 2017. Cengage Learning.

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

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

Samansky, A.J. and Smith, J.C., 2017. Federal Taxation of Real Estate. Law Journal Press.

Sawyer, A., 2016. Complexity of tax simplification: a New Zealand perspective. In The Complexity of Tax Simplification(pp. 110-132). Palgrave Macmillan, London.

Schenk, D.H., 2017. Federal Taxation of S Corporations. Law Journal Press.

Stantcheva, S., 2017. Optimal taxation and human capital policies over the life cycle. Journal of Political Economy, 125(6), pp.1931-1990.

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.

Thomas, R., 2018. Pearson's federal taxation 2019 comprehensive+ myaccountinglab with pearson etext access card. Prentice hall.

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

Yagan, D., 2015. Capital tax reform and the real economy: The effects of the 2003 dividend tax cut. American Economic Review, 105(12), pp.3531-63.