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Definition of a Tax Resident in Australia

Define the Tax Law for the Residents and Foreign Residents in Australia.

Fred, in the given situation will not be taxed in a manner same as the manner in which a resident would be taxed. Individuals in Australia are to be considered as resident for purposes of tax if they are residents of Australia under common law (ordinary meaning test or the common law); or if the domicile is that of Australia, unless to the satisfaction the place of permanent abode is established as not being in Australia (the test of domicile); or if the person is in Australia either intermittently or continuously for more than half of the income year, unless it is to the satisfaction of the Commissioner that it is not in Australia that the usual place of abode is and it is clear that there is no intention of taking up residence here (the 183 days test); or is the Commonwealth superannuation schemes member (Section 6, Australian Income Tax Assessment Act 1936) (Australian income tax assessment act 1936-1974, 1975).

The main concept behind this is that the residence of the taxpayer is where the “home” is of that tax payer (Clinton, 2016). Whether the “home” of the tax payer is in Australia is a question of fact and if the same is found to be true than there is no requirement of moving any further. In the case of Levene v IRC (Levene v IRC [1928]) Viscount LC defined the term “reside” a established the meaning as defined under the Oxford English Dictionary meaning the permanent dwelling or for a considerable period of time, to have an individual’s usual abode or one’s settlement, to live at or in a certain place. The determination of the fact that a man has his usual abode or is settled there is not difficult, and if the same is established he would not become less of a citizen if he has left the country for pleasure or business (Ato.gov.au, 2016).

The ATO issued the Taxing Ruling TR 98/17 to interpret the ordinary meaning of a resident (Wills 1997).  The relevant factors are identified that whether a person who is entering the country is under the ordinary meaning a resident. The person’s behavior’s character and quality and the period for which they are present physically are a factor (Ato.gov.au, 2016).

The character and quality of a person are indicated through secondary factors. Intention is the first main factor or the person’s presence’s purpose. The ruling differentiates between a person’s coming to Australia for employment purposes, travelling and education, albeit while doing work that is casual. The person’s location of family is the second factor whether the person maintains outside his place of abode, business ties that he has in Australia and the contract of employment’s existence, particularly purchase and occupation of a house which may establish his home in the country. The living and social arrangements is the fourth factor which is an indicative of residence which include the children’s education, joining of club, leasing of a house.

Factors Determining an Individual's Status as a Resident

Any resident under the Taxation Ruling TR 98/17 would be considered to be a resident when he has crossed the stay period of six months and have begun demonstrating behavior which is constant with residence in Australia. Fred will not be thus classified as a resident as the main factor of residence is only not complied with; he has only for setting up his company’s branch in the country. Other than this there is no intention of settling in Australia, further within the first year only he has returned back to Australia indicating that no behavior was demonstrated by him maintaining a residence in country.

This case the main objective of the company was of acquiring of land that contained copper. There however, was no extraction of copper from the land. Subsequently this land was sold by the company to another company and as consideration the company was given the shares of that company (California Cooper Syndicate Ltd. v Harris (Survey or of Taxes), [1904]). It was opined by the court that the revenue generated from the land’s sale is in nature income because the company’s main purpose behind the land was for making profit by selling the land. Therefore, this would form an incident which is ordinary of the business of taxpayers and the nature of it would be income.

This case the business which was being carried out by the company was that of coal mining on the parcel of land that was owned by it. After the company had extracted the entire coal from the said parcel of land over a period of time, the decision was made by it to sell this piece of land (Scottish Australian Mining Co. Ltd. FC of T, [1950]). To ensure that the land becomes more capable of being sold it was subdivided by the company and there were roads and such other infrastructure which was built on the land. It was opined by the court in this case that the profit which the company had made from the land’s sale cannot be assessed since the business of the company was not of selling land and the purpose merely for selling the said piece of land was for realizing its capital asset to the best possible advantage of itself that it could. The nature of the profit was thus in nature capital.

This case the company was a taxpayer which had been incorporated mainly for the purpose of acquiring of a parcel of undeveloped land which was located at the Whitfords Beach (FC of T v Whitfords Beach Pty Ltd, [1982]). It was beach frontage access that the land had and a company was formed by a group of people so that they could have over the beach an access to be able to fish there. A few years later due to an offer which had been made to them, the issued share capital of the company, which was a taxpayer, was sold off. The shareholders who had bought the shares from the previous owners so that they are able to get the land’s control and that they would be able to subdivide, develop and the sell the sites as residential and make a profit out of it. Eventually when this subdivided land was sold, it was argued by the new shareholders that the profit that was accrued from the sale was not in nature income but the capital asset realization of the company. However, it was opined the High Court that the company’s development of the land and the eventual sale business and the profits which were accruing from this sale would be assessed as being ordinary income. It was further stated by the court that when the new shareholders had acquired this company the main intention that they had was they would develop, subdivide and eventually sell the land, thus changing the intention from that of the previous owners which had been for purposes that were non-commercial in nature. Thus the court held that it would be the business’ ordinary course of activity that the sale of land would fall into and therefore it would be an income which is assessable.

Tax Cases Pertaining to the Sale of Land - Income vs Capital

This case a deceased estate’s trustees were the taxpayers. A parcel of land, which was for farming, had been acquired by this deceased with the intention that the family would be raised and some farm activities would be engaged with (Statham & Anor. v FC of T, [1989]). The deceased a few years later sold the half portion of this land to company which was being controlled by the members of the family. Till this time also there was no intention which was there for reselling of the said property and making a profit out of such sale. A partnership was entered into by the new owners to raise on this land, cattle. There was no good performance that the partnership showed and it was eventually decided by the owners that they would subdivide this land and then sell it. During the time of the sale of land which was subdivided the deceased passed away. It was argued by the commissioner that the profit generated from the subdivided land’s sale some of the land were income which was assessable of the estate who had deceased. It was however, argued by the tax payers that the proceeds which were obtained from the sale of the land would not amount to income which was ordinary. The courts opined that the profit that would be generated from the sale of the land would not amount to ordinary income since, the parties’ activities indicated that the sale of the land was not for the conducting of business or for the generation of profit scheme or undertaking. Further, it was only because the business of farming and the partnership for cattle had failed that the decision had been taken by the owners for selling the land, this does not however, mean that it would automatically lead to the realization of the asset to become taxable.

This case a farming property had been acquired by the taxpayer from his father and for the next twenty years he carried out on this land the business of primary production (Casimaty v FC of T 97, [1997]) . However, because of the debt that was growing and the poor health, it was decided by the taxpayer subsequently that he would subdivide and sell the land’s large portion off. Over a period of 18 years a total of 8 subdivisions were made and roads, sewerage, fences and water facilities were constructed by the tax payer as the subdivisions’ part. It was contended by the commissioner that the profits which had accrued from the individual block’s sale were in nature ordinary income and thus they would be assessable on the basis that the business of subdivision of land was being carried out by the taxpayer. The court however, on appeal opined that the profits that had accrued from the sale were merely that capital asset’s realization and there was no business of land subdivision that was being carried out by the taxpayer. Tax payer had acquired the land originally for farming purposes and for using it as a private residency and no evidence was available there that there was a change in this purpose.

This case the company had acquired a land which was located in Adelaide. A couple of years later a company acquired this land and the intention that had been stated was for the business of selling and/or working of the sand which was there (Mona Sand Pty Ltd. v FC of T, [1988]). After an application was received that the government wished to mine this land that was owned by them. A number of letters were then sent by the taxpayer stating their objection for the same. It was stated by them that the land had been held by them with the aim of subdividing and then selling it. It was later discovered by the taxpayer that the government had rezoned this land as being rural and there was later an intention of the Government for preserving this land was discovered. The Government eventually resumed that said land for a cost of $500,000. The payment of this amount was made in two tranches. It was contended by the Commissioner that this amount was the taxpayer’s ordinary income, since the tax payer had stated its intention of subdividing and selling the property for a profit. It was however argued by the taxpayer that the acquiring of the parcel of land was initially only for selling of sand and later sometime they had thought of subdividing it. Therefore there existed both an intention to be able to derive from the said land income and also to be able to sell this land at a later stage. The court however, opined that the amount which they had was ordinary income, since though it was through a transaction that was isolated that this amount was received, the ultimate intention of the taxpayer for selling this land was still indicated by it.

This case there a large amount of money which had been borrowed by a farmer for purchasing five blocks of land over a ten year period. This land was for some time used for the purposes of grazing, farming and for crop cultivation (Crow v FC of T, [1988]). However, eventually there was subdivision of this land. For the starting two years and then over a period of number of year there were 51 blocks which had been sold by the taxpayer eventually and he made a net profit overall of $388,288. It was opined by the Federal Court that, the profit which had been made by the taxpayer was assessable as a business of land development was being carried out by him. The court although, did acknowledge that for a short period of time at the very beginning where the use of the land was as a farm. However, evidence was found considering the amount of debt that had been taken by him that at the outset the taxpayer knew that it would be required to sell some of the land off. There was a systematic and repetitive characteristic of the transactions which were there in the said case with the purchasing of different properties and then subsequently subdividing and selling the parcels of land. There was difference that was made in this case and the Scottish Australian Mining Company case stating that the company had used the property for mining for a substantial period of time unlike this case where the business of farming was continued for only a short period of time.

The taxpayers in this case had purchased a plot of land. There was an old house on this land. This house was removed by the taxpayers and there were three townhouses that were constructed in this place. Even before these townhouses were completed they were advertised for sale. This was however, not a success (McCurry & Anor v FC of T, [1998]). The Tax payer and his family moved into two of the townhouses subsequently and lived there for a period of one year approximately, they were sold at this point of time and total net profit which was made was of $150,000 approximately. The taxpayers a few years later then purchased another parcel of land where units were constructed by them and these were then sold. It was contended by the Commissioner that the profits which accrued from the townhouse’s sale were income that was ordinarily assessable as it was a result of a profit making activity which was commercial in nature. It was argued by the taxpayers that the sale of the land was merely to realize the capital asset and therefore could not be classified as ordinary income since, these townhouses were being used for residential purposes and it was only when there were financial difficulties that it was sold. It was opined by the court that the land’s sale was ordinary income because the purpose with which the land had been acquired was commercial and the view behind it was for making profit for selling it. It was not for an investment purpose that the land was purchased and hence cannot be stated to be realization of capital asset.

References

Ato.gov.au. (2016). Examples of residents and foreign residents | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Residency/Examples-of-residents-and-foreign-residents/ [Accessed 23 Aug. 2016].

Ato.gov.au. (2016). Residency tests | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/Work-out-your-tax-residency/Residency-tests/ [Accessed 23 Aug. 2016].

Australian income tax assessment act 1936-1974. (1975). North Ryde, N.S.W.: CCH Australia Ltd.

California Cooper Syndicate Ltd. v Harris (Survey or of Taxes) [1904]5 TC 159.

Casimaty v FC of T 97 [1997]ATC 5135.

Clinton, A. (2016). ; Bentley, Duncan; James, Simon --- "The New Zealand Definition of "Residence" for Individuals: Lessons for Australia in a "Global" Environment" [2001] JlATax 1; (2001) 4(1) Journal of Australian Taxation 40. [online] Austlii.edu.au. Available at: https://www.austlii.edu.au/au/journals/JlATax/2001/1.html [Accessed 23 Aug. 2016].

Crow v FC of T [1988]88 ATC 4620.

FC of T v Whitfords Beach Pty Ltd [1982]150 CLR.

Levene v IRC [1928]AC 217.

McCurry & Anor v FC of T [1998]98 ATC 4487.

Mona Sand Pty Ltd. v FC of T [1988]88 ATC 4897.

Scottish Australian Mining Co. Ltd. FC of T [1950]81 CLR 188.

Statham & Anor. v FC of T [1989]ATC 4070.

Wills, M. (1997). The Income Tax Implications of a Foreign Individual Contracting to do Business in Australia, with Particular Reference to the Concepts of 'Residence' and 'Source'. Bond Law Review, 3.

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