Taxation Ruling For Australian Residency: Domicile, Normal Residency, 183 Day, Superannuation Essay.

Discuss about the Taxation Ruling for Australian Residency.

To take into consideration the given case facts and opine if Fred should get Australian residency for tax purposes in the given year.

Rule

For determining the ta residency of individuals in Australia, four tests have been recommended in the tax ruling TR 98/17. Satisfying any one of these in the given tax year would result in the underlying taxpayer being treated as tax resident. However, certain conditions are attached with regarded to satisfying these tests (ATO, 1998).

Domicile Test

This involves fulfilment of two prime conditions. Firstly, the concerned taxpayer should possess Australian domicile. Secondly, the permanent abode or permanent residence of given taxpayer should lie in Australian geographical territory. Failure to adhere to any of the  above points would result in failure in this test (Woellner, 2013).

Normal Residency test

Based on the interpretation and application of this test as deployed in court and tax rulings, there are certain relevant factors for decision making. One of these factors is the visit purpose and stay duration. A significant visit purpose such as employment (for reasonable time) would result in tax residency. The extent of relations on a personal and professional level that the taxpayer has in Australia. Also, the nature of social arrangements would also be considered drawing a comparison with corresponding life in country of origin (Sadiq et. al., 2015).

183 day test

In order to comply with this test, two conditions namely have to be fulfilled.

Stay of atleast half a year or 183 days in Australia by taxpayer under consideration during the financial year for which residency is to be determined.

Concerned taxpayer should have intent to permanent settle in Australia irrespective of whether it eventually materialises or not.

Failure in complying with any of the two terms would result in test not being passed (Barkoczy, 2015).

Superannuation Test

For individuals serving abroad on Federal government’s order, this test is deployed which effectively makes a decision considering if the underlying taxpayer contributes to atleast one of two designated superannuation funds (Gilders et. al., 2015).

It is apparent that Fred does not have a domicile of Australia and also is not a Federal government employee. As a result, the domicile and superannuation test are not useful for this case. Thus, the relevant tests for Fred are the normal residency test and 183 day test.

183 day test – Two conditions required as stated in the above section

Domicile Test

Condition 1- Minimum stay of 183 day (Fulfilled in Fred’s case as he stayed for 11 months)

Condition 2 – Intention of settling in Australia (Lacking since house in England rented and also no long term investment in Australia. Stay only for employment purpose)

Hence, this test is not passed.

Normal Residency Ties

The purpose of visit is significant even though the tenure is undecided as indicated by the 12 month lease of house. Further, the social life of Fred along with wife is comparable to UK which is a critical factor. Children are not significant as they are away in UK also for study.

Hence, this test is passed.

Conclusion

Based on the application of test above, Fred manages to satisfy one and hence is Australian tax resident.

In this particular case, Californian Copper Syndicate Ltd used a large portion of their capital to buy a copper mining land irrespective of the fact that after buying the land, they did not have enough capital to run the mining operation. Hence, the company decided to sell the ownership of the mining land to another company. The other company provided the shares of the company in exchange of the land. However, Californian Copper Syndicate orated that selling of the land was in regard to the transfer of one capital asset to the other capital asset i.e. land to the shares (Barkoczy, 2015). According to the common law, the source of the income of transaction is the imperative component to decide the nature of the income rather than size of the transaction. Hence, any particular transaction with the perspective of business is considered for the ordinary income and would be considered for tax (Sadiq et. al., 2015).

In this case, the court has argued that the prime focus of the company was to sell the land, because at the time of purchasing the land, they did not have much capital to run the mine. However, they bought the land irrespective of that fact. Company also sold the land to some other company in exchange of the shares. This business activity of the company led to gains for the company. Hence, the court provided the decision that this transaction would be held for business and would be liable for taxation under tax law (Woellner, 2013).

The nature of the revenue from sale of land depends on the two scenarios (Gilders et. al., 2015).

Normal Residency test

Realisation of the capital asset

Business activity with profit making intent

In this particular case, the Scottish Australian Mining Co Ltd had bought a land with the prime intention of coal mining. Company effectively completed the coal mining operations and the generated revenue. However, the coal reserves continuously decreased from mining and then eventually exhausted. Hence, the Scottish Company decided to sell the land. To earn a sizable profit from sale of land, they decided to make blocks of different sizes and to maximize the market value of the blocks. They invested a reasonable amount in further renovation of the blocks by installing of the water and sewage plant, railway stations, parks etc. These facilities enhanced the market price of the blocks and company received a sizable profit by this land sale. Commissioner of taxation decided that the revenue generated by sale of the land would be termed as ordinary income and liable for tax (Deutsch et. al., 2015). Company did not agree with the judgement of commissioner. They had taken this case in court, where court had given the judgement, after considering the case facts that the prime objective of the owner was to use the land for coal mining and they did the same for years and when the land was exhausted in coal deposit, the company decided to do the realization of the capital asset and for the same they developed the land. Therefore, the received income would not be treated as ordinary income and no tax was applicable on the taxpayer as it was a case of realization of the capital asset (Sadiq et. al., 2015). 

In this case, the taxpayer purchased a beach side land for drying the shacks for fishing business in the year 1953. The owner of the land decided to sell the beach land to three different companies in the year 1967. All the three companies were involved in the land development activities. Hence, the main motive of the new owners of the land was to earn the profit from sale of land, for this process, they divided the land into sub sections and then installed extra facilities to enhance the market value of the land. Additionally, the new owners had modified the article of association of the company to enable land development as a valid business. A sizable profit made from the transaction of land sale. Thus, the received profit would be termed as ordinary income and would be considered for taxation because as per the judgement of court, the purpose of the taxpayer and also the new owner was same to earn profit from sale of land (Gilders et, al, 2015).

183 day test

In this specific case, the key intent of the deceased was farming for purchase of land. However, after some time, the deceased sold half part of the land to a company run by his relatives. This company with the intent to start a new cattle business purchased the land. However, the market scenario and various factors were against the cattle business. They could not sustain the cattle business for long since the business was loss making. Hence, they made subdivision on the land and decided to sell. The tax commissioner said that the profit earned by sale of land would be treated as assessable income and liable for tax (Woellner, 2013). The taxpayer was not satisfied with this argument and landed the case to court. After analysing all the above factors, court had argued that no business activity was involved by the taxpayer and there was no motive of business making. Hence, the sale of the land was done because of the unsuccessful status of the cattle business. Thus, the sale of land is realisation of the capital asset and would not be taxed under any circumstances (Barkoczy, 2015).

Case 5: Casimaty v FC of T 97 ATC 5135

If the prime intention of the taxpayer is realisation of the capital asset, then there would not be any tax applicable on taxpayer, irrespective of the fact that the concerned taxpayer is selling the land and earn sizable revenues. In the leading case of Casimaty v FC of T 97 ATC 5135 case, the taxpayer Casimaty had received a farm land with the motive of farming from his father. Casimaty used the land for the farming and wanted to continue the same occupation for numerous years. However, the taxpayer suffered from the debt increment hence, he decided to sell majority part of land to discharge his debt issue. For this purpose, he continuously divided majority of the land into sub division and also installed various facilities which were needed to achieve higher returns. The tax commissioner argued that the sale of land after making sub division causes business activity and termed as assessable income, which would be taxed under law. Casimaty landed this decision into court (Gilders et. al., 2015).

After considering the above elements, court decided that the prime activity of the taxpayer was farming which was continued till now on the remaining portion and also the taxpayer sold the land to overcome from the financial debt issue which was acceptable. Hence, the sale of land was considered as realisation of the capital asset in order to discharge the debt. Hence, no tax was applicable on the income received from sale of land (Sadiq et.al., 2015).

Superannuation Test

The taxpayer had bought a land with the intent of doing business of extracting the sand from the land and selling into the market. The company was also was involved in the marketing of the extracted sand.  To sustain this business, the concerned taxpayer had taken all the requisite permits form the concern departments, so that the business could run smoothly. After years of operations, the land was exhausted in terms of sand quantity and the quality of the sand also became below the standard level. Thus, company decided to ripe the sand land and made various sub division in order to get higher returns (Deutsch et. al., 2015).

The income tax commissioner had made the decision that the received income would be ordinary income, because the taxpayer was bought the land with the motive of deriving the profit. Thus, the taxpayer was liable for taxation under law (Gilders et. al., 2015). The company did not accept this decision and landed this case to court, where court had argued that irrespective of the argument, that previously the taxpayer had used the land for sand extraction. Afterwards the concerned taxpayer had changed the intention and start selling the land for business, which directly derived sizable profit.  Hence, this activity of the taxpayer would be considered as a business activity and called assessable income with intention of profit deriving. This ordinary income would be taxed as per taxation law (Woellner, 2013). 

Case 7: Crow v FC of T 88 ATC 4620

According to the information provided in the case, the concerned taxpayer borrowed money from financial resources in order to purchase five land blocks. At the primary phase, after buying the land, the taxpayer had used the land for production of crops but after some time he completely changed the method of using the land, He made specified sub divisions of the land and prepared fifty one sub blocks from the five blocks land. These sub blocks were sold with the total revenue of around $ 388,288 (Sadiq et. al., 2015).

Court had taken all the respective aspects related the given case and made the final judgement that the intention of the taxpayer was to sell the land. Because at the time of purchasing the land, he was very well aware about the fact that the market worth of this land was much higher than the value, he gave to buy the land. Therefore, he purchased the land and sold after some time. Also, to show that this selling of the land was for the realisation of the capital asset, he started doing the farming business. However, court also mentioned the reference of the case Scottish Australian Mining Company Ltd v FC of T case, that this case was entirely different form the current case and the derived profit of $388,288 would be termed as ordinary income and therefore, treated for the taxation process (Barkoczy, 2015).

Primary intention of the taxpayer will be considered to determine the nature of the activity and underlying taxation of any derived income. Any activity with the intention of generating the profit will be treated as business activity and income will be termed as assessable income (Barkoczy, 2015).

In this case also, two brothers with the primary intention of making the profit purchased a land, which was having an old house. To enhance the worth of the land, they construct three story houses after doing numerous renovations and carrying out construction. However, due to some issues, they were not able to sell any of the houses immediately after construction. Hence, they decided to use one of the houses for their own residence purpose. After a year, both the brothers started selling the house again, this time they successfully sold the three houses and received a huge profit. The taxpayer made argument that this profit from sale of the land was not taxable, as it was not an ordinary income and this activity should be considered as realisation of the capital asset.  According to the judgement of the court, this activity of selling the land would not be treated as realisation of the capital asset, since the prime motive behind the purchase of land was to make profit. Hence, the profit would be taxed under taxation law (Woellner, 2013). 

References

ATO 1998. Taxation Ruling TR 98/17. Australian Taxation Office, Available online from https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR9817/NAT/ATO/00001 (Accessed on August 22, 2016)

Barkoczy, S 2015, Foundation of Taxation Law 2015, 7th eds., CCH Publications, North Ryde

Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2015, Australian tax handbook 8th eds., Thomson Reuters, Pymont

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2015, Understanding taxation law 2015, 8th eds.,  LexisNexis/Butterworths.

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2015 , Principles of Taxation Law 2015, 8th eds., Thomson Reuters, Pymont

Woellner, R 2013,  Australian taxation law 2012, 6^th eds., CCH Australia, North Ryde