HI6028: Taxation, Theory, Practice & Law Case Study Assessment

November 28, 2017
Author : Alex

Solution Code: 1GHG

Question: Taxation Law Case Study Assessment

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Taxation Law Case Study Assessment

Case Scenario/ Task

Case study 1: Residence and source

Kit is a permanent resident of Australia. He was born in Chile and retains his Chilean

citizenship. Kit spends most of the year working off the coast of Indonesia on an oil rig for a United States company. He was recruited for this job in Australia and signed a contract with the company here. For the last four years, Kitss wife has lived in Australia with their two children. They purchased a home in Australia three years ago. Kit and his wife have a joint bank account with Westpac Bank. Kitss salary is paid directly into his account. All of the familyss other investments, including a share portfolio that generates dividend income, remain in Chile. Kit gets one month off from work every third month and, on these occasions, he meets with his family either in Australia or on holidays around South America (usually in Chile where his parents reside).

Discuss whether Kit is a resident of Australia and how his salary and investment incomewould be taxed.

Case study 2: ordinary income

Explanations of the respective outcomes reached by the courts in the following cases which

all involving sales of land: I. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159 II. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188 III. (1982) 150 CLR IV. S m & An 89 ATC 4070

m 97 ATC 5135 VI. n S n 88 ATC 4897

VII. w 88 ATC 4620

VIII. u & An 98 ATC 4487

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Solution:

Case Study I – Residence and Source

In the given case, the primary thing to determine is residency status of Mr. Kit for taxation purposes.

If a person resides in Australia, in the general interpretation of the term, determining residency status is of little importance. However, this is not the case in the given situation. Mr. Kit is a migrant from Chile, who has migrated to Australia with the intention of staying there permanently or for a prolonged period of time. The Income Tax Assessment Act, 1936, includes migrants in the list of persons eligible to be a resident for taxation purposes ( FC of T v. Applegate 79 ATC 4307; (1979) 9 ATR 899 (Applegate)., 1979). Therefore, the primary thing to determine would be the residency status of Mr. Kit for this purpose.

It is important to determine the said residency status because, in general sense, a person who is “resident for tax purposes” in Australia is required to return all his income, whatever the source, in Australia and such amount is taxed thereafter. On the other hand only the income sourced from Australia is taxable in Australia, for a person who is a “non-resident for tax purposes” in Australia.

The primary test for determining the residency status of a person is known as the “resides test”. Under this test, the term ‘resides’ is interpreted in its literal sense. Mr. Kit, himself is not present in Australia for a continuous period of more than one month, or even a six month period in a particular financial year. His presence or activities that he carries out while in Australia have no routine. So even though he has family ties in Australia, i.e. his wife and children stay there, and he has purchased and maintains assets in Australia i.e. a residential dwelling in which his wife and children stay permanently and a joint bank account with his wife in Westpac bank, in which his salary is also paid directly, he cannot be termed as residing in Australia, under the general interpretation of the term.

In case a person does not qualify as resident under the primary test, he will still be treated as a resident for tax purposes if he passes any of the three statutory tests of residency status.

Domicile Test:

A person can be a domicile of a country by any of the following means:

  • Domicile by origin: when a person belongs to a country by the reason of his birth, the case is of being domicile by origin.

  • Domicile by his own choice: when a person makes a change, of permanent or at least a prolonged nature, of the residence, this is understood by law as being a domicile by choice of the new country of residence.

  • Domicile by law: this is a condition of being the domicile of a particular country, imposed by law.

If a person qualifies the domicile test, that is if the domicile turns out to be Australia, the next step is to determine the permanent abode place. If the place of permanent abode is in Australia, the person would be said to be a resident in Australia, for tax purposes.

In case of Mr. Kit, he, by choice changed his permanent residence from Chile to Australia. Also his place of permanent abode is Australia, as he owns a residential house in the country, where his family stays. Also he does not have a place of such abode in Indonesia. Another point for consideration is that he holds the joint account with his wife in an Australian bank, in which he also receives his salary.

Therefore, by virtue of qualifying this test, Mr. Kit is an Australian “resident for tax purposes”.

183 days test:

Mr. Kit is not present in Australia for a period of 183 days or more, that is for more than half the income year, whether continuously or in parts, for any of the income years. Therefore, Mr. Kit cannot be termed as a resident for tax purposes due to the 183 days test. Any how he does not need to qualify this test for being a resident.

Superannuation Test:

This test states that all the employees of Commonwealth Government & the states would be Australian residents, on fulfillment of certain conditions. This test is not relevant for Mr. Kit’s case.

Therefore, it is established from the above points that Mr. Kit is an Australian “resident for tax purposes”.

Now as per the rules laid down in Australia, Indonesia DTAA, dependent income of a resident of Australia, working in Indonesia, would be taxable in Australia, if the source of such income i.e. the employer, is situated elsewhere than Indonesia (Dezan Shira & Associates).

This implies that as per the provisions of this act, the salary income of Mr. Kit, from the US Company, for services in Indonesia, would be taxable in Australia.

However, Mr. Kit has also held onto his Chile Citizenship. Therefore, provisions of the act regarding dual citizenship need to be examined. As per the “Australia- Chile Dual Tax Treaty”, individuals holding dual citizenship are to be treated as residents of only in one of the countries, keeping economic relations on the pedestal. In the given case, the country is Australia. The given income would be taxed in Australia.

But In case the company announcing dividend is a resident of Chile, the income may be taxed in Chile, provided that such dividend doesn’t exceed 15% of the total dividends (The Republic of Chile and Australia, 2010).

Therefore, from the above discussion the following conclusions can be drawn:

Salary income of Kit would be assessable as taxable income in Australia.

However, if any tax is paid or deemed to be paid on such income in Indonesia, the assesse can claim refund of the same by the means of Foreign Income Tax Offset.

Dividend Income may be taxed in Chile in case of a resident company otherwise will be taxable in Australia.

Any other income from immovable assets located in Chile, will be taxable in Chile.

Case Study II – Ordinary Income- explain outcomes

Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159

The outcome of the given case establishes that, Californian Copper Syndicate sold the asset in the course of its business operations. This was concluded, keeping in view the stated business objective of the company at its inception. It was held that since the company sold such assets in such manner, the proceeds from such sale, in excess over cost of acquisition of the assets, shall be treated as gains or profits of business, i.e. business income (Australian Taxation office, 1904).

For application purposes, the general principle derived from the case can be that, if a company sells the assets of the business in such a manner as mentioned in the objects of the company, for which it was formed, any positive difference between the receipts and the acquisition cost and expenses, shall be treated as business gain/ profit.

Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188

Scottish Australian Mining Co Ltd was originally carrying out the business of mining coal. On exhaustion of the mine resources, the company decided to divide the land into smaller units and develop the property by the means of building the basic amenities like roads, schools, churches etc. After undertaking such development activities, the units of land were sold and a substantial profit derived.

It was held that the actions of the company merely led to realization of maximum value of the land asset on which carrying on the business any further was not possible. Therefore any proceeds from such sale could not be treated as profit or gain of the business. The profit income was thereafter decided to be not assessable (Smith, 2003).

FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR

In case of Whitford Beach, the beach was originally held by the assesse for the benefit of its shareholders. Later the land, by the means of shares in the company, was sold to 3 companies in the business of land development. The articles were amended to reflect the new intention of the company of dividing, developing and selling the land.

The judgment on the given case held that the profit from such sale would be assessable income and would be assessable u/s 26(a) of ITAA, 1936 as “Profit from a profit making undertaking or scheme” (Sydney Law Review, 1983).

Another important outcome of this case was that it limited the application of Scottish Australian Mining judgment, in determining the whether the income, from land development and sales operations of a formerly different business, would be assessable (Smith, 2003).

Statham & Anor v FC of T 89 ATC 4070

In the case of Statham & Anor, the purpose of holding land as well as the ownership share changed a few times. The land, in the end was held by Mr. Anderson, in partnership with a company, formed by his sister and brother-in-law, with the object of subdividing and selling the land due to familial circumstances. In the instance Mr. Anderson died before even the first part of such subdivision could be registered. The land was divided and sold by the executor without any of the abovementioned plan being executed.

The outcome of the case lies down that such sale of land lacks the benchmarks of a business enterprise. Such sale by executor, without any added efforts for enhancing the value of such asset, and in the course of his duty towards the beneficiaries, is only the realization of asset. The income, therefore, would not be assessable (Thompson & Ellison, 2009).

Casimaty v FC of T 97 ATC 5135

In the given case, the assesse carried out the business of farming on the land, which his father gifted him. Due to health issues, he subdivided part of his farm, developed it and sold it off. The development was limited to necessary development for such sale. The assesse was neither personally involved in the sale, nor did he claim any deductions for the cost of such subdivision.

It was held that, such sale was not carried out in the course of business and was only the realization of the value of land. The activity of this nature does not constitute as business of property development and sale as there is a lack of profit motive (Thompson & Ellison, 2009).

Moana Sand Pty Ltd v FC of T 88 ATC 4897

The assesse, in the current case, purchased a piece of land for mining and selling land. On exhaustion of sand resources the assesse held the land until it was ready for subdivision. The land was sold later on.

The decision of the case holds such transaction liable to tax. The income from sale proceeds is to be assessed as both ordinary income and Income from a profit undertaking or Scheme. It should be noted that the decision was given, even though subdivision and resale were not the underlying objects at the time of purchase of such land (Cassidy, 1994).

Crow v FC of T 88 ATC 4620

The outcome of the given case underlines the need to examine the intention behind the purchase of property, while determining whether it is assessable as revenue at the point of sale. The judgment declared the profits from the sale of property taxable on the grounds that, even though the multiple properties were agricultural lands, held and sold by a farmer, the intention behind purchase was making profit by sale of the said property (Smith, 2003).

McCurry & Anor v FC of T 98 ATC 4487

The outcome of the case establishes that, where in case of development of a property for sale, the property is later on used for another purpose, even though the option of earning profit by selling such units of developed property is available, and such property is sold thereafter, the proceeds from such sale are to be treated as realization of asset and shall not be assessable income. An important point to be considered while applying the case law is that the property was constructed against a loan and would have had to be sold at some point for the repayment of the same (WebMartin Consulting, 2015).

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