The Provisions of Australias Taxation Laws - Term Paper Example

Running Header: Tax Law Case Study TAX LAW CASE STUDY Name; Institution affiliation; Date; Case study: Residence and Source Facts of the case study: Kit having been born in Chile retains his Chilean citizenship but he is a permanent resident of Australia. However, he works abroad for the better part of the year though the recruitment for the job took place in Australia which is also where he signed the employment contract. His family lives in Australia and he purchased a home in Australia three years ago. He maintains a joint bank account with his wife in Westpac Bank which is where his salary is paid. His other investments are in Chile. He spends his leaves in Australia where he meets family or he goes to Chile to meet his parents. Is Kit a resident for tax purposes? This will be determined by the provisions of Australia’s taxation laws on residency as well as reference to decided court cases on tax residency. The Australian tax act of 1936 provides for a number of tests of residency. These include the residency under its normal and usual meaning. In this regard, the test will aim at establishing whether Kit still has a residence in Australia though he works abroad1. In this case, Kit’s home is still available to him since this is where his family lives in while he is working in Indonesian coast. He has not rented it out and has in fact purchased a permanent home in Australia three years ago2. Thus he remains an Australian resident under its usual meaning. The domicile and permanent place of abode test will also need to be conducted to determine Kit’s residency for tax purposes. In this case, he was born in Chile and still retains his Chilean citizenship thus having a Chilean domicile. However, it seems that he has acquired a voluntary Australian Domicile since he is a permanent resident of Australia. It should be noted that one with an Australian domicile may become a non-resident if they establish a permanent place of abode overseas. However, this is not the case with Kit3. He has not established a permanent place of abode in Indonesia though he works there. He has a permanent place of abode in Australia which is where his family (wife and two children) live. His having bought a permanent home in Australia three years ago indicates that his permanent abode is in Australia. Thus based on the domicile and permanent place of abode test, it can be concluded that he is an Australian resident for tax purposes. Another test that could be applied to this case is the 183 day test. In this case, one is an Australian for tax purposes if they are in Australia for at least 183 days in a given tax year. This is half of the year regardless of how the days are spread during the year4. In this case however, Kit fails this test since the only time he is in Australia is the one month he is on leave and at times he goes to Chile during the leave. Under the common law test, other factors that need to be considered in determining Kit’s residency given that he remains outside Australia for the better of the year. one of the factors is his physical presence in Australia. In this case, he is only in Australia for one month in a year if he does not go to Chile. Thus, this does not prove his being a resident. We also have to consider nationality. Even though he is a Chile citizen, it seems he has acquired an Australian citizenship where he is considered permanent resident and where his family lives. Another factor is his history of residence and movements. In this case, Kit lived permanently in Australia before he secured the foreign job. Another factor to consider is Kit’s habits and mode of life. In this case, his salary is paid into his Australian bank account and it seems it is used in meeting his Australian expenses like running the family and purchasing the permanent home. We also need to consider whether he has family and business ties with Australia. In this case, it should be noted that his family lives in Australia and he usually visits them during leaves if he does not visit his parents in Chile5. It should however be noted that his other business ties are in Chile. The final factor to consider is whether he maintains a place of abode in Australia as well as his intention after employment. In this case, it should be noted that his family resides in Australia. The fact that he has purchased a permanent home in Australia implies a place of abode as well as his intention to return to Australia after the employment is over. Therefore based on the above factors as well as circumstances, Kit should be considered to have continued to be an Australian resident for tax purposes although he has been permanently been employed abroad. How his salary and investment income should be taxed Having established that Kit is an Australian resident for tax purposes, his income from all sources will be taxed in line with the tax law provisions for residents. The graduated scale for residents’ taxation will apply to his salary with the tax-free threshold applying. He will also have to pay medical levy so that him and his family can be able to claim for the applicable medical benefits. Based on the provisions of ITAA 36, Kit’s income will have to be included as taxable income regardless of its source. Thus, the income from his Chilean investments will also be taxed in Australia6. However, any withholding tax on such investment income being allowed as a foreign tax credit offset with regard to applicable limits. It should also be noted that all applicable deductible allowances will also have to apply to Kit’s income given that he will be considered an Australian resident for tax purposes. Sale of land Cases decisions Case 1: California Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159 , The decision in this case was that the taxpayer was assessable on the profits that arose from the sale of the land since they were of an income nature. The nature of the company’s business was making profit from sale of land and the company never had enough capital to mine the land. Therefore, the sale of land was not different from other cases though consideration was in form of company shares as opposed to monetary consideration. Thus exchanging the land for shares of greater value was carrying on the normal business. A receipt from an isolated transaction may be income if the transaction was entered with an intention of making profit7. In this case, the gain was not mere realization of asset but intended to profit from the greater value of shares. Case 2: Scottish Australia Mining Co Ltd v FC of T (1950) 81 CLR 188 In this case, the court held that the profit made by Scottish Australia Mining Company Ltd when it sold the subdivided allotments was not assessable income for tax purposes. The reason for this decision is the fact that the company’s normal business did not involve subdividing and selling land. It should be noted that the nature of a business should be repetitive or that activity that the firm is normally carrying out for income. The company in this case had its normal (repetitive) activity being coal mining. However, since the coal has been depleted, how can the company best realize the asset? Thus, the company opts to subdivide the land and sell the allotment not as a normal business but as a way of realizing the asset to its best advantage. Case 3: FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR The court decided that the taxpayer was to be assessed on the profit it realized from developing the land and selling the houses. Based on FCT v Myer Emporium Ltd (1987), such activities cannot be considered to have been mere realization of capital. Furthermore, a new company was formed when the taxpayer sold shares to the two companies and made them managers. Thus the new company had a different purpose from the original one. The company did more than just subdivide land amounting to development and improvement of land which was not mere realization of asset and which was different from the original purpose of tax payer. Hence, such profit needed to be assessed for tax purposes. Case 4: Statham & Anor v FC of T89 ATC 4070 The company in question did not have its main purpose or business as that of selling land. As such, this was not the intention of the company’s business. This was the basis of the court decision that selling some of the subdivided lots by the company did not amount to taxable income of the deceased estate and hence the tax payer could not be assessed on it for tax purposes. It is to be noted that the farm had the original intention as farming but since farming did not succeed, the asset had to be realized to the best advantage. Thus, subdividing and selling part of the land was the best way the land could be realized and this was not aimed at generating income. Thus, the sales proceeds were not deemed as the tax payers income and hence could not be taxed. Case 5: Casimaty v FC of T 97 ATC 5135 The court in this case decided that the profit that the taxpayer realized by subdividing and selling the land could not be considered ordinary income for tax purposes and hence could not be assessed. For it to be considered as such the purpose for which the land was acquired had to have changed but there was no evidence to suggest this. That the subdivision , construction of road, water and sewerage services installation as well as fencing had taken place over 18 years could not make income therefrom taxable. This is because the taxpayer’s business was not that of land buying and subdivision. This was done as a way of realizing the asset and hence the decision that the proceeds could not be assessed for taxation purposes. Case 6: Moana Sand Pty Ltd v FC of T 88 ATC 4897 The court decided that the taxpayer had to be assessed on the $500,000 that arose from the resumption of the land. Though subdividing and reselling land was not the taxpayers normal business and the purpose having not changed, the court did not consider the need for a dominant profit making motif as necessary in deciding whether income is assessable or not. To the court, the circumstances led to the inference that the taxpayer had the intention of entering the transaction so as to make profit. This is why the court decided that the proceeds thereof were income for tax purposes despite this not having been the ordinary occupation of the taxpayer. Case 7: Crow v FC of T88 ATC 4620 In this case, the court determined that the taxpayer was carrying on a business of land development and hence the income should have been assessed. This was partly as a result of the taxpayer’s character. It should be noted that although the lands were initially being used for farming, the taxpayer’s character was that of purchasing various properties holding them for some time and then subdividing them and selling them. This is a character of a business which is systematic and also repetitive. Furthermore, the fact that he had a loan on the land indicated intention for reselling the land in future. This is the reason the court decided that the taxpayer should be assessed on the income. Case 8: McCurry & Anor v FC of T98 ATC 4487 The court decided that the taxpayer should be assessed on the profit arising from selling the land. This is based on the fact that when entering into the transaction, the taxpayer had the intention of making profit. In other words, the transaction was commercial. This is because it is clear that the aim of buying the land was so that the taxpayer can develop it and rent out the townhouses. Though the units were not rented out, they were eventually sold out and although this was not the company’s business, the proceeds from selling the townhouses were from a transaction of a commercial nature. This is why the court deemed such income assessable. Read More