Taxation, Theory, Practice & Law

Case Study 1: Residence and Source

In the present case, Fred has come to Australia with the intentions of setting up a branch office of his company. Since, Fred thinks the reasonable ties to establish office would be a period of twelve months; he has leased a residence in Melbourne as his residence. Fred has stayed for a period of eleven months in Australia and returned back due to reasons of ill health. During this period of eleven months, Fred received rent on the UK property and interest from investments made in France. Thus, the main issue is whether such income would be taxable considering Fred as a resident of Australia for the purposes of taxation.

The test of residency in Australia is as below (ATO, 2016):

A person shall be considered an Australian resident for the purposes of taxation if:

He/she temporarily leaves Australia and do not build a permanent home outside in any other country.

He/she being an overseas student is enrolled in certain course which is longer than six months, at an Australian institute.

e/she is visiting Australia for a period more than six months and during this time lives at a certain place in the country whereby also builds ties with the local community.

He/she migrates to Australia with the intentions of residing in the country permanently.

A person shall be considered a Foreign resident for the purposes of taxation if:

He/she visits Australia for a period more than six months and during this time travels and works in various locations all around the country.

He/she holidays in Australia or visits the country for a period shorter than six months.

If a person leaves Australia permanently, then he/she shall be treated to be foreign resident for the purposes of taxation from the date on which departure from the country was made.

The analysis of above requirements clarify that since Fred stayed in the country for a period of eleven months, which is more than six months with the intention to establish business and for the purposes of  which Fred also took up residence in the country, he shall be considered as a resident for the purposes of taxation. Fred stayed in Melbourne for a continuous period of eleven month and has also vacated his permanent residence in UK by letting it on rent, since his aim was to establish and set up his business in Australia.    

Further, residents for the purposes of taxation are taxed on their income earned worldwide. Thus, it is clear that any income that Fred earned during the eleven months including the rent received from the UK house and income from investments made in France shall be taxed in Australia. In this case, determination of residential status of Fred is easy since he directly fulfills the set guidelines of residency. It is regardless to say that Fred did not have certainty of his stay at the time he reached the country because the duration can be curtained from the duration of lease made for holding permanent residence in the country. 

Case Study 2: Ordinary Income

Explanations of the respective outcomes reached by the courts in the following cases which all involving sales of land:

1.      California Copper Syndicate Ltd. v. Harris (Surveyor of Taxes) (1904) 5 TC 159

The main principle established under this case was to distinguish a onetime transaction entered into with a view to earn project with a capital transaction so as to ascertain the nature of tax assessable on such transaction. The court determined whether gains, which are made during the course of business, shall be assessable or not. The court stated that if the gains have been made during the business but derived from such assets, which do not form part of circulating or trading assets of such business rather they are capital assets, then such gains shall not be considered as taxable in nature. 

While giving the above decision, the court explained that while dealing with the questions relating to assessment of Income Tax, the principle is well settled that if the owner having ordinary investment wants to realize it and in lieu of such realization, the owner obtains a price greater than at what it was originally acquired, then such enhancement of price shall not be regarded as profit in the sense of being assessed as Income Tax. The main reason of not considering such extra price as profit is that it is not of routine nature and does not even form part of the business activities but is merely a capital transaction made in business. Further, the court explained that it is equally established that where such enhancement in price is obtained from conversion or realization of securities, which form part of the daily course of business or are integral to carrying on or carrying out of business, then such change of investment or realization shall be assessable under Income Tax because it will constitute profit earned on recurring nature. It might be difficult to define a clear line of distinction between these two cases and thus it shall strictly depend on the facts and circumstances of each case while deterring whether a sum of gain made in the course of business by enhancing the value of an asset or security shall be considered as capital receipt or current receipt (Manyam, 2011).

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

In this case the court dealt with the issue that if a mining company, which acquired land for the purposes of mining later subdivided and sold it, then whether such sale would form part of ordinary income or realization of capital asset (Jade, 2016). When the commissioner assessed on the price relating to sale of land, the mining company argued that the income so earned after selling the land was capital in nature and could not be considered as ordinary income. However, the commissioner stated that the transaction was assessable as ordinary income because the main reason for acquiring such land was to make profit by sub dividing and re-selling the land. The court agreed the decision of the commission and said that the profits made on selling were taxable because the company was indulged in the business of selling lands with a view to make profits, which would come under ordinary profits. Since the main objective while selling was to make profits and such transactions were regular in the business of the minimum company and there was no investment purpose behind such transaction, it shall be considered as ordinary in nature and therefore assessable to tax (Bitomsky, 1991).

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

The main question before the court was whether proceeds from changing the shareholding structure of a company with a view to sell the land for high profit would constitute assessable income or not. Various earlier cases have readily agreed that when broad acres are converted into residential allotments, it is nothing more than mere realization of capital assets during the course of business. However, this opinion is varies from case to case. In the current case, since the taxpayer required to undertake active measures so as to remove such legal impediments that were on the development of subject land, the entire character of the present case transaction’s had changed. This change in character was pivotal for the successful achievement of the main purpose of the taxpayer. Thus, in the present case taxpayer invested in the subject land to enhance the capital of the business in a manner so that the profits of the business could also be enhanced by modifying the shareholding pattern of the company. Thus, in the present case the income earned from such land was considered to be assessable income and it came within the scope and meaning of income as defined under Section 25 of the Act. The court in this case stated that fulfilling legal obligations so as to change the structure of land, which is the subject of the transaction and at the same time seeking to make profits with such transaction would constitute the income assessable and not as that of capital nature (Jade, 2016). 

4.      Statham & Anor v FC of T 89 ATC 4070

In this case, the court stated that considering the facts and circumstances it would not be correct to push price earned from mere realization of assets to consider it as a transaction entered into with the aim of earning profits. The appellants in this instant case had appealed the decision of Administrative Appeals Tribunal which affirmed the disallowance by the Commission relating to assessment of income tax for sale proceeds of a certain land, stating such proceeds to be assessable as ordinary income. The court in its decision stated that the appellants did not involve in the sale in a manner which one might expect to be construed for business or under a scheme of making profit under the business. The sub-division was organized in a part-time basis manner. Thus, it was stated that the owners had no intention of entering into a scheme of profit making by selling the lands rather the mere intention of the owners was to subdivide and sale the land. Further, there was no business of selling land that was entered into by the owners and such sale of lands were not performed on ordinary basis as a part of business activity so as to construe the profits of sale to be assessable as income. Therefore, such realization of land by sale was concluded to be no resulting in income earned under section 25(1) of the Act (Wolters Kluwer, 2016). 

5.      Casimaty v FC of T 97 ATC 5135

The Deputy Commission of Taxation disallowed the assessment tax giving the reason that the applicant made successive subdivision on its farming property during the course of carrying on business. The main issue to be determined before the court was whether subdivision leading to sale of the farming property of taxpayer should be construed as a part of business conduct or the sale proceeds should be assessable as capital gains. The court ruled in the favor of the taxpayer, giving reasons that the property, which was subdivided and subsequently sold was acquired and used for the purposes of residence as well as business. Further, the taxpayer underwent the activities to seek approval time to time required for subdivision of the property, however while taking such approvals, the taxpayer did not in any manner changed the main object or the purpose of the land. Thus, the present case stands different from the previous cases, wherein he taxpayers entered into legal obligations for changing the object of the land prior to subdivision and sale. The taxpayer in the present case also did not acquire any other land so as to add to the stock of the business, if such a transaction would have been carried out then it would result in the intentions of the taxpayer to sell the land with a view to carry on the business of land development. The main objective of selling the land was to reduce the burden of increased debt and also making provisions for the future considering deteriorating health of the taxpayer. Therefore, the tax was not assessable as income (Wolters Kluwer, 2016). 

Moana Sand Pty Ltd v FC of T 88 ATC 4897

In this case, the taxpayer received a surplus as the land owned by it was resumed by the authorities. The commissioner assessed such surplus to be income, which was challenged by the taxpayer.  In the present case, the taxpayer purchased the land for conducting the business of sand on such land. With the exhaustion of sand on that land, it was considered as “ripe” for the purposes of subdivision and sale. The court held considered the main purpose of the taxpayer while acquiring the land was not to earn profit by reselling it but despite such main purpose, the court stated that such income from reselling shall be assessable (Flynn, 1999). In this case, the court rejected the test for “dominant purpose” while conducting a test on the scheme of profit-making. However, even after this rejection, the court went further to endorse the test of “dual purpose”. The property of the taxpayer was described to be fulfilling the ultimate purpose of the company in regards to the land. However, it can be said that the court agreed to the proposition that if in a profit making scheme, there are dual purposes, one amongst which proclaims profit, then it shall be deemed to be sufficient to render such a transaction in the revenue account (Cassidy, 1994).  Thus, considering the dual purpose objective, which included profit making, the profit earned from sale was considered to be assessable (Young, 2007).

7.      Crow v FC of T 88 ATC 4620

The main question before the court was whether the proceeds from the sale of land would be considered as assessable income or not. The court viewed that in the present case of purchase and subsequent division along with sale of various properties, the taxpayer was involved in systematic and repetitive transactions, which promoted the characteristic of continuing business in regards to land development. The court had sufficient reasons to believe that the sole purpose of the taxpayer in buying and selling the land was to make profit out of such transactions. The activities of the taxpayer depicted carrying on business and thus profits from such activities would constitute income for the purposes of taxation.  The court relied on various transactions, which lead to the conclusion that there existed continuous business for land development. Thus, the profit earned from subdivision and sale was considered as assessable. Further, such profit was the income as under Section 25(1) of the ITAA, 1936. The court emphasized that while viewing a transaction to determine whether it constituted business activity, it is pertinent to determine the overall activities in which the person was indulged and not just a transaction in isolation. Further, it was held that profits and gains can be of two types, first, which arise from the business transaction, and second, which arising from a transaction that constitutes ordinary incident of business activity (ATO, 2001).

8.      McCurry & Anor v FC of T 98 ATC 4487

In this case, the taxpayer was involved in purchase, construction and sale of townhouses on land. The land on which townhouses were constructed was used for residential as well as purposes of selling. The commissioner held the profits from sale to be assessable as ordinary income since it resulted from commercial activity of profit making. When the matter was bough before the court by the taxpayer, it stated that the primary objective of acquiring land was to make commercial use of such land and obtain profit from sale. Thus, the profit from sale of townhouses would constitute ordinary income. The taxpayers did not have any purpose or intention of purchasing the land for investment and thus the proceeds from sale of such land cannot be determined as capital receipts. Further, the court stated that it is irrespective that the taxpayers used the property for residential purposes for a certain period of time because the dominant purpose of entering into such arrangement was to redevelop the property and sale it, so as to make higher profits out of the transaction. Thus, the court relied on the intention of the parties, which could be clearly concluded from the event and activities in which taxpayer participated. Since, the intention was clear as to resell, it constituted business activity and the profit earned as income assessable as ordinary income under the provisions of income tax. The taxpayers could not take any exemption in this income stating it to be of capital nature (Wolters Kluwer, 2016).

References

ATO, 2001. ATO Interpretative Decision. [Online] Available at: https://www.ato.gov.au/law/view/document?docid=AID/AID200155/00001 [Accessed 19 August 2016].

ATO, 2016. International tax for individuals. [Online] Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/Work-out-your-tax-residency/ [Accessed 19 July 2016].

Bitomsky, G., 1991. The Concept of Assessable Income Has it Changed. Revenue Law Journal, 2(2).

Cassidy, J., 1994. The Taxation of Isolated Sales under Section 25 (1) ITAA: TR 93/2 v Joint Submission. Revenue Law Journal, 4(1).

Flynn, M., 1999. Distinguishing between Income and Capital Receipts- a Search for Principle. Journal of Australian Taxation, 2(3).

Jade, 2016. High Court of Australia- Judgement. [Online] Available at: https://jade.io/article/67040 [Accessed 19 August 2016].

Jade, 2016. JadeScottish Australian Mining Co Ltd. v Federal Commissioner of Taxation. [Online] Available at: https://jade.io/article/64663 [Accessed 19 August 2016].

Manyam, J., 2011. Taxation of Gains from Banking and Insurance Businesses in New Zealand. Revenue Law Journal, 20(1).

Wolters Kluwer, 2016. CASIMATY v FC of T, Federal Court of Australia, 10 December 1997. [Online] Available at: http://www.iknow.cch.com.au/document/atagUio539843sl16716249/casimaty-v-fc-of-t-federal-court-of-australia-10-december-1997 [Accessed 19 August 2016].

Wolters Kluwer, 2016. Court Cases. [Online] Available at: http://www.iknow.cch.com.au/document/atagUio544343sl16788832/statham-anor-v-federal-commissioner-of-taxation-federal-court-of-australia-full-court-23-december-1988 [Accessed 08 August 2016].

Wolters Kluwer, 2016. McCURRY & ANOR v FC of T, Federal Court of Australia, 15 May 1998. [Online] Available at: http://www.iknow.cch.com.au/document/atagUio539084sl16707683/mccurry-anor-v-fc-of-t-federal-court-of-australia-15-may-1998 [Accessed 19 August 2016].

Young, N.J., 2007. The Historical Significance of the High Court’s Decision in Federal Court’s Decision in Federal Commissioner of Taxation v The Myer Emporium Ltd. Melbourne University Law Review, 31, pp.266- 294.

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