Professional Commitments of Tax Rwsidency

Question: Discuss about the Professional Commitments of Tax Rwsidency. Answer: 1. Issue This case details present information on Fred namely his purpose visit, assets, family and professional commitments so that the tax residency status can be determined for the given year under assessment. Rule The relevant statute that plays a key role in tax residency is subsection 6(1), ITAA, 1936. This along with the tax ruling TR 98/17 provides guidance with regards to the exact mechanism to be adopted with regards to determination of tax residency status. The four tests that are available to check for tax residency as outlined in TR 98/17 are briefly discussed below (Gilders et.. al., 2013). Domicile Test As per this test, there are two major conditions that are to be fulfilled. Firstly, procession of Australian domicile is mandatory. Secondly, the permanent abode of taxpayer must not lie outside Australia. In the event that the given taxpayer fails to satisfy any of the two conditions mentioned, Australian tax residency would not be given based on this test (Woellner, 2015). Resides test The test mainly relies on tax rulings and case law to derive on the application as the available information in various statutes and legislation is rather limited. As per these, the critical aspects that play a crucial role in determining residency are as mentioned below (Coleman, 2011). Underlying significance of the purpose with which taxpayer has arrived in Australia Level of comparability between the life led in Australia and the country of origin Intensity of various ties in Australia If either of the above parameters are satisfied, the taxpayer is considered an Australian tax resident. 183 day test This test requires the taxpayer to comply with two main conditions (Barkoczy, 2014). Minimum presence of 183 days in Australia by the taxpayer in the year under assessment. This stay need not be necessarily continuous in nature. Intention to settle in Australia on the part of the taxpayer in the long term/ Inability on the part of the taxpayer to meet with any of the above would lead to Australian tax residency not conferred. Superannuation Test The tax of foreign based government officers is decided on basis of whether or not contribution is made atleast one of the designated superannuation funds. This test is not used for any other type of taxpayer and hence is highly specific (Sadiq et. al., 2015). Application It is apparent that Fred does not belong from Australia and hence does not have a domicile of Australia rendering the domicile test as not applicable. Similarly, since Fred is not an Australian government employee, hence superannuation test is also not applicable. The two applicable tests are 183 day test and Reside test. 183 day test is not satisfied by Fred despite staying in Australia for more than 183 days since there is a lack of intention from Freds side with regards to settling in Australia. This is apparent from lack of any fixed investment in Australia, leasing house for 12 months and also putting the house in England on rent. However, the resides test is satisfied as the purpose of visit is employment that too not for a few months and hence is significant. Also, Freds life in Australia is similar back home which implies that the test is passed. Conclusion Fred is a Australian tax resident for the given year as he has managed to pass one test listed under TR 98/17. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159 It is essential to determine the concepts behind the source of the received income form the transaction. If the source of the derived income is from realisation of the capital asset, then it would not be assessable as per the ITAA. Also, diversification in the intent of the taxpayer will cause the shift in the type of received income (Gilders et. al., 2013). A copper land was sold to a company which was actively involved in the mining of copper ores. This copper land was purchased on the part of the taxpayer for copper mining. However, the company did not even start the copper mining process on the owned land and eventually sold it to some other mining company. The taxpayer received shares of the respective company as compensation of the copper enriched land (Woellner, 2015). The verdict of the honourable court said that the intention of the company was to invest in the land and then subsequently sell it to the potential mining company. Since, they did not have enough financial resou rces to operate the mine, irrespective of this fact, they had spent all their capital and also the money taken from financial sources would use to purchase the land and would also explain the intent on the part of the taxpayer to profit from sale of mine (Manyam. 2010). Thus, the receipts would not be considered under the source of realisation of the capital asset and it was more likely towards carrying a business of making profit from sale of land, thus, the earned amount from sale of the copper mine land would be assessable income under ITAA, 1936 (Coleman, 2011). Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188 It was contention on the part of the company in the court that the purpose behind the land development and sale of the land was just to consume the available land. Thus, it should be considered under the section 24 or section 6, thus leading to realisation of the capital asset. According to the information collected from the memorandum of the company, it was found that the prime aim of the company was to engage in mining of coal from the purchased land for this purpose. The Lambton land was bought with the above mentioned intention and mining had been performed by the company for years. This continuous mining of coal caused the formation of the ripe land, which could not be used for more coal mining. Therefore, the shareholders made a final decision to sell this land after making it suitable for residential purpose. In this process, plots cutting on the land, road construction, park, water supply, sewage unit, hospitals, school, and church and railway station were constructed. These above mentioned land development activities were essential in order to make it significantly suitable for residence, because an unstructured mined land could not be sold directly for residential purpose (Barkoczy, 2014). Hence, after considering the above evidences, it was ruled by the honourable court that the income from the land sale would be termed as capital receipts. Therefore, the sale of the mined land by the company was only mere realisation of the capital asset, rather than profit making business activity (Jade, 2016). FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR This case discussed the intent of the taxpayer to sell his land to the land development companies. It was observed by the court that a beach side land was sold to the companies which were performing land development and trading activities. In the initial stages, the taxpayer had involved in the activity of the drying of the fishing shacks on the land. However, later on he sold the land to these companies at a higher value. Companies professionally started land development on this acquired land. In order to authorize these activities, various correction was also made in the article of association by the companies. Thus, in the process of land development, various plots, roads were constructed in order to achieve premium returns. A sizable return was earned by the companies from the sale of the beach side land plot. It was clearly expressed that the intention on the part of the taxpayers was to conduct a business activity of land trading. It was ruled by the honourable court that the i nvolvement of the taxpayer in the land development activities and after that selling of the beach side land plots was to be treated as per the ordinary concepts of the assessable income and would be subjected to assessable income section 25 of ITAA, 1936 (CCh, 2016a). Statham Anor v FC of T 89 ATC 4070 The taxpayers received a part of a deceased estate, which was initially bought with the intent of farming. The financial conditions of the taxpayers were not stable and hence, for betterment of the financial conditions of the family, a small cattle business was started by them. This cattle business failed due to unorganised business techniques and lack of market research. Poor financial status and failure of the new cattle business forced the taxpayers to sell the land. They were not in a favour to sell the whole farm land. Hence, subsequent subdivisions were conducted by the taxpayer. A small section was kept for farming business and rest of the land part was sold to the land buyers. No advertisement was performed on behalf of the taxpayer to search for a premium buyer. This activity on the part of the taxpayer hinted towards the intent that they did not want huge profit by selling the land hence, no efforts were performed to search potential buyer. This activity indicated the non-b usiness intent on the part of the taxpayer. The court declared that the intention of Statham Anor was to earn some funds in regards to solve their financial scarcity. There was no willingness on the part of the taxpayers to conduct any land trading commercial business of profit making from sale of land. Therefore, the shifting of the activity from farming to sale of a land part will be considered as realisation of the capital asset as per the above mentioned factors and would not be liable for taxation under the assessable income concepts of ITAA, 1936 (CCh, 2016b). Casimaty v FC of T 97 ATC 5135 Any transaction of sale of the land with high magnitude amount cannot always be considered as assessable income of profit making under the section 26 of ITAA, 1936. The critical issue that arose in this case as observed by the Federal court was whether Casimaty was involved in the business activity of selling of the subsection plots made on the purchased far land. The taxpayer i.e. Casimaty claimed that the sale of the land was enacted to overcome the loan and he was still using the remaining part of the land for farming and there was no intent of selling the land for generating gains. He had taken a loan amount from bank and the mortgages kept on increasing day by day hence, to pay this loan. He sold a sizable part of his farm land. The court agreed with this contention on behalf of the taxpayer and ruled that the selling activity would be just a realisation of the asset and non- assessable receipts were generated from sale of land, hence there would not be any tax applied on the re ceived income of the taxpayer (CCh, 2016c). Moana Sand Pty Ltd v FC of T 88 ATC 4897 In this case, the tribunal decided that the primary activity of the taxpayer was extracting and selling of the sand. The activity changed and the land was used for selling purpose by the taxpayer. The sand land turned ripe due to depletion of sand reserves and subsequent sub division was performed on the part of the taxpayer. Several land development activities were taken by taxpayer to get the premium price of the subdivided land part. The Federal court had cited business activities by the taxpayer to receive high revenues. Hence, the assessable income was to be taxed, while there were several contentions on the part of the taxpayer that it was mere realisation of the sand land asset (Sadiq et. al, 2015). Finally, the tribunal decided that the secondary activity was taken in account on the part of the taxpayer when the land was completely exhausted to continue the primary activity of extraction. Hence, to use the ripe land, the company liquefied the land and it was essential to perf orm land development activity to prepare the land for selling activity. Hence, based on these evidences it was declared a realisation of the land asset and would not be assessable under taxation law (Coleman, 2011). Crow v FC of T 88 ATC 4620 There are some series of activities that were performed on behalf of the taxpayer mentioned below. Purchasing of the farm land from borrowed money Subsequent subdivision of the farm land Continuous selling of the plots to different buyers at undefined time interval Initially the land was utilized for farming and afterwards the above mentioned activities were performed on behalf of the taxpayer. Significant profits were earned from sale of plots. The Federal Court had ruled that the sale did not amount to realisation of the available asset to repay his bank loan. This is primarily because the taxpayer even though was poor, but still undertook huge loan for buying land being fully aware that he would sell them at a later stage and thereby earn high profits. Further, the farming was continued for a very short term after which the taxpayer was indulged in buying of more pieces of land and developing these. This process went on repeatedly in a systematic manner which as per the court signals land development business and hence makes the derivable gains assessable as ordinary income. Had it been that the land development was an afterthought provided farming did not paid rich dividends, then it would have amounted to realisation of capital asset. Howe ver, here the intention to indulge in land development was present from the very beginning (CCh, 2016d). McCurry Anor v FC of T 98 ATC 4487 McCurry Anor were two brothers who had planned to buy a land which already had few old unstructured houses. They dismantled the old houses from the land in regards to construction of the new townhouses. For performing this activity, they issued a loan of $80,000 from bank. The taxpayers also made an advertisement for the sale of the townhouse to find the potential buyers and maximise their revenue. Over a period of time, these newly constructed townhouses were ready for selling, but they did not find any optimistic buyer for the townhouses. Hence they started residing in one of the townhouses. After one year of searching, all the three newly constructed townhouses were liquidated. The received revenue from sale of the townhouses was approximately $150,000. The tax commissioner had ruled that the revenue of $150,000 would be assessable in nature and liable for taxation under the section 25(1) of ITA, 1936. However, it was cited on behalf of the taxpayers that the selling of the townh ouses was to discharge the financial dues (bank loan) and also there was some financial crisis faced by their family. The case was landed into court, where the court ruled that there is no potential in the arguments made by the taxpayers because the land development, construction of new houses was specifically mentioned the intention of the taxpayer to carrying land trading business. They wanted to earn huge revenue from the sale, and for the same work, they spent a sizable amount for advertising about the townhouse in regards to find the potential buyer. Hence, the court decided that the received revenue of $ 150,000 would be assessable for taxation (CCh, 2016e). References Barkoczy,S 2014,Foundation of Taxation Law 2014,6th eds., CCH Publications, North Ryde CCh 2016a, FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR, Available online from https://www.iknow.cch.com.au/document/atagUio549860sl16841994/federal-commissioner-of-taxation-v-whitfords-beach-pty-ltd-high-court-of-australia-17-march-1982 (Accessed on August 29, 2016) CCh 2016b, Statham Anor v FC of T 89 ATC 4070, Available online from https://www.iknow.cch.com.au/document/atagUio544343sl16788832/statham-anor-v-federal-commissioner-of-taxation-federal-court-of-australia-full-court-23-december-1988 (Accessed on August 29, 2016) CCh 2016c, Casimaty v FC of T 97 ATC 5135, Available online from https://www.iknow.cch.com.au/document/atagUio539843sl16716249/casimaty-v-fc-of-t-federal-court-of-australia-10-december-1997 (Accessed on August 29, 2016) CCb 2016d, Crow v FC of T 88 ATC 4620, Available online from https://www.iknow.cch.com.au/document/atagUio545564sl16800674/crow-v-federal-commissioner-of-taxation-federal-court-of-australia-17-august-1988 (Accessed on August 29, 2016) CCh 2016e, McCurry Anor v FC of T 98 ATC 4487, Available online from https://www.iknow.cch.com.au/document/atagUio539084sl16707683/mccurry-anor-v-fc-of-t-federal-court-of-australia-15-may-1998 (Accessed on August 29, 2016) Coleman, C 2011, Australian Tax Analysis, 4th eds., Thomson Reuters (Professional) Australia, Sydney Gilders, F, Taylor, J, Walpole, M, Burton, M. Ciro, T 2013, Understanding taxation law 2013, 6th eds., LexisNexis/Butterworths Jade 2016, Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188, Available online from https://jade.io/j/?a=outlineid=64663 (Accessed on August 29, 2016) Manyam, J 2010, Taxation Of Gains From Banking and Insurance Businesses In New Zealand, Revenue Law Journal, Vol. 20, No.1, pp. 1-29 Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2015 ,Principles of Taxation Law 2015, 7th eds., Thomson Reuters, Pymont Woellner, R 2015, Australian taxation law 2015, 8th eds., CCH Australia, North Ryde