Tax Law

Question 1:

Whether or not Kit is an Australian resident for tax purposes will be determined by the provisions in Taxation Ruling No. IT 2650.

Facts of the case:

Kit’s domicile is Chile where he was born and whose citizenship he retains. He works outside Australia for the most part of the year for a US company though he was recruited in Australia and signed employment contract in Australia. His wife and two children have lived in Australia since he was employed and they even purchased a home in Australia three years ago. He maintains a joint account with his wife with Westpac bank through which his salary is paid. His other investments are in Chile. Kit spends his one month off either in Australia or in Chile with his family or parents respectively.

Whether he is a resident or non-resident for tax purposes

The Income Tax Assessment Act 1936 views an Australian resident for tax purposes as a person residing in Australia and includes a person whose domicile is in Australia unless the commissioner does not consider his permanent place of abode to be in Australia1. One is considered a resident if he/she has been in Australia continuously during more than one half of income year or a person that is an eligible employee for purposes of the superannuation act 19762. Arising from this therefore, there are four tests used in ascertaining whether one is a resident including residence according to ordinary concepts, the domicile and place of abode test, the 183 day test or the commonwealth superannuation fund test. In deciding whether Kit is an Australian resident for tax purposes, the following factors would need to be considered;

  1. His intended and actual length of stay overseas- In this regard, Kit would always stay overseas as long as he is employed overseas.

  2. His intention to return to Australia at some point- His family, home and bank account being in Australia indicate intention to return after employment is over.

  3. Whether he has established a home outside Australia- there is no evidence that he has established a home outside Australia.

  4. Whether he has abandoned his residence in Australia- He has not abandoned his residence in Australia but has bought a home.

  5. The duration of his presence in the overseas country- He always stays overseas when working

  6. His association with a particular place in Australia- He has a home, a family and a bank account in Australia.

It is worth noting that though his natural Domicile is in Chile, he has chosen another domicile in Australia where he lives with his family prior to being recruited for the job. Thus, it can be concluded that he is domiciled in Australia and hence fulfills the domicile test. Apart from the domicile test, we have to determine his permanent place of abode. This is the place he resides together with his family and sleeps at night or his dwelling place3. It is to be noted that although it is obvious that Kit personally resides in Indonesia where he works, his family resides in Australia permanently. It is also to be noted that he acquired a home in Australia three years ago4. This means that despite his working outside Australia, he has established a home in Australia and has not abandoned the Australian residence due to the fact that his wife and children reside in this home. It is also worth noting that there is no evidence that Kit has established a home outside Australia. It is worth noting that despite his working outside Australia for the better part of the year, he has maintained a bank account with his wife at Westpac bank. It in this account that his salary from the employment is paid. The fact that his family resides in Australia, maintaining of the bank account and buying a home in Australia three years ago imply permanency of his association with Australia. It is to be noted that maintaining of his residence and bank account in Australia implies that he intends to return to Australia after his employment is over. In fact, he at times spends his one month leave in Australia with his family if not in Chile. Another factor to be considered is the duration and continuity of his presence in Indonesia. The fact is that he spends eleven months in his place of work. However, this does not negate the fact that he has a permanent abode in Australia.

Having considered the above factors, it can be concluded that Kit is an Australian resident for tax purposes. Thus, he will be taxed as an Australian resident for tax purposes. His salary will be taxed in line with the Australian graduated scale. He is however entitled to all the allowances and deductions awarded to Australians for tax purposes. In addition, his income from investments in Chile will also be taxed in Australia. ITAA 36 section 6AC provides that where an Australian resident derives income including dividends and interest from overseas sources implying that withholding tax is deducted at source, the income will still be included as part of his/her assessable income and the withholding tax allowed as a foreign tax credit offset up to the limit of the Australian tax payable on that income5. This is in line with the provisions of S6-5(2) of ITAA97 that Australian residents for tax purposes are taxed on all income whether sourced in Australia or overseas. Based on the above analysis therefore, Kit will be taxed on all his sources of income as an Australian resident with all the allowances and deductions applying accordingly.

Question 2:

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

The decision was that the company was assessable on such profits since they were of income nature. This is since the company’s business in line with its memorandum of association, it was involved in the business of buying the copper bearing land and since it lacked sufficient capital, such land would be sold at a profit. Though the land in question was sold in form of shares, it cannot be considered exchange or enhancement of capital since this is the business in which the company was always involved only that in this case, the consideration was in form of shares and the company did make profit from acquiring the shares. Thus, the profit thus made ought to be assessed since it is in the form of the company’s ordinary income generating nature.

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

The decision in this case considered whether the profit that Scottish Australia Mining Company Ltd realized from the sale of subdivided allotments was assessable income for tax purposes. The court held that it was not assessable income. This decision was made on the basis of the fact that a business activity is repetitive and hence business income should be from the activity that the business is normally involved in in the course of business. In this case, the taxpayer’s normal business operations involved mining of coal but in this case, the coal in this parcel of land has been exhausted. Though the company incurs expenses in subdividing the land, this is done to realize the land to its best advantage. The company had not bought the land for sale and its business is not selling land. Thus, the income thereof is not assessable for tax purposes.

Case 3: FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR

In this case, it was held that Whitfords Beach Pty Ltd would be assessed on the profit realized from the development of the land by subdividing it and constructing houses for sale. The rationale behind this is that the development could not have been held to be mere realization of capital. It should be noted that on selling shares to the other two companies and making them managers, the original company and its sole purpose had ceased to exist. It is to be noted that the taxpayer did not just subdivide the land; the process involved laying out and construction of roads, provision of parklands, services and other improvements. This is development and improvement of land to a great degree that cannot be considered mere realization of an asset. Thus, judges were right that the company be assessed on the profit arising therefrom for tax purposes.

Case 4: Statham & Anor v FC of T89 ATC 4070

In this case, it was held that the sale of some of the subdivided lots by the taxpayer was not assessable income of the deceased estate for tax purposes. This decision is based on the fact that the company in question did not have its main agenda as selling land and hence this was not the intention of the company. The original intention was farming but since farming did not succeed, dividing and selling part of the land was seen as a way of realizing the asset and not an income generating activity. Thus, the decision is right as the sales proceeds cannot be deemed ordinary income in this case.

Case 5: Casimaty v FC of T 97 ATC 5135

The decision in this case was that the profits realized from the subdivision of the taxpayers land was not ordinary income for tax purposes. The decision was based on the fact that though the taxpayer had subdivided the land, constructed road, and installed water and sewerage facilities and fence over a period of 18 years and hence this could be deemed as the business of land subdivision, it could still not be considered as such in this case. This is because there was no evidence that the purpose for which the land was acquired (farming) had changed. The taxpayer was not in the business of buying and subdividing land and hence the proceeds could not be deemed ordinary income for tax purposes.

Case 6: Moana Sand Pty Ltd v FC of T 88 ATC 4897

The decision in this case is that the profit arising from the resumption of the land amounting to $500,000 is profit for taxation purposes. This is despite the fact the subdivision and resale of the land was not the original purpose for which the land was purchased neither was there evidence that the purpose had changed. The judgment thus does reject the need for a sole or dominant profit making purpose. This decision therefore seems to suggest that the circumstances are such as to give rise to the inference that the taxpayer’s intention of entering into the transaction (subdividing and reselling the land) was to make profit or gain. Thus, such profit or gain was deemed income despite the fact that this was an extraordinary transaction given the ordinary course of Moana Sand Pty Ltd business.

Case 7: Crow v FC of T88 ATC 4620

The decision in this case was that the taxpayer for assessable on the profit since it was determined that he was carrying on the business of land development. Although the lands had initially been used for farming, the profit should have been assessed. This is based on the character of the transactions. This is because the tax payer purchased various properties which he subsequently sub-divided before selling. These actions are repetitive and systematic a characteristic of business. The loan also point to intention of reselling the land later.

Case 8: McCurry & Anor v FC of T98 ATC 4487

In this case, the decision that the profit from the sale of land was assessable under s 25(1) was the right one. It should be noted that the taxpayers entered into the transaction with a commercial intention or with the intention of making profit. This property had been acquired with a view of making profit from developing and renting out the townhouses which is commercial in nature. However, the units were eventually sold out which was not the original intention. However, though this is not deemed a business, the profit they acquired arose from a transaction of a commercial nature (commercial dealing) and hence the reason why it was deemed assessable.

1 Income Tax Assessment Act 1936

2 Taxation ruling No. IT 2650

3 Levene v I.R.C (1928) A.C. 217

4 F.C of T. v. Applegate (79 ATC 4307; (1979) ATR 899)

5 ITAA 36 s 160 AO.