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Analysis on Taxation Laws and Cases

Question:

Discuss about the Analysis on Taxation Laws and Cases.

Answer:

Case study 1: Source and Residence

According to the tax authority of Australia, Fred is obliged to pay tax to the government, since the tenure of his stay in the nation is over 11 months before returning to the UK. N addition, the amount earned from investment in France would also be taken into account during the tax assessment of the person. The diverse ranges of difficulties are needed to be considered depending upon the individual circumstances. However, it needs to be borne in mind about the connotation of the lucidity relating to the residency subject. This also includes the immigrants obtaining the relevant advice in relation to a specific business and undertaking any contract.

From the provided case, it is inherent that Fred is an Australian resident, as far as the tax assessment is concerned. In order to obtain the residential status of Australia, a person needs to spend 183 days in the country (Sharkey 2015). According to the given case, Fred has stayed in Australia for 11 months and hence, liable to pay tax to comply with the norms of the nation. Along with this, Fred has leased a land in Australia for 12 months and resided with his wife before coming back to the UK due to poor health conditions. The guidelines of the Australian tax agency connote that a person could be relieved from tax payment if the nationality is different with no intention to reside in Australia.

At the time of domicile test, the “Income Tax Section, 2650” cites that the nation, in which an individual is born until the person has shifted to other area and adopted the citizenship of choice are exempted from tax payment in Australia (Barnett and Harder, 2014). With relevance to the provided case study, Fred is an UK resident having no desires to build up a business in the province of Australia. However, the tenure of the person’s residence has met the criteria of Australian citizenship. In addition, Fred has leased a property for a year, although the person made his way back to the UK after 11 months due to health problems.

It is worth mentioning that the residential status of Fred could be decided according to the tenure of stay in Australia. The test related to residency is utilised to fetch the information of the tax liability based on the circumstances of tenure. Moreover, in situations, when an individual returns to the home country, the regularity, frequency and periods of trips are considered in order to assess the taxable income of the person.

If the reason behind the absence of a person from Australia is related to business, then it could not be considered sufficient to assess the inhabitancy of the individual for tax assessment. Based on the above statement, the bonding of Fred with business and family in Australia is sufficient under “Income Tax Act” for taxable purpose. Hence, based on the above discussion, it could be inferred that Fred has met the eligibility criteria of the Australian citizenship and thus, taxable under the “Income Tax Act”, Australia.

Case study 2: Ordinary Income

I. “Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159”:

This specific case is concerned with the recognition of complexities related to the capital assets and making decision whether the amount received from the sale of property could be subjugated for the minerals through ordinary income or capital (Law.ato.gov.au. 2016).

Law:

The law provides the path in ascertaining the income accumulated from secluded dealings and it is assessable under ‘Section 25(1) of the Income Tax Assessment Act, 1936”. The secluded transactions are referred as the transactions, which are generated from outside the business of the taxpayer. The taxpayer is the individual responsible for managing the activities pertaining to trade and commerce. In addition, these dealings also arise out of transactions of the taxpayers not associated with any type of business activities.

Results:

The case result observed depicts that the taxpayer has been assessable on the profit ground arising from the land sale. This is because the amount received from sale has been in the form of profit, which indicates its nature in terms of income. It is evident that the taxpayer has made an effort to make profit from such sale. Additionally, the taxpayer has declared that the individual did not have sufficient funds for land mining.

As per the court verdict, the presence of a well-settled doctrine is inherent in providing answers to the income tax assessment. As remarked by Davison, Monotti and Wiseman (2016), the “owner of ordinary investment” has recognised the investment made on the part of the taxpayer at the time it reaches a higher cost and not only profit. Therefore, according to “Sense of Schedule D of the Income Tax Act of 1842”, the income made from land sale is assessable to income tax.

II. “Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188”:

The above case portrays a vivid description of the income made from business and learning from subdivision for land sale. This could be further exploited for the recognition of capital (Tran-Nam, Evans and Lignier 2014).

Law: Tax gains from capital:

The capital gains and losses could take place in different forms and it could be made if the event related to capital gains tax is mentioned in “Section 108-5(1) of the income tax assessment act 1997”. This clearly points out that the capital gains could be referred as the “legal equitable right” or “form of property”; however, not a property itself (Taylor and Richardson 2013).

Results:

The decision undertaken on the part of the management could be considered for the transfer of proposition, which is associated to the scanty recognition of the concern. According to the report of common law, the verdict has taken a longer timeframe of two days and the verdict has been passed on the sixth day. The results obtained clearly indicate that the commercial exercise has been treated as a meager recognition of the capital assets (Lignier and Evans 2012).

III. “FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR”:

This case is based on the piece of information that whether a taxpayer has been charged tax based on the profits made from the sale of the land subdivision. Therefore, it needs to be taken into account under “Section 25(1) or 26(a) of the Income Tax Act”. Alternatively, it could also be considered when the taxpayer has been seen to liberate the capital assets (Barnett and Harder 2014).

Law:

The sections of this law provide directions in ascertaining the amounts derived from secluded transactions. These amounts are then treated as “income or assessable under Section 25(1) of the Income Tax Assessment Act, 1936”. However, this law fails to consider the “Section 25(A) of the capital gains and losses under provision and division of Part III(A)”.

Results:

According to the verdict of the case, the taxpayer has been assessable on the income earned from the sale of the land, as discussed in the above “section 25(1)”. The high court has evaluated that the income made has crossed the limit of the meagre realisation of the capital assets and the other associated activities, which are necessary to manage the day-to-day operations of the business (Arthur 2016).  Even though the court has specified the second limb under “Section 25(1)”, it fails to take into account the profit generated from the gross income. As a result, it is associated with the generation of profit, which is calculated by deducting the gross income generated from the value of the land sale. This needs to be done by keeping in mind the date, when the income has been ventured in the development business of the taxpayer. 

IV. “Statham & Anor v FC of T 89 ATC 4070”:

This particular case pertains to selling of parcel of land that are subdivided and the subsequent incomes that is derived from such sale. The relevant provisions relating to such income are not taxable under provided under the section 25 (1) or under section 26 (a).

Law:

Taxable Income: The incomes derived from the realisation and sale of piece of land that has been subdivided and which was previously acquired with the intention of farming and on which agricultural activities has been conducted. The income from the proceedings shall be taxable irrespective of whether such income has been generated in the usual course of business or from disposal of a capital asset (Thampapilla et al. 2015)

Decisions: The judges ruled that such income that are derived from realisation of parcel land does not comes under the purview of section 25(1) or 26 (a). The decision that have been undertaken by the owner pertaining to sale of land after partitioning owing to cessation of agricultural activities cannot be subjected to taxation. The mere abandoning of intention towards further agricultural activities cannot be amounted to the fact that such assesses have been engaged in business or gain generating activities.

V. “Casimaty v FC of T 97 ATC 5135”:

This specific case ascertains the profit amount generated from sale of the land portion and subdivision. In addition, it also determined whether the same is assessable under “Section 25(1) or 25(A)”.

Law:

This particular case study could be kept under the sections of assessable income, which explains the sales arising from the land subdivision accumulated and utilised for farming purpose Woellner et al. (2016). The main question here is to dissect whether the generation of profits has been due to conduction of business processes or meagre recognition of capital assets.

Results:

According to the verdict of the court, the profit made has not been generated from the commercial land subdivision or intention to make profit schemes. In addition, the court verdict also stated it was not meagre recognition of capital asset in the context of the taxpayer. From the case study, it has been observed that the taxpayer has been engaged in conducting farming activities by collaborating with his family. However, the court has not accepted the “action view” in relation to partnership asset. In addition, the taxpayer has not claimed the business expenditures as interest to manage the cost of subdivision.

Hence, the court has passed the order that the taxpayer has not generated any profit from sales, which is assessable under “first limb of Section 25A (1)”. The second limb of the above section has also been ruled out, as there is no motive to generate income from the conduction of the business activities.

VI. “Moana Sand Pty Ltd v FC of T 88 ATC 4897”:

This particular case focused on the accessibility of income under the sections 25(1) or 26 (a) pertaining to a profit on $370000 subjected to costs of acquisition along with other costs significant to transfer.

Law:  

The aforementioned case assists in determining whether income arising out of isolated transactions comes under the purview of income tax and whether such income are assessable under section 25 (1) of ITA Act, 1936. The isolated transactions in this context relates to such transactions that falls outside the normal course of business or are carried out by non business payee.

Judgement:

The income received in the aforementioned case has been regarded as a isolated transaction owing to the separate nature of the income. However, in another case pertaining to “ FC of T v The Emporium Ltd ATC 4363” the income in question has included in assessable income under section 25(1). The purchase of land with an intention of utilising it and selling it afterwards has been taken up under the purview of assessable income. The ruling also mentions the fact that the sale of land was undertaken with an intention towards gaining from such irrespective of the subsequent ending of such schemes. The aforementioned profit can still be subjected to assessment under section 26(a).

VII. “Crow v FC of T 88 ATC 4620”:

This particular case is related to the taxability of profit gained by a taxpayer in relation to disposal of land near Hobart.

Law:

Assessable Income: Gains or profits that are derived through disposal or selling of land originally earmarked for farming and agricultural processes are considered under assessable income. The intention of sale or disposal has not been taken into consideration in regards to inclusion of profits for tax assessment.

Judgements: The honourable Federal Court decided that such income should be assessed for taxation purposes as the taxpayer has are running a business pertaining to improvement of land. Moreover, the court also stated the fact that the even though the taxpayer was initially engaged in farming but the amounts of debts entered onto by the taxpayer in order to acquire the land showcases the intention towards subsequent disposal of land for profit making purposes (Taylor and Richardson 2014).

VIII. “McCurry & Anor v FC of T 98 ATC 4487”:

The premises of the case pertains assessment of income under 25(1) arising out of construction of additional sets of building on a piece of land and subsequently selling off such property.

Law:

Assessable Income: The properties acquired prior to 20.09.85 are beyond the purview of the aforementioned section. Moreover, the section also tends to lose applicability in cases where the income or profits have aroused prior to the accounting year 1997-98. The relevant law states that the income derived from transferring or sale or disposal of any property previously acquired with an intention of deriving profit are assessable for taxation purposes (Latimer 2012).

Judgement: The Federal Court stated that the profit regarding sale or transfer of such land is to be assessed under section 25(1). Judge Davies J. states in this particular instance that in case the acquisition of a particular property was made during ongoing course of business operations or commercial dealings, the income received from subsequent disposal of such property is subjected to taxation under section 25(1). Moreover, the judges state such income to be of commercial in nature. However, it has also been in the judgement that in order to be taxable under section 25 (1) the income has to derive from a commercial dealing.

References and Bibliographies:

Arthur, G., 2016. Tax files: Taxation duties of executors. Bulletin (Law Society of South Australia), 38(2), p.28.

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

Barnett, K. and Harder, S., 2014. Remedies in Australian Private Law. Cambridge University Press.

Bryan, M., Degeling, S., Donald, S. and Vann, V., 2016. A Sourcebook on Equity and Trusts in Australia. Cambridge University Press.

Burr, A. ed., 2016. Delay and disruption in construction contracts. CRC Press.

Dabner, J.H., 2015. Partners or combatants: A comment on the Australian Tax Office's view of its relationship with the tax advising profession.Available at SSRN 2707914.

Davison, M., Monotti, A. and Wiseman, L., 2016. Australian intellectual property law. Cambridge University Press.

Gains, F.R.C., 2014. LAW SOCIETY ADVOCACY AND LAW REFORM: LATEST NEWS AND DEVELOPMENTS.

Lanis, R. and Richardson, G., 2012. Corporate social responsibility and tax aggressiveness: a test of legitimacy theory. Accounting, Auditing & Accountability Journal, 26(1), pp.75-100.

Latimer, P., 2012. Australian Business Law 2012. CCH Australia Limited.

Law.ato.gov.au. (2016). ATO ID 2002/483 (Withdrawn) - Loss from isolated sale of property. [online] Available at: http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2002483/00001 [Accessed 14 Sep. 2016].

Lignier, P. and Evans, C., 2012, August. The rise and rise of tax compliance costs for the small business sector in Australia. In Australian Tax Forum(Vol. 27, No. 3, pp. 615-672).

McBride, L., 2016. Taxation: Disproving tax fraud or evasion: The onus is on you. LSJ: Law Society of NSW Journal, (25), p.76.

Sackman, J., Van Brunt, R., Rohan, P.J. and Reskin, M., 2015. Tax Issues in Condemnation Cases (Vol. 7). Nichols on Eminent Domain.

Schwieger, D. and Chen, S., 2013. Tax Consequences of Selling, Purchasing and Using State Income Tax Credits, The. J. Tax'n Fin. Products, 11, p.9.

Sharkey, N., 2015. Coming to Australia: Cross border and Australian income tax complexities with a focus on dual residence and DTAs and those from China, Singapore and Hong Kong-Part 1. Brief, 42(10), p.10.

Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), pp.12-25.

Taylor, G. and Richardson, G., 2014. Incentives for corporate tax planning and reporting: Empirical evidence from Australia. Journal of Contemporary Accounting & Economics, 10(1), pp.1-15.

Thampapillai, D., Tan, V., Bozzi, C. and Matthew, A., 2015. Australian Commercial Law. Cambridge University Press.

Tran-Nam, B., Evans, C. and Lignier, P., 2014. Personal taxpayer compliance costs: Recent evidence from Australia. Austl. Tax F., 29, p.137.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016.Australian Taxation Law 2016. Oxford University Press.

 

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