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Australian Taxation Law for Property Development

Question:

Discuss about the Australian Taxation Law for Property Development.

Answer:

As per Australian Taxation Law, a person has to pass the residency test to be a resident of Australia. There is no specific definition of resident in Income Tax Law so the courts and ATO has taken the definition from Oxford Dictionary. Following factors need to be considered in determining the residential status in Australia: (Residency - the resides test | Australian Taxation Office, 2016)

  • Family and business
  • Purpose and intention of staying Australia.
  • Location and maintenance of assets.
  • Living and social arrangements.

If mostly all the above mentioned conditions are satisfied the person would be considered as an Australian resident. If behaviour of a person in Australia is similar to the behaviour which he had outside Australia then he should be regarded as an Australian citizen. A considerable time to be called as a resident of Australia is six months. It is not necessary that a person who stayed in Australia less than six months would be considered as foreign resident. If a person is in Australia for more than six months then generally he is considered as an Australian Resident. But this is not the only factor in determining the residential status, all the factors needs to be considered together to determine the residential status. (Australian permanent resident information, 2016)

In the current situation we need to analyse that whether Fred is an Australian resident or not. Fred is a British citizen who is an executive of a British Corporation. He was working in this company as a management consultant and now was planning to open a branch in Australia.  Due to this he went to Australia and leased a resident in Melbourne for 12 months. His wife came with him but his teenage sons did not accompany him. Fred satisfies most of the residency conditions of being a resident of Australia. Conditions which are satisfied are:

  • He came to Australia with his wife and had also leased a residence in Melbourne for 12 months. But his teenage sons didn’t come which shows that his intention was not there to permanently reside in Australia.
  • For being a resident in Australia, one needs to reside for at least six months. He went back to London after completing eleven months since he was unwell. He stayed in Australia for more than six months.
  • The day to day behaviour of Fred was very similar to his behaviour when he was in London.

Though his intention was not to permanently settle in Australia, but he stayed in Australia for more than six months and even his daily behaviour was very similar. Hence, Fred will be considered as Australian Resident as per Income Tax purposes. He needs to pay tax on all incomes earned in or outside Australia.

Case I

In the case between Californian Copper Syndicate (Surveyor of Taxes) v Harris (1904) 5 TC 159 judgements was given by the Judge J.H.A. Macdonald. If a person has an ordinary investment and he chooses to realize it for which he would get much greater price then such enhanced price is considered as profit. This saying is based on a general principle. Under such situations these transactions are generally considered as part of the business. It is equally established that enhanced values from conversion of securities or realization of securities would be assessable since it is just a change or realization of an investment. (Tax Ruling, 2016)

In the said case Court had declared that the transaction entered was for the profit purpose. The main reason behind this judgement was that the property was purchased for the purpose of being resold at a profit. Here the intention was to sell the property at profit and not a regular business transaction. If it would have been a regular business operation transaction then Court would have given judgement in favour of the assesse. But since the motive was to earn profit, it was chargeable as an ordinary income. Assess needs to pay tax on the profit earned. It would be taxable under the head Business Income. This is not a generic judgement given by the court; it was purely based on facts. The judgement could be taken as reference in other cases as well but should not be regarded as provisions. The judgement should vary based on the facts of the case. (Stephen, 2016)

Case II

In the case between Scottish Australian Mining Co Ltd v FCT (1950) 81 CLR 188 company decided the sell the mining land. To get a better price for the land company had done construction, built roads and had also granted land to public institutions such as churches and schools. (Andrew, 2016 )

In this case Court held that company had done several constructions and had also build roads so that it could get better price in the market when the land is sold. Company had taken necessary steps so that it could realize the land in the most advantageous way. The profit earned here is considered to be not assessable. Decision of the Court was not in favour of the company, since they thought that company has sell the land for profit making purpose. But actual position was quite different. The mining land taken by the company was not doing well and it was not for business purpose. So the company decided to improve the land by doing various constructions. After constriction land would be sold at a better price and can be used well. The decision of the court was long cited but finally Judicial Terrain altered the High Court’s decision after the Whiteford’s Breach case in 1982         at a very minimum limited the application of the Scottish Australian Mining case. (Australian Tax & Accounting | CCH iKnow, 2016)

Case III

In the case between FCT v Whitefords Beach Pty Ltd (1982) 150 CLR original shareholders of the company sold shares to three development companies which acquired the company with an intention of subdividing, developing and selling the land at a profit. Even the articles of the companies to capture this intention. In the majority of the similar cases High Court had held that such profits would be assessable under Section 26(a) of the Income Tax Assessment Act 1936. (Hart, 2016)

This case is very similar to the above case of Scottish Australian Mining Co Ltd v FCT. Judge held that actions taken by the company was more than a mere realization of a capital asset and also constituted business of land development. Gibbs stated that if a taxpayer does no more than realise an asset then in such cases profits need not be taxable. It does not matter that how the taxpayer has gone to realise the asset in an enterprising way. Just that the taxpayer has realize an asset does not mean that it is converted into the business. But if the same is considered as an operation of business the all the realization and profits should be taxable.  The said decision was completely different with the decision given in the Scottish case. As it was discussed in the Scottish case that in such cases decision needs to be taken based on the facts of the case, Decision will differ based on different facts of the case. (Whiteford's, 2016)

Case IV

The said case was between Statham & Anor v FC of T 89 ATC 4070, where the applicant said that the amount of $62,884 should not be considered as income as per the ordinary concepts. It should not be considered as a profit arising from the sale of any property. There were several conclusions drawn from the case like land became the property of the owners only at the time of partnership. Hence, there was no venturing of the land in any property development exercise. Owner had also decided to sell the land rather than keeping the land with themselves. After the death of the owner the deceased decided to sell the land rather than continuing with it and finally the nature of sale was not into venturing of capital in the business and it was neither a part of setting up of the business. (Australian Tax & Accounting | CCH iKnow, 2016)

Finally the Court had given the following orders in respect to the said case:

  • Commissioner should pay the costs of the appeal which applicant had to bare.
  • Appeal should be allowed and objection which was raised in 1983 has to be upheld.
  • The income which was derived in the said case would be reduced by the amount of $62,884.(Legal database - View: ATO Interpretative Decisions: ATO ID 2005/157, 2016)

Case V

In the case between Casimaty v FCT 97 ATC 5135 a father has gifted his son a farm known as Action View. On that farm he had carried out various production activities like dairy operation and even raising beef and sheep implemented wool and some cropping too. But the problem was that all these activities were not profitable and he was under debt. Finally he decided to sell of some portions of the farm so that he could reduce debt. The farm was sub-divided into separate divisions. Commissioner assessed the profits derived from the farm under Section 25(1) of the Income Tax Assessment Act 1936. He did so on the basis of that the profits were derived by sub-dividing and selling land. (ATO ID 2002/273 (Withdrawn) - Sale of subdivided farm land - Income or capital gain?, 2016)           

It was concluded that the tax payer was not carrying on the business of land development. The conclusion was on the basis that the sub-division of the farm was done on piecemeal basis to reduce debt. There was no plan made by the tax payer to dub-divide the land. If the farm was earning profits then he might not have sub-divided the land. He didn’t had any intention to sub-divide the land. Even the largest part of the farm was not sub-divided, this shows that his intention was not to sub-divide or sell the land. Hence it was concluded that the taxpayer had acquired the land for residential and primary production purpose. (Magill, 1947)

Case VI

In the said case between Moana Sand Pty Ltd v FC of T 88 ATC 4897 the intention of the taxpayer was to sell the land and then to hold the land till the time it becomes ripe for sub-division. The sale of land was for two purposes, one for providing cash flow and other in removing the sand hills.

Court held that the intention of the owner to held the land was to sell it in near future by sub-division. Commissioner of the Income Tax mainly relied on two provisions which was as per 25(1) and para 26(a). It was held that the income derived needs to be charged as tax. This case was very different from the case of Kratzmann because the sale of land was the main purpose of the company. Hence at the end the appellant case of rejected since it was very different from the Kratzmann case. Hence the income derived from the sale of land needs to be charged under Income Tax Assessment Act. (Australian Tax & Accounting | CCH iKnow, 2016)

Case VII

In the case Crow v FC of T 88 ATC 4620 it was held that when there is a purchase and subdivision of properties and land then it is considered to be very repetitive and systematic.. These transactions also had the features of continuing business of land development. The court was convinced that the taxpayer has sold the land only to earn profit. The activities performed by the taxpayer clearly shows that the income and profits derived should be considered as income as per Section 25(1) of the Income Tax Assessment Act 1936. (Legal database - View: ATO Interpretative Decisions: ATO ID 2001/55 (Withdrawn), 2016)

All the transactions which were entered by the tax payer clearly show that his intention was to earn profit. His activities were viewed as carrying on business of land development and profit would be considered income as per the Section 25(1) of the Income Tax Assessment Act 1936. As per the Taxation Ruling TR 92/3 it was not clear that what the High Court meant by profits made in the ordinary course of business. Hence two types of office would come under such descriptions which are:

  • Transaction not directly entered in its main business activity; instead it should be incident to the business activity of the tax payer. Profits and gains should be arrived from the latter.
  • Profits arising from transactions which are a part of ordinary business.(ATO ID 2002/483 (Withdrawn) - Loss from isolated sale of property, 2016)

Case VIII

In the case of McCurry & Anor v FC of T 98 ATC 4487, activities were beyond realization of capital asset. There were two brothers who purchased land and then demolished an old house and then constructed three new houses. But unfortunately they were not successful to sell the houses before it was completed. Hence they decided to live in two of the units with various family members. They were able to sell the units after one and a half year.

This case was went beyond just a mere realization since properties were put in the market prior to the completion. While it was held in the market taxpayers did not took any steps to acquire tenants. This shows that their intention was to sell the property at some point of time so that they could repay the loan which was taken. Both the brothers had an option to sell the property at any point of time and they could have even used the property for some other purpose. Hence the court held that the property was used for mere intention of selling the property. The income or profit derived from the sale needs to be taxed under the Income Tax Assessment Act. Both the brothers need to pay tax on the profit which was derived by selling the property. (Webb Martin Consulting | Expert Tax Advice, 2016)

References

Andrew, S., 2016. Property Development. Land and Property, 1(1), pp.5 and 6.

ATO ID 2002/273 (Withdrawn) - Sale of subdivided farm land - Income or capital gain? [Online] Law.ato.gov.au. Available at: [Accessed 17 Aug. 2016].

ATO ID 2002/483 (Withdrawn) - Loss from isolated sale of property. [Online] Law.ato.gov.au. Available at: [Accessed 17 Aug. 2016].

Australian permanent resident information. [Online] Border.gov.au. Available at: [Accessed 17 Aug. 2016].

Australian Tax & Accounting | CCH iKnow. [online] Iknow.cch.com.au. Available at: [Accessed 17 Aug. 2016].

Australian Tax & Accounting | CCH iKnow. [online] Iknow.cch.com.au. Available at: [Accessed 17 Aug. 2016].

Australian Tax & Accounting | CCH iKnow. [online] Iknow.cch.com.au. Available at: [Accessed 17 Aug. 2016].

Hart, G., 2016. The Limited Impact Of Whitfords Beach In Urban Land Development.Revenue Law Journal, 1(1), p.16.

 Legal database - View: ATO Interpretative Decisions: ATO ID 2005/157. [online] Ato.gov.au. Available at: [Accessed 17 Aug. 2016].

Legal database - View: ATO Interpretative Decisions: ATO ID 2001/55 (Withdrawn). [online] Ato.gov.au. Available at: [Accessed 17 Aug. 2016].

Maguire, J. and Magill, R., 1947. Cases on the law of taxation. Chicago: Foundation Press.

Residency - the resides test | Australian Taxation Office. [online] Ato.gov.au. Available at: [Accessed 17 Aug. 2016].

Stephen, B., 2016. Foundations of Taxation Law 2016. 8th ed. Oxford University.

Tax Ruling. [online] http://law.ato.gov.au/. Available at: [Accessed 17 Aug. 2016].

Webb Martin Consulting | Expert Tax Advice. [online] Webb Martin Consulting | Expert Tax Advice. Available at: [Accessed 17 Aug. 2016].

Whitfords Beach Pty Ltd v the Commissioner of Taxation of the Commonwealth of Australia [1983] FCA 97; (1983) 67 FLR 151 WA (25 May 1983). Federal Court of Australia, 1(1).


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