Residence and Source: Evaluating Tax Status for Income Received

Case Study

Case Study
 

1. Residence and source 2. Ordinary Income.
 

The issue of the case study is to evaluate and appraise the Chilean citizen  Kit’s residential status for tax purposes and this would allow for appropriate recommendations to be made for taxation treatment for the income received.

Section 6(1) of ITAA, 1936 is the determining force for the residential status of a citizen for the purpose of taxation. The tax ruling TR 98/17 includes various tests, which can evaluate and test the tax payer (ATO, 1995). The four steps is enlisted below:

Individuals residing in foreign countries for personal and professional reasons and also enjoying Australian domicile are tested by the domicile test. The primary condition needed to be satisfied as per the domicile test is that the individual should be residing in the Australian territory as per the Domicile Act, 1982. It is also necessary for the individual to pass the necessary requirement as per argument posted in the Federal Commissioner of Taxation vs. Applegate. This argument also states about the individual residing in the territory of Australia (Barkoczy 2013).

The domicile test presents certain highlighting points. According to this, an individual enjoying Australian domicile but having a permanent residency of a foreign country deems to be ineligible to pass the domicile test.

Various factors are included by the Tax Commissioner to evaluate and recognise the causes and reasons of permanent residence of individuals as per Taxation Ruling IT 2650 (Jones 2015).

• The level of deviation between the actual and the estimated duration of stay in foreign countries and beyond the territories of Australia.
• The inclination of the person to live on foreign soil
• The acts, which depict the intention of setting up residential places in foreign countries
• The duration of stay in foreign countries and the number of times the person visits the foreign country, beyond Australian territories.

The domicile test does not supply enough evidence to provide legal binding. A residency test provides the decisions and depicts a statement that was provided in the case study. The points were:

• Exact place of permanent residence
• The time period of the stay in the foreign country as well as the home country, Australia.
• Some visit outside the home country, Australia.
• Time period of visits to foreign countries
• The reason for such visits and the importance of such visits. In such scenario, the verdict of the case, Levene v IRC [1928] AC 217 is considered.

The involvement in two schemes is evaluated as a criterion for a taxpayer to be considered a resident of Australia for tax purposes. The schemes are:

• Commonwealth Superannuation Scheme
• Public Sector Superannuation Scheme

On fulfilling the criterion, the tax payer is considered to be a resident of Australia for tax purpose. This could be a scenario that a person was a part of the scheme despite being on foreign soil. This test is applicable for officers who serve the orders of the federal government by being posted on foreign soil.

The main requirement of this test is that a person needs to be present in Australia for 183 days in the assessed financial year. The stay could be consecutive or in breaks or intervals.

In the given case study, it is inferred that Kit holds his Chilean citizenship despite being a permanent dweller in Australia. His employment formalities were conducted in Australia but obligations due to work made him travel to the county of Indonesia, where he is employed in an oil rig. Kit has a house in Australia where he resides with his family. A joint account with his wife also exists in Australia, where the transactions relating to his salary is done. It is observed that Kit does not intend on living outside Australia. He gets a month off from his work in every three months and he either use it for vacations to South America or returns back to his country of Australia (McDaniel 2015)   

Issue

The evaluation of all the criteria and factors, it can be said that the most important yardstick that can be used in this case study is the domicile test. Kit is a resident of Australia with domicile of Australia. This was the most important yardstick for him to fulfil. From the assessment of another factor, it has been inferred that Kit develop no intention of living outside the territory of Australia and intends on dwelling in Australia. Kit also owns and maintains a bank account in Australia, where he conducts the transactions relating to his remuneration (Lee 2014).

From the data given above, it can be viewed that Kit fulfils the main conditions of the domicile test and can be regarded as a tax resident of Australia as per the sections 6(5) of ITAA, 1997. In this circumstance, all domestic and foreign income that is accruing to Kit will fall under the treatment of the tax law of Australia and the investment, as well as the salary generating from foreign soil, would be regarded as ordinary income and the taxation will be under the jurisdiction of the provisions ITAA. 

Conclusion

On concluding the test, it can be that Kit is a resident of Australia, with the domicile test applying to him. The investment and income generating from foreign soil will be treated as per the tax law of Australia.

The case study studies these land deals and the income that generates from the sale of lands as per the tax law of Australia.

As per this case study, it was viewed that the Californian Copper Company bought a land for the purpose of copper mining. Therefore, the income generated in the process is considered to be of capital nature and thus does not require to be taxed. However, it was viewed that the land was disposed of for the intention of earning revenue. This was traced from the fact that owner expected a considerable profit of margin from the sale of the land. This transforms the revenue to be eligible to be taxed under the tax law of Australia (ato.gov.au).

The purchase of land was undertaken for mining purposes. The owner of the company intended on selling the land for business and residential reasons. As a consequence, the land was divided into sub plots and the turnover was carried out at a premium rate. However, in the court, the verdict that was given was that the company could not utilise the land for commercial and profit purposes as the land was purchased for mining purposes. Therefore, in ordinary circumstances, the income arising from such sale would be taxed but the court verdict was that since the company was not obligated or allowed to sell the land, the income from the process could not be taxed (ato.gov.au).

Rule

The owner of the company intends on selling the land and receives a huge sum of money in the process. The owner of the company knew that the revenue generated from the sale of the land would be greater than his conceived idea of the income. The company was n ot intending on continuing with the business and decided to earn a huge revenue from the sale of the asset. This reason led to the revenue being generated as the taxable revenue according to the tax law of Australia 15-15, ITAA 1997 and made the income liable for taxation.   

According to this case study, the land owner was a farmer and was involved in farming endeavours. With passage of time, he disposed of a portion of the land, to generate a turnover. It can be viewed that the farmer is involved in business and does not belong to a business or profit-generating activity. Thus, the revenue generated from the sale of land was considered to be of capital nature. It was inferred that since the revenue was a portion of the sale of an asset, the revenue could not be considered for taxation purposes.

The land was gifted to Casimaty by his father as a deed of gift. There were no intention of sale regarding the land from Casimaty’s side and he did fence the land to protect it. It was however noticed that due to growing health issues and the scene of a financial crisis, led him to selling 2/3^rd of the portion of land under such circumstances. Under normal circumstances, the revenue generated from the sale of land would be taxed. But the court’s verdict was that since he did not intend on carrying on business or profit making activities, the revenue from the land would be treated as revenue of capital nature. The revenue arising from the sale of land under such circumstances does not arise to be liable for taxation. 

The company is formed with the intention of deriving sand from the land. The sand quantity was not sufficient for the business of the company. Consequently, the company divided the land into different parts and began selling. It can be served that the primary and main objective of the company in the current time is to earn revenue, which it achieves from the sale of land. Thus, it can be observed that the company achieved some revenue from the sale of land. The revenue earned in the process is eligible for taxation under the tax laws of Australia (Jones 2015).

The primary purpose of the land is farming. In due course of time, the company bought another land after borrowing money. This land was sold at a high price and the trend was noticed as recurring. This it was concluded that it was a revenue earning activity and with profit as the objective. The revenue earned in the process was taxable under normal circumstances under the tax law of Australia

An old house was purchased for investment agenda by a person. He incurred expenditure by transforming the old house into three townhouses with the intention of sale. Due to stringent market conditions, he was unable to conduct sale of the townhouses. He inhabited the townhouses in the meanwhile. Later, he sold the townhouses at a high rate and earned a considerable profit in the process. This act was considered to revenue earning act and was of the nature of a business activity by the Federal Government of Australia. Thus the income earned in the process was considered to be taxed under the tax law of the government (ato.gov.au).  

Reference List

ATO 1991.Taxation Ruling No. IT 2650 . 

ATO 1995. Taxation Ruling TR 95/7.

ATO 2005. Guide to capital gains tax 2005.

Barkoczy, S., 2013. Foundations of taxation law. CCH Australia Ltd.

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

Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, &Snape, T 2015.Australian tax handbook (8th edition).Thomson Reuters, Pymont

Jones, C., 2015. Review of Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877-1929, by Ajay K. Mehrotra.

Köszeghy, K. and Simon, G., 2013. Taxation of companies on capital gains on shares under domestic law, EU law and Tax Treaties, National Report Luxembourg. Taxation of companies on capital gains on shares under domestic law, EU law and Tax Treaties.

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

Lee, Y.T., 2014. Australian taxation issues for Chinese investors investing in Australian real property.

McDaniel, P.R., 2015. Federal Wealth Transfer Taxation (Doctoral dissertation, Pepperdine University).

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2012.Australian taxation law. CCH Australia.