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Case study:
Residence and source Kit is a permanent resident of Australia. He was born in Chile and retains his Chilean citizenship. Kit spends most of the year working off the coast of Indonesia on an oil rig for a United States company. He was recruited for this job in Australia and signed a contract with the company here. For the last four years, Kit’s wife has lived in Australia with their two children. They purchased a home in Australia three years ago. Kit and his wife have a joint bank account with Westpac Bank. Kit’s salary is paid directly into his account. All of the family’s other investments, including a share portfolio that generates dividend income, remain in Chile. Kit gets one month off from work every third month and, on these occasions, he meets with his family either in Australia or on holidays around South America (usually in Chile where his parents reside). Discuss whether Kit is a resident of Australia and how his salary and investment income would be taxed.
The Australian Tax regime requires that an individual who resides in Australian taxed on income from all sources while an individual who resides outside Australia is taxed on income sourced in Australia.
Section 6-5(3)(a) stipulates that when considering the taxation of foreign residents in Australian, emphasis is placed on income that is sourced in Australia and statutory income, ordinary or statutory income that has been deemed to include in assessable income on some basis other than having an Australian source, section 6-5(3)(b) and section 6-10(5)(b), an entity is allowed to subtract any loss to the extent that it is incurred in gaining or producing assessable income or carrying on a business for the purpose of gaining or producing assessable income section 8-1(1), no deductions for exempt income section 8-1(2)(c).
Temporary Resident (from 01 July 2006)
Section 995-1 defines a temporary resident as an individual who has been issued with a temporary visa under the Migration Act 1958 and but happen not to be resident within the definition of the Social Security Act 1991. Consequently, the provisions of the Social Security Act 1991 deem the spouse not to be an Australian resident. However, a person cannot be a resident temporarily he has been at one time and a resident of Australian after the entrenchment of this regulations.
Section 768-910(1) stipulates that all statutory and ordinary income that has been accumulated from a source other than his place of residency is deemed to be non-assessable non-exempt income for the purposes of taxation.
Income derived from sources other than the place of residency represents the ultimate capital profits acquired on assets other than those which represent property within Australian taxable jurisdiction and interest withholding tax obligations linked to monies owing to non Australian lenders. This income is also referred to as a non assessable and non-exempt income. Section 6-5(3) provides for the assessment of all the Australian source income. Section 6-5(3) relates to income acquired in the ordinary cause of business and section 6-10(5) relates to income acquired by virtue of legislation.
A number of legislation came into effect with an intention of preventing individuals who for the purpose of taxation are residents for taxation purposes from altering or changing income to reflect as a source acquired from outside Australia which has been accumulated by a foreign resident which was on that note not taxable. These legislations include the Transferor Trust and Foreign Investment Fund (FIF) Controlled Foreign Company (CFC), Double tax agreements (DTA) arrangements giving effect to provisions that regulate the manner in which income that has been derived by individual residing in those jurisdictions are taxed in order to ensure accuracy and avoiding double taxation and fiscal evasion. Section 4 of the International Tax Agreements Act 1953 (Cth) as read together with ITAA36 and ITAA97. Foreign resident as used in the ITAA97 Act means the same as a non-resident as defined in the ITAA36 Act.
For purposes of taxation, the status of an individual in relation to laws of migration is not conclusive for tax purposes. There are situations whereby an individual may be treated in respect of tax purposes as a resident but a non-resident in respect of migration purposes. Consequences that is not clear like an individual having to pay for Medicare yet not allowed to access public health facilities. There is no test for foreign residency. You test for Australian residency, and if they fail, they are a foreign resident. It is a tradition that issues relating to whether an individual is a resident or not for taxation purposes are determined on a yearly basis.
In the determination of residency status in Australian Tax Law, the facts and circumstances relating to common law and statutory provision are put into play. The fact that a person spends most of his time in Australia will qualify him to be taxed as an Australian tax resident. Determination of residency status is not based on the conditions of the foreign jurisdictions but the matter that the individual in a foreign resident
In a situation where a person is a resident of Australia according to the natural interpretation of the word as contained in the Income Tax Assessment Act 1936, sub section 6(1). This law of residency applicable in common law has been practiced and recognized by many in judicial interpretations in Australia. This concept recognizes the overall circumstances regarding that period of residency. When considering those facts, the law takes cognizance of the intention of the individual’s settlement in Australia, the extent to which the person’s business or family and relationship of employment while a resident of Australia, the location and maintenance of the individual’s assets and a person’s living and social arrangements.
The definition of the word resides as observed in subsection 6(1) of the ITAA 1936 has been expounded through the taxation ruling 98/17.
Statutory tests
Apart from those common law tests, a person can still satisfy the authorities on the test of residency by the application of statutory norms and regulations as stated in sub section 6(1) of the ITAA 1936. These norms include the permanent place of abode test, which deems and individual to be an a resident of Australian for the purposes of taxation if their live permanently in Australia with an exception that where there permanent place of abode in outside Australia, the 183 day test which deems an individual to be an Australian resident if they are present in Australia for 183 days or more in the relevant period unless the individual’s normal place of permanent stay is outside Australia and the Commonwealth superannuation fund test which deems an individual to be a resident of Australian if the individual is a contributing member or is the spouse or a child under sixteen of a person who is a contributing member of the superannuation fund for commonwealth government officers.
An individual could also be deemed to belong to a special category of temporary Australian resident, who normally possess a visa to the effect that they could only reside in Australia for a defined period. The conditions to be fulfilled in order for an individual to be considered a tax resident of Australia have been exhaustively provided in the ITAA 1936 and The Income Tax Assessment Act 1997(ITAA 1997)
Companies
A company is deemed to be a resident company in Australia upon confirmation that it was registered and incorporated in Australia, it conducts its daily activities in Australia with an executive management facility located in Australia or its voting power controlled by shareholders of Australian residency (subsection 6(1) of the ITAA 1936)
There are certain instances where a corporate limited partnership is considered as a company include the situation whereby the partnership was formed in Australia, and the partnership performs most of its activities in Australia or has established its executive offices in Australia.
Business income from isolated transactions
the most important proposition that stands out from Californian Copper Syndicate v Harris3z and Ducker v Rees Roturbo Development Syndicate33 is that a receipt may be termed to be income if there is proof to show that it originated from a business engagement that was isolated or when a business engagement takes place which is not normally a within the tradition of the business of the individual, though prove of whether the individual agreed to transact with the intention of acquiring a gain in terms of profit from the business.
Many schools of thought have pulled hands together in an effort of prohibiting the judicial service system from recognizing a mere fact that the existence of an intention of acquiring a gain or profit is sufficient to effect the stamp with the recognition of an income item. The initial misconception was the idea that realisation of an asset was a issue of capital and not income. The second was the indication that windfall gains and gains from games of luck be part of income unless the idea of income, different from income derived from personal exertion and investments, was confined to profits and gains arising from business transactions. And the third notion, itself associated with the idea that the carrying on of a business involves a systematic series of recurrent acts or activities, was that a gain generated by recurrent transactions is income, whereas a gain generated by an isolated transaction of capital.
What the mere realization of an asset does not amount to income is a common rule in the Australian jurisdiction (Scottish Australian Mining Co. Ltd). These issues mostly related to the sale of land.
Case law, Scottish Australian Mining Company limited
The facts
A person acquired land for mining purposes and owned it for over fifty years when he decided to dispose of and in the process developed the land by putting structures including road works, parks and train stations. In its assessment, FCT declared the individual solely on the threshold that it was either income acquired in the ordinary cause of business or the equivalent provision of section 15-15(s26AA).
It was observed that HCA the taxpayer main activity did not involve the land purchasing business but was merely realizing the value of his capital asset. The learned judge emphasized that the taxpayer main object was to purchase the land for mining purposes and not to be sold at a profit. The chances that the same decision would be conducive today are unlikely.
FCT vs Whitfords Beach
Facts
To have access to a beach that could serve as their fishing ground, three fishermen acquired possession of by purchasing in the year 1953. Later, in the year 1967, the fishermen’s company expanded by incorporating other members though the land was not transferred as the shares. The new shareholders reviewed the constitution to give room for the development of the land. The taxpayer resisted the attempt by FCT to examine them depending on the profits they had acquired from the sale of the land on the ground that they were simply disposing off the property at its best advantage in the process of realizing the value of a capital asset.
HCA in its conclusion declared the activities reflected the normal process of carrying out the business of developing land and the profits derived from the sale were held to be ordinary income. The circumstances changed with the incorporation of a new shareholder which changed the intentions of the business. This case apart from relating to the land transaction, it proclaims that a taxpayer can change the intentions for which it holds an asset.
The query about how one could arrive at the benefit which ordinarily represents the amount to be included in the taxpayer’s assessable income becomes of much concern. It would normally take a form of gross proceeds of sale deduct the value of the land in question on the particular date that it was acquired, and the individual’s developments in the land business, the process of acquiring the property was deemed to be December 1967 the period when the business commenced.
This case involves the acquisition of property in land by one Moana Sand with an intention of selling the sand available on the land. Further, it was by the owner of the piece of land that once he sold all the sand, the land would revert into normal plots for the purpose of subdivision. In time, the Land was resumed for $500,000). The Federal Court found that the resultant profit was taxable under both by virtue of section 25(1) and section 26(a), although the subdivision and resale not reflecting the initial intention behind the purchase.
The subsequent refusal to acknowledge the necessity for a major profit –making intention was not critically evaluated. The court observed that for the application of section 26(a) to take effect, there should the necessity for a major purpose of profit making by the consequent resale of the property in question, there was no justification for the exclusion of the requirement from 25(1).
There was a notable presumption by the court that it was unnecessary. In the effort to substantiate the aforementioned, the rule recognizes the case of Moana Sand though it falls short of providing decisions and justifications supports the claims. In the commissioner’s opinion, the planned procedure of profit realization was through a further resale either to a different company or another individual and that the compulsory resumption was therefore not within the means initially foreseen. Viewing the Moana case from that perspective could support the claims provided in paragraph 57. There are major issues arising from the above regard, that foremost it could viewed that the resumption was in order to sale to another neutral person fulfilling the requirement of being within the planned means.
There is no clear provisions that could provide the basis for differentiating the sale by compulsory acquisition and a similar conversion by means of an ordinary sale. The Court further observed that while the sale was subject to compulsory acquisition, it was the fulfillment of the intended company’s plan of utilization of the land. In the case of Moana Sand, the intention of the customer could have been to make profit by all means possible. A clear and deep analysis of this case would lead to the provisions of paragraph 56(a).
The presence of a relationship between the laid procedure of realizing the profits and whether that procedure was implemented in the realization of the same was not an issue before the court. The decision rests on a rejection of this requirement; it does not rest on a reasoned rejection.
Whilst Moana Sand may provide authority for paragraph 57, there are straight forward provisions to the contrary in Westfield Ltd and Myer Emporium when it comes to matter of choice is the preferred option. This is especially so basing on the High court’s holding in the matter in Hill J’s judgment in Westfield Ltd that it was did not rely on the fact of the misrepresentation of the Myer principle, the observation should be treated as a precedent in relation to this aspect of the law. It is in order to declare that the means that effects the achievement of profits must have been planned an individual while he was acquiring the property.
References
Income Tax Assessment Act 1997 (Cth)
Case law
AGC Investments Ltd v. FC of T 91 ATC 4180; 21 ATR 1379
Blockey v. FC of T (1923) 31 CLR 503
Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159
Chamber of Manufactures Insurance Ltd v. FC of T (1984) 2 FCR 455; 84 ATC 4315; 15 ATR 599
Commercial and General Acceptance Ltd v. FC of T (1977) 137 CLR 373; 77 ATC 4375; 7 ATR 716
F C of T v. Commercial Banking Co. of Sydney (1927) 27 SR(NSW) 231
FC of T v. Cooling 90 ATC 4472; 21 ATR 13
Ducker v. Rees Roturbo Development Syndicate Ltd [1928] AC 132
Edwards v. Bairstow [1956] AC 14
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