Tax Residency and Ordinary Income and Law †Myassignmenthelp.Com

Question: Discuss about the Tax Residency and Ordinary Income and Law? Answer: Introducation The aim is to determine whether Kit who retains his Chilean citizenship and works abroad would be considered to be a tax resident of Australia or not. Further, the task is to comment on the income tax treatment applicable on the income (employment and investment) received by Kit during the assessment year. Section 6(1) of ITAA 1936 describes the myriad provisions related to the tax residency of individual taxpayer. Further, to determine tax residency position of taxpayer tax ruling TR 98/17 is taken into account (Barkoczy, 2017). This ruling comprises four residency tests which need to be applied on the taxpayer to check the underlying tax residency status. The taxpayer who passes at least one residency test would be recognised as Australian tax resident irrespective of the facts that the taxpayer is residing in other country or fails to pass the remaining tests. The applicability of the various residency tests is majorly dependent on the aspect that whether the taxpayer is a foreign resident or an Australia resident as apparent below (Nethercott, 2016). 1) 183-day test Foreign residents 2) Superannuation test Government employees or officials working abroad 3) Domicile test Australian residents 4) Resides test. Foreign residents To check whether a foreign resident would be designated as Australian tax resident the below highlighted tests are applied (Sadiq, 2016). 183-day test The two main conditions of this test are given below: Taxpayer must have resided in Australia for at least a period of 183 days. Taxpayers intention to permanently settle in Australia. If the taxpayer fails to fulfil any of the above conditions, then the taxpayer would not be termed as Australian tax resident. Resides test There is no statute or ruling highlighted in Australian context that can provide the actual commutation and implications of the term resides. Therefore, the respective case laws and their verdicts are considered while checking the tax residency of foreign resident. Further, the purpose of taxpayer behind the visit and stay in Australia, frequency of visits, social arrangements, presence and strength of any tie with Australia and with the foreign country is taken into account under resides test. Finally, the imperative aspect that would be noticed by the tax authorities is the nationality of the concerned taxpayer (Woellner, 2015). To check whether an employee of Australian government would be designated as Australian tax resident the below highlighted test is taken into account. Superannuation test When Australian government has sent their employee to foreign county in regards to complete the extended duties, then this test is applied to test the tax residency. The imperative condition for this test is the constant and systematic contribution of the taxpayer in any of the superannuation scheme of Australian Government. These schemes are Commonwealth Superannuation Scheme and Public Sector Superannuation Scheme (Barkoczy, 2017). To check whether an Australian resident would be designated as Australian tax resident domicile test is used. Domicile test The taxpayer who is categorised as Australian resident has resided in the foreign country, then the two main conditions of domicile test needs to be check to test the tax residency. According to the Domicile Act 1982, the taxpayer must hold Australian domicile. Permanent place of abode of taxpayer (as defined in Levene v, I.R.C. (1928) A.C.2017 case) must be on the land of Australia (Sadiq, 2016). There are certain specific factors associated with the determination of the permanent place of abode of taxpayer that are significant and highlighted in the tax ruling IT 2650 and are listed below (Sadiq, 2016). Deviation in the duration of abode between intended and actual stay in foreign country. Taxpayers activity of purchasing home in foreign country Intent on behalf of taxpayer to visit other country or to return back to Australia after a substantial but definite time Total time period of stay in foreign and the intention to stay more Action of the taxpayer that indicate that taxpayer want to shift the permanent abode from Australia Level of association (personal, educational, employment and so forth) of taxpayer with Australia. Application Chilean citizen Kit is a permanent resident (PR) of Australia. He has entered into an employment contract with a United Company and has spent most of year working off the coast of Indonesia on an oil rig. It can be seen from the above that Kit neither a foreign resident nor an employee of government. Hence, it can be concluded that 183 days test, resides test and superannuation test is not applicable. The only relevant residency test is Domicile Test because Kit is an Australian resident. Domicile Test The first condition of domicile test is satisfied by the Kit because he is a PR of Australia and hence, possesses Australian domicile. Further, it is essential to find the permanent place of abode of taxpayer during the income year. It is because if Kit has shifted his permanent place of abode from Australia, then he would not be classified as Australian tax resident. The factors related to permanent place of abode under IT 2650 is listed below (Coleman, 2016). Kit has purchased a home in Australian three years back. His family has resided in this home only even after Kit has working in coast of Indonesia. Kit and his wife have account in Australian bank. His salary is credited in this Australian bank only. Kit has either returned to Australia to meet his family or make visit to South America (Chile) during the one month off from work in every three months. After the completion of the contract, he would come back to Australia as there is not intent of taxpayer to extend the stay in Indonesia. It can be seen in the highlights of IT 2650 that taxpayer Kit does not shift his permanent place of abode from Australia and thus, his permanent place of abode is in Australia. Hence, both the conditions of domicile test is satisfied by Kit and therefore, he would be tax resident of Australia. Conclusion Kit is classified as Australian tax resident and therefore, income from all the relevant sources (foreign sources and Australian source) would liable for taxation. Hence, the salary derived from employment and dividend amount derived from various investments would be considered for tax under ordinary income concepts in the accordance of section 6-5(2) of ITAA, 1997. Investors of the company were not in the position to start the mining operation on the purchased mine. Subsequently, the land was sold to other leading mining company in the compensation of shares. The commercial value of the shares was significantly high and hence, the investors earned huge amount of profit. Court said that they purchased land on the name of mining however, they never started the mining because the concerned investors knew that they were not be able to commence the mining operation due to shortage of operating capital. Therefore, court had opined the judgement that the isolated transaction made by the investors was mainly for deriving profit. Hence, the all the derived income from the shares would be categorised under the assessable income of the investors (Sadiq, 2016). Investors of the mining company had conducted mining for several decades on the coal mine. Further, when the mine become depleted in reserves and further mining could not be feasible, then the investors decided to utilise the land. After considering all the respective aspects, they had concluded that the only efficient and feasible option was to create the mine suitable for residential use. The exhausted land could not be used for domestic purpose and hence, the necessary development works were undertaken. Investors also made houses for the ex-employees of the company. The rest of the plots were liquidated and caused huge amount of income to investors. The tax commissioner cited that mine land development and liquidation would result assessable income. The investors claimed that they would have continued the coal mining if the land was not exhausted in reserves. Court took the claim and purpose behind the development and liquidation into consideration. It extended the verdict that th e action was with the intention to use the exhausted land not with deriving profit. Therefore, non-assessable proceeds from realisation of asset would not be taxed under assessable income tax treatment (Jade, 2017). Initially the company was involved in the fishing business and purchased a land mainly for drying of nets and shacks. Further, the company was acquired by the estate development companies. The investors were looking for a beach side land and hence, developed the land which was used for drying of shacks and conducted several value addition installation and facilities to increase the overall worth. For this act, they also amended the article of association of the company. Developed beachside land was sold and caused huge profit to the investors. The honourable court cited that the land was utilized by the taxpayers for their business process. The development was to increase the total revenue and hence, the nature of the profit would assessable income (CCH, 2017a). It was decided on the part of the tax commissioner that the sale of a significant section of land was with the purpose of profit deriving and hence, the income would be assessable. However, honourable court ruled that the taxpayers subdivided the land and sold a significant section of land so that their financial problems could be resolved. Further, the land was initially used to establish a cattle business which was then closed due to insufficient business skill. Taxpayers had land sale as the only available option to get fund and hence, the action of land division and sale would be called realisation of capital asset (CCH, 2017b). Realisation of capital asset would result in capital receipts and hence, would be considered as non- assessable income of the concerned taxpayer. Casimaty who had received a small farm land from his father for farming had to liquidate the major portion of land because he took loan from bank at prime rate of interest to start farming. Moreover, very less proceeds were derived from farming and he could not repay the outstanding. This created bad effect on health of Casimaty. He needed funds to repay the loan and for treatment. Court took the decision after taking the situation of taxpayer and ruled that there was no evidence that indicate the profit driven intention of Casimaty behind the liquidation of land. Therefore, the profit would be non-assessable income resulted from realisation of capital asset (CCH, 2017c). Californian copper syndicate ltd V Harris (surveyor of tax) (1904) 5 TC 159 The land which was utilized to extract the sand was liquidated by the investors after subsequent subdivision. The claim was made by the investors that the sand mine was exhausted and hence, the option of liquidation of land was adopted. Court overruled the claim of the investor and opined that the land should be used for mining not for profit driven activities. Further, the investors has spent sizable amount for the land development. This action was clear intention of taxpayers of high revenues. Thus, the assessable income resulted from the isolated transaction would be taxed (Barkoczy, 2017). The purpose for the purchase of land was to conduct farming. However, Crow realized that market value of land was significantly high and it would be profitable if the land was sold after subsequent division. With-in a year, he made nearly 51 blocks from land and at different point of time had sold these to prospective buyers at premium prices. He was deriving significant gains from the sale as compared with the farming and hence, finally, decided to close farming occupation and to buy additional land block. Court took the systematic subdivision and selling business strategy of Crow and extended the judgement that Crow was conducting business of land subdivision and selling. The closing of farming business was the testimony of involvement of taxpayer in new business. Hence, the income would be classified as assessable income from ordinary sources (CCH, 2017d). Taxpayers took loan for the construction of new designer houses on the purchased land. The land already had some old buildings. Three houses were constructed on land. Taxpayers conducted several advertisements for the sale of the houses. Irrespective of marketing they could not get expected prices and hence, agreed to keep the houses for a year. Later on, the houses were liquidated at the expected prices. Court extended the judgement that taxpayers purchased the land with profit driven intention. Hence, the income would classify as assessable income (CCH, 2017e). References Barkoczy,S. (2017).Foundation of Taxation Law 2014(7th ed.). North Ryde: CCH Publications. CCH 2017a, FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR, Available online from https://www.iknow.cch.com.au/document/atagUio549860sl16841994/federal-commissioner-of-taxation-v-whitfords-beach-pty-ltd-high-court-of-australia-17-march-1982 [Accessed May 7, 2017] CCH 2017b, Statham Anor v FC of T 89 ATC 4070, Available online from https://www.iknow.cch.com.au/document/atagUio544343sl16788832/statham-anor-v-federal-commissioner-of-taxation-federal-court-of-australia-full-court-23-december-1988 [Accessed May 7, 2017] CCH 2017c, Casimaty v FC of T 97 ATC 5135, Available online from https://www.iknow.cch.com.au/document/atagUio539843sl16716249/casimaty-v-fc-of-t-federal-court-of-australia-10-december-1997[Accessed May 7, 2017] CCH 2017d, Crow v FC of T 88 ATC 4620, Available online from https://www.iknow.cch.com.au/document/atagUio545564sl16800674/crow-v-federal-commissioner-of-taxation-federal-court-of-australia-17-august-1988 [Accessed May 7, 2017] CCH 2017e, McCurry Anor v FC of T 98 ATC 4487, Available online from https://www.iknow.cch.com.au/document/atagUio539084sl16707683/mccurry-anor-v-fc-of-t-federal-court-of-australia-15-may-1998 [Accessed May 7, 2017] Coleman, C. (2016). Australian Tax Analysis (4th ed.). Sydney: Thomson Reuters (Professional) Australia. Jade 2017, Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188, Available online from https://jade.io/j/?a=outlineid=64663 [Accessed May 7, 2017] Nethercott, L., Richardson, G., Devos, K. (2016). Australian Taxation Study Manual 2016. (9th ed.). Sydney: Oxford University Press. Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., Ting, A. (2016).Principles of Taxation Law 2016 (8th ed.). Pymont: Thomson Reuters. Woellner, R. 2015, Australian taxation law 2015, 9th eds., North Ryde: CCH Australia.