Taxation Theory - Practice - and Law Purposes

Question: Discuss about the Taxation Theory, Practice, and Law Purposes. Answer: Introduction: In order to be called resident of Australia for tax purposes, one is needed to surpass three tests such as domicile test, 183 day stay test, and superannuation test (Australian Taxation Office, 2016). If the conditions of any of these tests are met, the person is deemed to be resident of Australia for tax purposes. The domicile test is applied to check the permanent place of residence of the person based on which the person is declared resident of Australia for tax purposes. The 183 days stay test is the most crucial test applied in determining the residential status of a person. As per this test, the person is called to be a resident of Australia for tax purposes, if the period of stay in the income year is 183 days or more (Deloitte, 2016). Thus, a person coming to Australia for any purpose whatsoever and staying there for a period of 183 days or more in the income year, be deemed as resident of Australia and be liable to pay taxes on the income earned there. Another test of reside ncy is the superannuation test, according to which, the Australian government employees posted outside Australia to render service to the Australian government are deeded as resident of Australia. Thus, the Australia government employees posted outside Australia will always be deemed to be resident of Australia. Further, it is to be noted that the intention and personal behavior of the person migrating to Australia is of paramount importance in determining the residential status (Australian Taxation Office, 2016). The intention to migrate to Australia for permanent and personal behavior showing that the person might reside in Australia for longer period than usual, have great bearing on determining the residential status. In the present case, Fred, residing in the UK, arrives in Australia on an official tour. The company has sent him to Australia to work for a branch set up there and the time required to set a branch is not certain. The total period of stay of Fred in Australia in the income year is 11 months, which exceeds the limit of 183 days. Further, the personal behavior of Fred showing that he did not migrate to Australia temporarily. For example, his wife accompanied him and he rented out the property in the UK, which shows that his intention was to stay in Australia for longer duration. Thus, based on these findings of the current case, it could be articulated that Fred is resident of Australia for tax purposes (Australian Taxation Office, 2016). Ordinary Income Sale of land has been a controversial issue for the taxation authorities in Australia. In some cases, the gains arising on sale of land have been taxed as ordinary business income while in others; the same have been held to be of capital nature gains. In the following section, the outcome of eight cases involving sale of land has been discussed, which is helpful in identifying the circumstances in which the sale of land would be taxed as ordinary business income and the circumstances in which it would be held of capital nature. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159 The issue involved in this case of was that whether the taxpayer was liable to pay tax on the gains arising on sale of land considering it as ordinary income or not (CCH Australia Limited, 2011). The court made a rigorous into the case and reached out at the following outcomes: In taxing the sale of land, it is of paramount importance to clarify that whether or not the taxpayer carries out the operations in respect of realisation of land with a profit motive. If the operations carried out in respect of realisation of land are of the nature that depicts a business carried on or adventure in the nature of commerce carried on by the taxpayer, the gains accrued will be taxed as ordinary business income (CCH Australia Limited, 2011). Further, the court pronounced that there is no signal criterion to ascertain that whether or not the profit motive was involved in a particular case. Thus, facts of each case should be analysed separately to take decision of taxing the income of sale of land (CCH Australia Limited, 2011). Thus, considering these findings, the court held that the gains arising on sale of land were taxable as ordinary business income in case of Californian Copper Syndicate Ltd (CCH Australia Limited, 2011). Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188 The court ruling pronounced in case of Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188 further clarified the distinction between the ordinary business income and capital gains. The taxpayer was engaged in mining operations on a piece of land, which was sold later on by carrying out sub-division work (Smith, 2003). The tax authorities levied tax on the gains arising on the sale of such land considering that the taxpayer was involved in the business of land development. The court held that in order to ascertain that whether or not the taxpayer was engaged in the business of land development, the true nature of activities and the intention of the party are to be analysed. The court held that carrying out mere sub-division of land and taking necessary steps so that the land could be sold in the most profitable way can not be equated with the business of land development (Smith, 2003). Therefore, the court held that in the present case, the taxpayer was only involved in taking necessary steps to realise the land in the most advantageous manner, which can in no way be held as land development business. Further, the intension of the taxpayer was also not to earn regular income from the land after getting it sub-divided. Hence, based on these findings the court pronounced its decision in favour of the taxpayer by holding that the gains arising on the sale of land could not be taxed as ordinary business income (Smith, 2003). FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR In this case, the gains arising on sale of land were ordered to be taxed as ordinary business income. This decision of the court was contrary to the decision made in the case of Scottish Australian Mining Co Ltd v FC (Hart, 2007). The court explained the reasons for contrary decision in this case as under: The court observed that there was something more than mere realisation of land involved in this case. This implies that in the eyes of the court, the taxpayer carried out certain operations in respect of land, which tantamount to carrying on business of land development (Wolters Kluwer, 2016). Further, the court explained that there was a clear intention of the tax payer to use and sale the land with a profit making motive. This intention of the tax payer is apparent from the fact that the shareholders of the company transferred their shares to three different land development companies. Thus, the motive here was to carry out development work on the land and then sale it profitability over the period of time (Wolters Kluwer, 2016). Therefore, considering the fact of change in the ownership of the land and inherent intention of the taxpayer to realise the land with the profit motive, the court held that the profit arising on the sale of land was liable to be taxed as ordinary business income (Wolters Kluwer, 2016). Statham Anor v FC of T 89 ATC 4070 In this case, the applicant claimed that the decision of tax authorities to include the gains arising on sale of land amounting to $62,884 was not correct (Wolters Kluwer, 2016). The taxpayer claimed that activities carried out in respect of land were not in the nature of business or trade, thus, the gains arising on the sale should not treated as ordinary business income by the tax authorities. Considering the circumstances of the case, the court held that the net proceeds of the sale of land can not be brought to tax as ordinary income in this case. The court based its decision on the ground that there was not conclusive evidence to establish that the taxpayer was engaged in the profit making activities or working on a profit making scheme. Thus, in the absence of any solid evidence, it was held that the taxpayer was not carrying on any business of land development, thus, the net proceeds of sale of land could not be taxed as ordinary business income (Web Martin, 2016). Casimaty v FC of T 97 ATC 5135 The issue of levy of tax on the sale of subdivided farm land was raised in this case. The primary issue in this case was that whether the gains arising on the sale of farm land, which was being previously used by the taxpayer in primary production, will be taxed as ordinary business income or capital gains. The court made roving inquiries into the case and pronounced that the sale of subdivided farm land could not be taxed as ordinary business income (Wolters Kluwer, 2016). The court based its decision on the following grounds: The court observed that the taxpayer was in no way directly involved in carrying out certain business nature activities such as advertising the sale of land (Wolters Kluwer, 2016). Further, it was observed that the activities carried out in respect of subdivision of the farm land were limit to make the land salable. These activities do not tantamount to carry on a business of land development. Thus, court ordered in favor of the taxpayer, holding that the gains arising on the sale of subdivided farm land can not be taxed as ordinary business income. These gains are to be taxed as capital gains (Australian Taxation Office, 2016). Moana Sand Pty Ltd v FC of T 88 ATC 4897 Another issue connected with the taxation of sale of land came up in this case before the judicial authorities. During the hearing of this case, the court found out that the intention of the taxpayer or the purpose of selling the land is immensely important in deciding as to whether the gains arising from the sale of land are to be taxed as ordinary business income or capital gain (Cassidy, 1994). In this regard, the court held that if the intention or the purpose was to make profit, the gains from sale of land are to be taxed as ordinary business income else it would be assessed as capital gains. Further, the court observed that, in a transaction of sale of land, the dominance of the intention of profit making is not to be established. Thus, the principle was laid down by the court that although, the intention of profit making is not dominant, but it should be significant in a transaction of sale of land to able to regard it as ordinary business income (Australian Taxation Office, 2 016). Crow v FC of T 88 ATC 4620 The principle as set by the court in this case was that in determining the nature of gains arising on the sale of land, all the activities of the taxpayer should be considered rather than taking the transaction in isolation. In the current case, the court observed that the taxpayer was engaged in subdividing the land, carrying out the property development and selling the developed pieces of land (Australian Taxation Office, 2016). The nature and description of the activities carried out by the taxpayer in relation to the land were indicative of the existence of the business of land development. Further, the court observed that there many activities performed by the taxpayer, which makes it quite obvious that the transactions of sale of land were made with the profit making motive. Hence, based on these findings, the court held that the sale of land in the current case was liable to be taxed as ordinary business income (Australian Taxation Office, 2016). McCurry Anor v FC of T 98 ATC 4487 The court reiterated that it is the well established facts the dominant intention of the taxpayer is to be taken into account to determine the nature of gains on sale of land for taxation purposes (AUSTAX PBR, 2016). Therefore, it is important to see that whether the intention of the taxpayer was to make profits from the sale of land or not. In the current case, the taxpayer sold property which was constructed with the prime motive of earning profit from the sale. However, due to some unavoidable reasons the constructed property could not be sold out for some time and during this period, the tax payer used that property for residential purpose. The court held that mere fact that the property was used for residential purposes during the intermittent period, does not wash out the core intention of the taxpayer, which was to make profit out of sale of constructed houses (Wolters Kluwer, 2016). Thus, considering the fact that the inherent intention of the taxpayer was to build houses for making profit by selling those in the market, the court ruled out that the gains arising on sale of the property in this case have to be taxed as ordinary business income. Further, in support of its decision, the court also asserted that the taxpayer constructed the houses by borrowing a huge sum of money from the banks, which is a normal practice being adopted in the business (Wolters Kluwer, 2016). References AUSTAX PBR. 2016. Relevant facts and circumstances. [Online]. Available at: https://austaxpbr.com.au/document/PBR_1011607555723 [Accessed on: 10 August 2016]. Australian Taxation Office. 2016. ATO ID 2002/273 (withdrawn). [online]. Available at: https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2002273/00001 [Accessed on: 19 August 2016]. Australian Taxation Office. 2016. ATO interpretive decision. [online]. Available at: https://www.ato.gov.au/law/view/document?docid=AID/AID200155/00001 [Accessed on: 19 August 2016]. Australian Taxation Office. 2016. Income tax: whether profits on isolated transactions are income. [online]. Available at: https://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR923/NAT/ATO/00001 [Accessed on: 19 August 2016]. Australian Taxation Office. 2016. Residency tests. [Online]. Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/Work-out-your-tax-residency/Residency-tests/ [Accessed on: 19 August 2016]. Australian Taxation Office. 2016. Taxation Ruling: TR 98/17. [Online]. Available at: https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR9817/NAT/ATO/00001 [Accessed on: 19 August 2016]. Cassidy, J. 1994. The Taxation of Isolated Sales under Section 25 (1) ITAA: TR 93/2 v Joint Submission. Revenue Law Journal, 4(1), pp. 1-26. CCH Australia Limited. 2011. Australian tax casebook. CCH Australia Limited. Deloitte. 2016. International Tax: Australia highlights 2016. [Online]. Available at: https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-australiahighlights-2016.pdf [Accessed on: 19 August 2016]. Hart, G. 2007. The Limited Impact Of Whitfords Beach In Urban Land Development. Revenue of Law, 17(1), pp. 1-14. Smith, A. 2003. Property development. [Online]. Available at: file:///C:/Users/Abasus%20Solution/Downloads/d020520030207_prop_development_smith.pdf [Accessed on: 19 August 2016]. Web Martin . 2016. Is your client considering subdividing their property? [online]. Available at: https://www.webbmartinconsulting.com.au/#!Property-Subdivision/c7zf/551ba1e30cf215f35a2ff93e [Accessed on: 19 August 2016]. Wolters Kluwer. 2016. CASIMATY v FC of T, Federal Court of Australia, 10 December 1997. [online]. Available at: https://www.iknow.cch.com.au/document/atagUio539843sl16716249/casimaty-v-fc-of-t-federal-court-of-australia-10-december-1997 [Accessed on: 19 August 2016]. Wolters Kluwer. 2016. Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd., High Court of Australia, 17 March 1982. [Online]. Available at: 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 on: 19 August 2016]. Wolters Kluwer. 2016. McCURRY ANOR v FC of T, Federal Court of Australia, 15 May 1998. [Online]. Available at: https://www.iknow.cch.com.au/document/atagUio539084sl16707683/mccurry-anor-v-fc-of-t-federal-court-of-australia-15-may-1998 [Accessed on: 10 August 2016]. Wolters Kluwer. 2016. Statham Anor v. Federal Commissioner of Taxation, Federal Court of Australia, Full Court, 23 December 1988. [online]. Available at: 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 on: 19 August 2016].