Case study 1: Residence and source
If Kit is the resident of Australia, he will be assessed not only for the income earned within the Australia but also income flowing from abroad. Similarly if he is not the resident of Australia from the point of income tax then he has to pay only for the income earned within the country.
The following rules are instrumental for deciding the status of residency used for determining how an income of individual will be assessed in the current income year. (“Income Tax Assessment Act 1936 – Sect 6”, 2017)
Test of Common Law: When Australia is the place of residence of the person.
Test of Domicile: When Australia is the place of residence of the person unless the person has been successful in explaining the commissioner about his residence not being within the Australian boundary.
Test of 183 days: When 183 days or more has been spent by the person in the territory of Australia unless the person could explain the commissioner about his non intention to be a domicile of Australia.
Test of Super fund: When superannuation is the cause for an employee to become eligible for residency of Australia
In the present context, Mr Kit who has been holding Chilean Citizenship from his birth and simultaneously holding permanent residency in Australia has shifted his base to Indonesia. Here he is working for a US company involved in rigging oil which selected him from Australia after completing the various formalities required for the job. The concerned company as per their policy allows the employee to take a leave for 1 month for every three months of work put in for the company. So in a year Mr Kit ideally receives a holiday for 3 months for every 9 months of work in Indonesia. These three months he has been spending either by visiting Chile or Australia. According to the Act a person should spend a minimum of 183 days residing within the geographical boundary of Australia is order to be adjudged as the resident from the point of income tax for a particular incomer year. Even if we consider the best possible situation where Mr Kit is assumed to spend his entire holiday period in Australia, still makes him residing in the country for a total period of not more than 90 days. This 90 days period in the country still debars Mr Kit from being eligible of passing the Test of 183 days, where in a person should spend minimum 183 days in the country to be eligible for being a permanent resident from the point of being assessed for taxation. Therefore considering the above situation Mr Kit is ineligible for being a resident in the current income year.
Mr Kit who has been working in Indonesia and is a non resident of Australia for the current income year as per the discussion mentioned above. The immediate implication of the same will be on the treatment of salary which he will receiving for his service at Indonesia. According to Section 6.5 of the Income Tax Assessment Act of 1997, a non resident will only be assessed for the income which he has earned within the geographical boundary of Australia and not for the one which he has earned beyond the border of Australia. (“Income Tax Assessment Act 1997 – Scet 6.5”, 2017). Therefore Mr Kit will not have his salary from his engagement at Indonesia assessed in the current income year.
Case study 2: ordinary income
It is further added the salary received from his employment at Indonesia is credited in his Australian bank account jointly held by Mr Peter and his wife. The salary when deposited in the bank account generates interest which is within the boundary of Australia. This interest income generated from the salary is liable to be assessed for taxation. In other words any interest which has an Australian source will be liable to be assessed and corresponding taxes need to be paid. (“Non-residents: Interest Income”, 2017)
However since the concerned bank account is jointly being held by Mr Kit and his wife the burden of taxation can be shared between both of them as per the prevailing rate of taxation. Mrs Kit who has been residing continuously in Australia for 4 years will in fact pay lesser tax once assessed owing to favourable tax structure for permanent residents.
According to Section 6.5 (3) of Income Tax Assessment Act 1997, a person who is not the resident of Australia, will only be assessed for the income which he has earned within the geographical boundary of Australia whether through direct or indirect means. In the current context Mr Kit who has a portfolio of share in Chile will not be charged for the dividend income paid by the company in Mr Kits name because the income has been accrued outside the geographical boundary of Australia which is beyond the ambit for assessment for a non resident. (“IIncome Tax Assessment Act 1997 – Sect 6.5”, 2017) However if he chooses to bring the money which he has received in the form of dividend to Australia and deposit it in the bank, he will then be exposes to assessment for paying tax at the applicable schedule of rates meant for the non resident for the interest income generated from the bank. (“Non-residents: Interest Income”, 2017) However it is to be noted that since his wife, Mrs Kit is a resident of Australia from the point of being assessed for taxation, any income from the portfolio in her name singly or jointly will attract assessment for taxation and payment of tax of the same will be on the basis if schedule of taxes meant for resident citizen. (“Income tax rates for Residents and Non Residents”, 2017)
The decision given in this case is by Lord Justice Clerk. In the present case differentiation is being made in two separate cases and the every case is to be construed as per facts. The main issue of this case that was determined was whether a sum of gain is a simple increase of value by realisation of a security or profit being made out of a business (Manyam, 2010). As per the judge, the realisation of an ordinary investment and getting a higher price over the cost of the investment cannot be treated as profit and assesses under Income Tax. However, the judge also acknowledges of the fact that such realisation can be assessed as taxable if the act is done while carrying out a business.
This is an appeal case made by the Scottish Australian Mining Co. Ltd where they invoked section 196 of the Income Tax Assessment Act 1936-1943. The issue in consideration is whether the taxpayer had made a complete and true disclosure regarding the necessary material facts to allow the commissioner to create an assessment. Thus the question of law in this case is the complete analysis of section 170 of the Income Tax Assessment Act 1936-1943. Section 196 of this Act thus gave the High Court the power and jurisdiction to take into consideration the appeal which came from the decision of the Board of Review (Graw, 2012). The company had raised objections pertaining to the assessment if income tax by the respondent.
This is the original case which was presided by the High Court. It was held that the proceeds coming out of the sale of any portion of the land of the taxpayer at the Whitfords Beach were construed as assessable income of the taxpayer. This was considered as per section 25 sub section 1 of the Income Tax Assessment Act 1936. The common ground identified between the parties was that the sum of money to be included within the assessable income of the taxpayer for every year would be the profit earned by the taxpayer from sales of material (Hanegbi and Obst, 2016). It was also decided that the relevant date of the valuation of the land sold was the date on which the part of the land was used in business of the taxpayer.
The case is with respect to taxpayers who were trustees of the estate of a deceased. The arguments advanced by the taxpayers were that outcomes of the sales were not same as ordinary income. This was because the work of the parties showed that the proprietors were not carrying out a business or involved in making of profits (Nielson and Harris, 2010). The proceeds of the sales were also not outcome of a profit making plan. The court thus agreed with the taxpayers and agreed the proceeds were not ordinary income. Considering the fact that the farming business did not work and that the owners decided to sell the land did not mean that asset realisation was taxable.
In the present case, a farming property was acquired by the taxpayer and was used for business of primary production for 20 years. Due to increasing debt and poor health he subdivided and sold a major part of the property. Over a period of 18 years, eight subdivisions were made and used for water and sewerage, road construction and fencing. It was alleged by the Commissioner that the proceeds from the blocks were ordinary income and constituted business of the taxpayer. When the case was put on appeal, it was decided by the court that the profits were only realisation of capital asset (Barkoczy et al., 2010). There was no business of land subdivision by the taxpayer. Purpose of acquiring the land was for farming and private residence. There was no evidence of change of purpose.
The court in this case made a distinction between income and capital gains with respect to receipts. They used certain fundamental principles for coming into a conclusion. The considered that an acceptable structure for understanding receipts is to recognise the matter for which the payment is made. The receipt is made on the capital account if the recipient loses an advantage that was part of the profit making structure (Carbone, 2010). If the advantage and assets do not form part of the profit making structure, the nature of the receipt is income. If receipt acts as a flow created by an item of capital, the nature of the receipt is revenue.
In the present case the court came to a certain conclusion. The buying of certain properties and eventually subdividing of them and selling of parcels of land constituted of transactions. The transactions were systematic and repetitive in nature and had the features of a perpetual land development business. The court was satisfied of the fact that the individual had purchased and sold the land with the intention of making profits (Bradley and Goldsmith, 2017). The activities of the taxpayer describe the conducting of land development business. Thus as per normal concepts the profits are considered as income.
The present case shows that a land was purchased by the taxpayer which consisted of an old house. The house was removed and three townhouses were built. The decision of the court was that the selling of the townhouses constituted ordinary income as the land was acquired for business purpose and for obtaining profit from the sale. The buying of the land and the eventual building of the townhouses did not show investment purpose and could not be considered as realisation of capital asset (Hopkins, 2011).
References
Barkoczy, S., Rider, C., Baring, J., & Bellamy, N. (2010). Australian Tax Casebook. CCH Australia Limited.
Bradley, C. A., & Goldsmith, J. L. (2017). Foreign Relations Law: Cases and Materials. Wolters Kluwer law & business.
Carbone, D. (2010). An extraordinary concept of ordinary income? The significance of FCT v Montgomery on what is income according to ordinary concepts. Revenue Law Journal, 20(1), 1.
Graw, S. (2012). An introduction to the law of contract. Thomson Reuters.
Hanegbi, R., & Obst, W. (2016). Small-scale property development: GST implications.
Income tax rates for Residents and Non Residents. (2017). Ato.gov.au. Retrieved 29 April 2017, from https://www.ato.gov.au/Rates/Individual-income-tax-rates/?page=1#Foreign_residents
Income tax assessment act 1936 – sect 6. (2017). Austlii.edu.au. Retrieved 27 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s6.html
Income tax assessment act 1997 – sect 6.5. (2017). Austlii.edu.au. Retrieved 25 April 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html
Hopkins, B. R. (2011). The law of tax-exempt organizations (Vol. 5). John Wiley & Sons.
Manyam, J. (2010). Taxation of gains from banking and insurance businesses in New Zealand.
Nielson, L., & Harris, B. (2010). Chronology of superannuation and retirement income in Australia. Department of Parliamentary Services.
Non-residents : Interest Income. (2017). Ato.gov.au. Retrieved 28 April 2017, from https://www.ato.gov.au/individuals/data-matching-letters/types-of-letters/interest-income/non-residents/
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