Issue
The current issue is based on the determination of tax consequences of Smith along with the determination of the residential status of Smith for moving out of Australia for the purpose of employment. The study will also determine the capital gains consequences from the sale of subdivided land by Smith.
- Subsection 6 (1) of the ITAA 1936
- C. of T. v. Jenkins 82 ATC 4098; (1982) 12 ATR 745
- C. of T. v. Applegate
- Taxation ruling of 98/17
- Subsection 995-1 (1) of the ITAA 1997
According to the Domicile Act 1982 a person having the domicile in Australia will be considered as the resident of Australia unless it is understood by the administrator of taxation that the permanent place of residence is outside of Australia (Barkoczy 2016). domicile is considered as the legal concept in determining the legal concept in determining the residential status. An individual usually undertakes the domicile of their father at the time when they are born. Most of Australians leaving Australia with the Australian passport in hand, will preserve their Australian domicile and will continue to do so for a large period of time. From the current study of Smith it is understood that Smith is an Australian resident and shall be considered as the Australian resident on assuming the fact that his permanent place of dwelling is in Australia.
As evident from the current study Smith was employed in Australian firm however in the year 2013 he decided to move to Hong Kong to work in the senior academic position. The contract contained the clause of terminating the contract of employment after the period of two and half years provided that if his family is not happy in living in a foreign country (Woellner et al. 2016). Therefore, to determine the residential status of Smith following test are conducted
- Domicile test
- Resides test
- 183 days test
Reside test is done to ascertain whether or not a person residing in Australia under the ordinary sense of the word. If the person is an Australian resident and lives in Australia, an individual shall be regarded as the Australian occupant for the taxation purpose and the person is not required to apply for any other form of test. In the present context of Smith resides test is applied to determine the residential status (Vann 2016). According to the taxation ruling of 98/17 it provides guidelines in the understanding of the ordinary sense of the expression resides that fall inside the meaning of the term resident under subsection 6 (1) of the ITAA 1936. As defined under the section 995-1 of the Act Australian resident represent a person who is considered as the occupant of Australia for the purpose of the act 1936. The definition defines that the term occupant or resident of Australia is within the context of the subsection 6 (1) of the ITAA 1936 of the Act. In determining the residential test of Smith it can be stated that the main test of deciding the residential position of a person is to determine whether the person lived in Australia under the regular sense of the expression resides. In the present context it can be stated that Smith is an Australian resident in context of the subsection 6 (1) of the ITAA 1936. It can be stated that Smith resided in Australia as per the ordinary concept of the word “reside” and hence he will be considered as the Australian resident under section 995-1 of the Act.
Legislation
According to taxation ruling of IT 2650 it lay down the guidelines in determining whether the person who leave Australia for the time being to reside abroad on a provisional international work assignment ceases to be the occupant of Australia for the purpose of income tax throughout their overseas stay (Fry 2017). As a general rule an individual leaving Australia for temporarily purpose shall be said to have preserved their Australian residential status except on the conditions it is recognized that the person have obtained the residence of their own choice or due to the operation of the law. As evident from the current case study it can be understood that Smith had moved to Hong Kong only for a temporary basis as his employment contract contained the clause to terminate the contract on the conditions that his family is not happy in living in Hong Kong.
As held in the case of F.C. of T. v. Jenkins 82 ATC 4098; (1982) 12 ATR 745 that was involved with bank officer that has been transferred to New Hebrides for a period three years. He was forced to return to Australia by citing the issue of poor health. The taxpayer even made an attempt of selling up the house however on failing to locate a buyer he undertook the decision of leasing the house and even reserved the bank account in Australia. As evident from the current case study it can be stated that Smith has leased his house in Australia before leaving for Hong Kong and maintained a bank account in Melbourne from which he derived interest. In determining the permanent place of abode or domicile of Smith it is vital to believe the necessary intent of Smith as to the nation in which he intends to make his residence for an indefinite period. Hence, in context with the description of occupant under subsection 6 (1) an individual with the Australian domicile however living out of Australia will be capable of retaining the domicile if an individual proposes to return to Australia on a clearly foreseen and sensibly expected contingency after the end of his or her employment (Anderson, Dickfos and Brown 2016).
In determining the residential status of Smith under the description of the term “resident” in subsection 6 (1) it can be concluded that he will be considered as the Australian resident as he aims to come back to Australia on an obviously foreseen circumstances after the termination of the employment. Having established that Smith has his enduring place of residence in Australia under the definition of the term resident and it is satisfied that Smith permanent place of residence is not outside of Australia.
As per the 183 days test if a person is not is present or residing in Australia for more than half of the income year either constantly or with breaks shall be considered as the Australian occupant, unless it is recognized that the person place of residence is outside of Australia and does not contain any purpose of taking up the home in Australia (Tan, Braithwaite and Reinhart 2016). From the present stud of Smith it can be stated that Smith has been present in Australia until 1st July 2013 prior to moving Hong Kong and has also maintained the bank account with the Australian bank in Melbourne. Furthermore, Smith did not had any intention of taking up the residency in abroad country therefore under the rule of 183 days test he will be considered as the Australian occupant for that period.
Application
The liability to tax also arises yearly in the present context of Smith according to the facts that are applicable to the particular year of income that is under considerations (Tran-Nam and Walpole 2016). The primary question that arises in considering the residential status of an individual that leaves Australia is whether the person can be regarded as the Australian citizen under the ordinary concepts. In other words, if a person is found to have not to be residing in Australia then the person shall be considered as the Australian resident under the extensive description of the term resident. With reference to F.C. of T. v. Applegate it can be stated that Smith income from the Hong Kong shall be subjected to tax liability since Australian does not has the treaty of Double Taxation Agreement between them. As consequences of this, the income derived by Smith in the Melbourne bank account will attract tax liability.
According to the taxation rulings of TR 97/11 it provides the guidance on determining whether the primary producer shall be included in the income of the person that carry on the business of the primary production (Snape and De Souza 2016). The ruling is applicable to the person that carries on the activity which can be considered for primary production under the ITAA 1997. Subsection 995-1 (1) of the ITAA 1997 lay down the definition of the primary production business. It comprises of cultivation of or propagating of plants or other forms of products or parts in any form of physical environment. As evident from the present case study of Smith it is found that Smith used his land for the cultivation of olive trees that were used in making oil. Furthermore with reference to the section 995-1 (1) the activity of Smith constituted in the nature of the commercial purpose since smith has more than the intention of indulging in the business activities. The activities was organized and carried on by Smith represents in the manner of business as it was directed with the purpose of making profit.
As held in the case of Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922) the tax payer is not required to obtain all part of his proceeds from the activities of the primary production. The taxpayer might also be working in some kind of profession or occupation (James 2016). However, the primary rule in determining the activities of primary production is carrying on of an activity of business. The activity is usually considered as separate from any other form of profession or business that is carried on by the taxpayer. The activities of Smith contained the purpose of profit making prospect and the activity of Smith primary production represented a related way to that of ordinary trade in line of the business.
According to the subsection 104-10 (4) of the Income Tax Assessment Act 1997 an individual deriving gains from the disposal of the subdivided land that are in the nature of primary production will be considered for as capital gains (Williamson et al. 2017). In the present context of Smith it can be stated that the subdivided block of land that was used in the primary production shall be considered a capital gain under the subsection 104-10 (4) of ITAA 1997. In spite of moving out of Australia for employment purpose Smith in the present context did not ceased the activity of primary production as his brother looked after the business during his absence.
Resides Test
As held in the case of Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 the verdict passed illustrate that in situations where there is non-presence of any profit making objective at the time of acquiring the farming land. Then under such circumstances the probability of making any form of profit on the ultimate sale of land will be diminished from being considered as the income under the ordinary concepts. However, profits from the sale of the land that is subdivided will be considered in the form income under the ordinary impression within the section 6-5 of the ITAA 1997. The profits will be regarded as the profit making activity within the section 15-15 of the ITAA 1997 given the fact that the profit from the subdivided land shall be considered distinct from the business operations or commercial transactions. By applying the current legislation in the present context of Smith it can be stated that the sale of subdivided block of land will be considered for assessment as income under subsection 104-10 (4) of the ITAA 1997.
On the other hand, as per the taxation ruling of 1999/67 a person can apply for the main residence exclusion under the subdivision 118-B of the Income Tax Assessment Act 1997 to whatever area of land selected by the taxpayer on which the dwelling of the person is situated. In the present context of Smith, he can apply for the main residential exemption with reference to the Subdivision 118-B of the ITAA 1997. However, it is must be denoted that the amount of capital gains derived or attributable to the remaining part of the land should be sensible in the conditions.
Conclusion:
To arrive at the conclusion, it can be stated that to determine the tax consequences of Smith it is of primary importance to determine the residential status. Furthermore, the study clearly establishes the tax liability for smith on the circumstances that he will be regarded as the Australian resident subsection 6 (1) of the ITAA 1936. The income derived from the primary production and sale of subdivided block of land will be subjected to assessment as well.
Reference list:
Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.
Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law Select: Legislation and Commentary 2016. Oxford University Press.
Vann, R.J., 2016. Hybrid Entities in Australia: Resource Capital Fund III LP Case.
Fry, M., 2017. Australian taxation of offshore hubs: an examination of the law on the ability of Australia to tax economic activity in offshore hubs and the position of the Australian Taxation Office. The APPEA Journal, 57(1), pp.49-63.
Anderson, C., Dickfos, J. and Brown, C., 2016. The Australian Taxation Office-what role does it play in anti-phoenix activity?. INSOLVENCY LAW JOURNAL, 24(2), pp.127-140.
Tan, L.M., Braithwaite, V. and Reinhart, M., 2016. Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), pp.329-344.
Tran-Nam, B. and Walpole, M., 2016. Tax disputes, litigation costs and access to tax justice. eJournal of Tax Research, 14(2), p.319.
Snape, J. and De Souza, J., 2016. Environmental taxation law: policy, contexts and practice. Routledge.
James, K., 2016. The Australian Taxation Office perspective on work-related travel expense deductions for academics. International Journal of Critical Accounting, 8(5-6), pp.345-362.
Williamson, A., Luke, B., Leat, D. and Furneaux, C., 2017. Founders, Families, and Futures: Perspectives on the Accountability of Australian Private Ancillary Funds. Nonprofit and Voluntary Sector Quarterly, p.0899764017703711.
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