Revenue and Tax Law

Question: Discuss about the Revenue and Tax Law. Answer: Residence and source The facts of the instant case are as follows: Fred is an executive of British corporation and a specialist in management consultancy. With an intention to open a branch of his company he arrives in Australia. He takes a property on lease for a period of 12 months in Melbourne. His wife accompanies during his stay in Australia but his teenage sons were left to stay in London as they were pursuing education in college. Fred earns income form an UK property which he has rented and also he earns interest from his investments in France. Fred returns to UK due to his ill health, 11 months after his arrival in Australia. The question to be determined here where he should be considered as an Australian citizen for the purpose of taxation or not. It is relevant here to look into the term resident as has been defined under subsection 6(1) of the Income Tax Assessment Act, 1936. According to the provision under the subsection of this Act, a person, who resides in Australia, would be deemed to be an Australian resident if: He has a domicile in Australia He has been in Australia for a period of more than 6 months unless the Commissioner is satisfied that: He does not have intention to take up residence in Australia and He has a place of abode outside Australia (King 2016). Case law: Reid v. The Commissioners of Inland Revenue (1926) In this case it was held that the things which are to be considered for determining whether a person should be considered to be a resident or Australia or not are the quality of their presence and time in Australia (Harding 2012). Behaviour of individual whilst their stay in Australia The behaviour of individuals whilst their stay in Australia is an important factor to be considered for determining whether they should be treated as a resident of Australia or not. If the behaviour of individuals do not change during their stay in Australia and their behaviour is more or less same before their arrival in Australia, then will be considered to be resident of Australia for taxation purpose (Mares 2012). Business ties The factor that a person enters Australia for setting up a business in Australia would be an important factor for determining whether he is a resident of Australia or not. If the person stays for a long time in Australia for establishing a business, he would be considered to be an Australian resident for the purpose of taxation (Dirkis 2012). In the instant case, Fred has arrived in Australia for business purposes. His intention is to establish a branch of his company in Australia. He is himself not much aware of the time required for establishing a branch of his company and he has taken a property on lease in Melbourne for a period of 12 months which may be extended according to emerging circumstances. Moreover, his daily behaviour is similar to his behaviour before his entering into Australia. He has been in Australia for a period of 11 months and he has gone back to UK due to his ill health. He is again required to come back to Australia for fulfilling the business purposes. Under the provisions of the relevant statute and under the prevailing circumstances, he should be considered to be a resident of Australia for taxation purposes. Ordinary income Californian Copper Syndicate Ltd v Harris In this case it has been laid down that when investment owner wants to realize the investment and gets a price higher than the price through which he has acquired it, then the excess of price is not considered to be a profit to be assessed for income tax purposes. But if an owner of a security wants to realize it or convert it, then the excess values obtained may be assessed for the purpose of income tax if it can be shown that the act done by that person is truly for the purpose of doing business (Kheng 2015). There is a thin line of difference between these two classes of cases, and every case has to be determined according to its facts and circumstances (Tiley and Loutzenhiser 2012). Scottish Australian Mining Co Ltd v FC of T In this case, 1771 acres of land was acquired by the taxpayer between 1863 and 1865 mining coal in the property. In 1924, the coal got exhausted and then the taxpayer started to prepare for subdivision and sale of the land. He built some roads, constructed a railway station, gave lands to churches and schools and kept aside some land for parks. The Court took the view that the realisation of the land through the subdivision of land could not be considered as a profit making business scheme. The land was no more viable for carrying out the coal mining and the steps were taken by the company for realising the land. Thus, the companys intention was not to get engaged in the business of selling land. Hence, the Court held that profits acquired out of the sale of the land could not be assessed for the purpose of income tax (Scottish Australian Mining Co Ltd v FC of T, [1950]) In this regard, William J. said the following: It is impossible, I think, to hold that the appellant was engaged in such a business or profit-making undertaking or scheme prior to 1924. The crucial question is therefore whether the facts justify the conclusion that the appellant embarked on such a business or undertaking or scheme in 1924. The facts would, in my opinion, have to be very strong indeed before a Court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realising it when all that the company had done was to take the necessary steps to realise the land to the best advantage, especially land which had been acquired and used for a different purpose which it was no longer business like to carry out. III. FC of T v Whitfords Beach Pty Ltd In this case, 1584 acres of land was purchased by the taxpayer company (Whitfords) so that fishing sacks on a beach could be accessed by the fishermen who were shareholders of the Company. The Company had no intention to make profit at the time when the company was formed or at the time land was acquired by the company. In 1967, the companys shares were transferred to three development companies. The intention of the development companies was to develop the land and accordingly they altered the constitution of the company. They started working for the development of the land and sold the land. The High Court observed that land has been acquired by the development companies for the purpose of doing business and in pursuance of a profit-making scheme. The venture was truly commercial and therefore any income generated form the subdivision and sale of the land would not be exempted from assessment for income tax purpose. Thus, the High Court held that the profit acquired by the development companies would not considered to be realization of the asset and would be assessed for income tax purposes (FC of T v Whitfords Beach Pty Ltd, [1982]) Statham Anor v FC of T In this case, the Court observed that the main question which was to be determined was whether subdivision of a land amounted to a mere realisation of asset or whether it amounted to a land development business carried out by the owners of the land for the purpose of generating income out of the subdivision and sale of the property. In this case, the Court took a view that the farming land was subdivided and sold for realisation of asset and hence the profit acquired out of such subdivision and sale of the land would not be assessed for the purpose of income tax (Statham Anor v FC of T, [1989]) Casimaty v FC of T In this case, a farming property comprising of 988 acres of land was acquired by a taxpayer from his father. A further 40 acres of land adjacent to it was purchased by the taxpayer subsequently in which he established his homestead. In the subsequent years (around 20 years), he used the property for primary production. But, as his health got deteriorated and his debt got increased, he subdivided the property and sold a large portion of his property. In the period between 1975 and 1993, eight separate subdivisions were carried out. The taxpayer constructed several roads, provided sewerage and water facilities to the relevant blocks. The boundaries were also fenced by the taxpayer (Obst and Hanegbi 2016). The Commissioner sought to assess the income generated from such subdivision and sale of the property for income tax purpose as he was of the view that the taxpayer was conducting a business of subdividing and selling land. The Commissioner observed that the taxpayer had a profit making scheme while conducting such business. An appeal was filed by the taxpayer in the Court. It was held by the Court that the subdivision and sale of the land represented the realisation of asset and the profit out of the sale of the land could not be assessed for the purpose of income tax because he was not carrying out of a business. He was using the land for residential purpose and for the purpose of primary production. Thus, the income generated from the sale of the land was not considered as a profit made out of the conduct of a business and hence he was exempted from paying tax (Casimaty v FC of T, [1997]) Moana Sand Pty Ltd v FC of T In this case, it was held that if a venture involves dual purpose, then if any of the purpose is profit making, then the profit would be assessed for the purpose of income tax. In this case, a land was purchased by the company, Moana Sand Pty Ltd. for the purpose of conducting the business of selling sand on land and then to keep the property under their occupation until they get a good price for the lands subdivision. It was held that the amount which was received on compulsory redemption less the costs incurred on acquiring the land would be assessed for the purpose of imposing tax (Moana Sand Pty Ltd v FC, [1988]) VII. Crow v FC of T In this case it was observed that when various properties were purchased and were subsequently subdivided and sold, there was a repetition in the transactions involved. Moreover, the transactions were being carried out in a systematic way and resembled characteristics of a continuing land development business. Therefore, it was held that the profits acquired out of such transactions would be assessed for imposing tax (Crow v FC of T, [1988]) McCurry and Anor v. FC of T In this case, the Federal Court observed that if the acquisition of a property is done in pursuance of a business dealing with a motive to develop the land and sell it afterwards, then such acquirement of property could not be considered as an investment and the profits out of the development and sale of the property would be assessed for the purpose of income tax. In these kinds of cases, the main or the dominant purpose of the scheme would be an important factor to determine whether the acquirer had a profit making scheme or not. In this particular case, the factor of intention to resell the property was a dominant factor to determine that the acquirer did not have an intention to realize the asset but intended to enter a profit making scheme. Moreover, in this case, the money which was used for the purpose of acquiring the land was borrowed money. From this fact, the Court inferred that there was a high possibility of reselling the land and hence the profit which would be generate d from such resale would not be considered as a realization of asset and would be assessed for the purpose of income tax (McCurry Anor v FC of T) Reference List Casimaty v FC of T [1997]ATC 97, p.5135. Crow v FC of T [1988]ATC 88, p.4620. Dirkis, M., 2012. '... Nowhere man sitting in his nowhere land': The continuing saga of cross border arbitrage. Revenue Law Journal, 22(1), p.88. FC of T v Whitfords Beach Pty Ltd [1982]CLR 150. Harding, C., 2012. Who is a resident of Australia?. Concise Collection of Tax Fundamentals, A, p.181. Kheng, T.K., 2015. 24. Revenue and Tax Law. significance, 4, p.7. King, A., 2016. Mid market focus: The new attribution tax regime for MITs: Part 1. Taxation in Australia, 50(10), p.590. Mares, P., 2012. Temporary migration and its implications for Australia. Papers on Parliament, (57). Moana Sand Pty Ltd v FC [1988]ATC 88, p.4897. Obst, W. and Hanegbi, R., 2016. Small-Scale Property Development: GST Implications. Adelaide Law Review, Forthcoming. Scottish Australian Mining Co Ltd v FC of T [1950]CLR 81, p.188. Statham Anor v FC of T [1989]ATC 89, p.4070. Tiley, J. and Loutzenhiser, G., 2012. Revenue Law: Introduction to UK Tax Law; Income Tax; Capital Gains Tax; Inheritance Tax. Bloomsbury Publishing.