Ordinary Incomes Taxation

73

Requirement

Discuss whether fred is a resident of Australia for taxation purposes.

Question 1
Issue
Fred is new in Australia for the purpose of setting up a branch of his own company. The house that he is residing in during his stay, has been put on lease for 12 monthsby the owner. He is being accompanied by his wife, while he left his sons back home. So, will he be an Australian resident for taxation purposes?
Law
The above scenario entails the laws that are applicable in Australia for the tax purposes. So, the relevant applicable laws are: 

Solution

Taxation Ruling 98/17, and 
ITAA 1936.

Application
The Ruling 98/17 explicitly talks about the residency and the “resides test” that is used to figure out whether anyone can reside in Australia(Smith and Richardson, 2005). This definition of the residency for taxation purposes is also underlined by subsection 6(1) of Income Tax Assessment Act (1936). The ruling spells out the meaning for resident of

Australia in the following ways:
a.    Residency in Australia: an individual who is provided with a place to live in the country or has been residing Australia for a long time.
b.    Domicile in the country: if the persons place of living is in the territory of the country and that has been a permanent place of his stay. Also, it is required that there should be no other place to live other than Australia then only be the person considered a resident(Austaxpbr.com.au, n.d.).
c.    He/she has been residing in the country for more than half of the period of the taxation. For the purpose of taxation, the number of days to be counted should be counted from the very first day of the financial year, which is 1st July of the current year and 30th June of the next year.
d.    Superannuation Fund Test can be used on the basis of his/her registration under Superannuation Act, 1990. Employee test under Long Service Leave (Commonwealth Employees) Act 1976. It is also tested that whether the person is a spouse or a child below the age of 16 years. 

The residency status is an important criteria that determines a person’s liability towards Australian Taxation. So, any individual who passes any of the above tests, shall be considered as a tax resident of Australia. Section 6(1) of ITAA clearly espouse that all the residents of the country are taxable for the incomes they earn in the country. 
The general meaning of the word “reside” even encompasses the people who are migrating permanently as well those whose are coming to live for a considerable time. If the migrant comes for the purpose of permanent stay, his taxation shall start from the first day. However, for first test, Fred intends to reside for the period of 12 months and possess a place to live in the country. As for the second test, he doesn’t have domicile of country and his permanent place of residence is outside the territory of Australia. He fulfills the third test as he has been living for more than half of the period of taxation.
Conclusion
Fred fulfills two out of four tests, so he is tax resident of Australia.
Question 2
Issue 

To determine the existence of the ordinary incomes in the following cases.

Discussion

1.    Californian Copper Syndicate ltd v Harris (1904):

The Taxation Ruling 92/3, is applicable in this case where a group of people constituted a company for the purpose of buying a mining property.The clear intention behind their decision of buying the minefield was making profit. However, no business was carried out from the mine and the purchase was a onetime event. Now, a personal exertion is required for the incomes to be able to become ordinary incomes. The ordinary income comprises of income from employment, income from business activity or income earned from renting a property or dividends(Prebble, n.d.). It also consists of certain transactions that were conducted just to make profit.The present case does not seem to be qualifying of having personal exertion in it as no operations were being conducting in the mine and hence no business activity took placethere. However, the observations made by the court were that even if a onetime transaction was made, but that transaction was made for the purpose of profit. Therefore, it had to fall under the category of ordinary incomes. Also, the proceedings from such sale of mining were to be assessed as per ordinary income.

2.    Scottish Australian Mining co ltd v FC of T

As per the facts, a company made a decision of selling a property on which mining operations were carried out. The memorandum of the company clearly mentioned that mining will remain the main object of the company and it is deciding to buy the properties that are rich in mineral production. As the company is also involved in investment of the capital, so what it does it purchases the property and use it completely till the time of exhaustion completes. The company fared soundly in terms of output and the activity was done in a manner, which is suggestive of business. It was observed that the initial intentions of the company were not to make any profit by selling the land but only performing mining operations. 
In this case, no isolated transactions were made and therefore the sale will transpire to be a sale of capital asset(Pearson, 2009).Therefore, it was concluded by the court that the sale of land will not be going raise any tax implications and the income earned in this manner shall not be assessed as per the rule of ordinary income. Incomes of this kind shall be taxable under head capital gains.

3.    FC of T v. Whit fords Beach Pty Ltd (1982)

The facts say that a company was formed in order to acquire a land. After some time, when the shareholders of the company were changed, the land development took place and then sold. Later on the company applied for rezoning in order to make the sub-divisions and finally selling it in the market. The land was developed as per the requirements and the stakeholders involved in it were expected to make profits. 
As per law, the operations are called business when the activities carried out in it allow the people to make profits. So, in this case the company was performing land development work and changing its category into different zones as well as selling it again indicates that business operations were taking place. The given transaction, however, was not a onetime event and the new stakeholders were those people who were in the business of developing and selling the land. Therefore, as per the court observation, the income was taxable or assessable as per ordinary income.  

4.    Statham &Anor v FC of T 89

In this case, there were some taxpayers who were trustees of a diseased land. An acquisition of the piece of a land was made that was used for the purpose of farming. After few years, half of that land was sold to the people of a company and they were the members of the family of the deceased. So, as the land acquired by these family members, was being used for raising cattle in partnership. Finally, due to the non-performance of the partnership, the land was sub-divided and sold in the market. 
So, it was observed that the property was not bought with an intention of making profit and there was no existence of isolated transaction. The family members were not involved in performing any type of business activity due to the fact that there was no existence of trade on a regular basis. As we have already stated that income is usually assessed as per ordinary income, which should have generated either by making profit due to business activities or any form of isolated transaction. In this case, none of the above conditions were fulfilled. Therefore, the sale of land’s income shall not be taxable as per the ordinary income. 

5.    Casimaty v FC of T 97

As per the facts of this case, a person acquires a land from his father, which was used for the purpose of farming by father himself, but the intention of the son was to acquire the land for the purpose of carrying out business activity. However, the rising debt of the person coupled with his illness, the land was rendered unused and was subsequently sold. It was divided into smaller piecesand then sold. But before the sale was made, the person had built roads and other facilities in the land.
The court decided that the building of road and creation of facilities indicated that a business activity was done, but the capital assets were realized due to the fact that the land was originally acquired for the purpose of doing farming and living. Also, the court observed that the sale of the land generated no income whatsoever. Therefore, it declared no taxable ordinary income and capital gains would be declared if it was sold above the cost of the property. 

6.    Moana Sand pty ltd v FC of T 88

The facts of this case say a company bought a land in order to sell sand on it. The members of the company first obtained an application regarding government’s plans for purchasing such a land. In order to carry out mining, the taxpayer made an appeal that such a land would be acquired for the purpose of selling it later on in sub-divided buildings. The government in turn made the payment to the company with an amount of $500,000 in two installments for preserving the land. It was felt that such income fell under the category of ordinary income because the intentions of the taxpayer were to make profits by selling the land in the form of sub-division.
The court held that such a transaction came under isolated transaction, however, the intention of the sale was profit. Therefore, income was taxable as per the ordinary incomes.

7.    Crow v FC of T 88

As per the facts of this case, a significant piece of land was bought for a period of ten years on loan amount. The purpose of the land was farming, growing crops and grazing. Then, subdivisions of that land were made and sold as many as 51 blocks by making certain profit. The court held that due to the fact that the taxpayer knew he would be in debt and would be unable to pay the loan by the farming activities. Which is why, the sale was done by the process of sub-division. The activities of sub-division were in continuity that was the suggestive of a business. Therefore, the profit was made out of this activity and hence was considered taxable under business income as well as ordinary income(Cahill, 2010).

Hence, the court was of the view that an isolation transaction had been made, however, it was also felt that there was no business activity performed.

8.    McCurry &Anor v FC of T 98

As per the facts of this case, a taxpayer bought a land in order to build a house on it. Then the house was removed and three townhouses were created instead. An advertisement was put for the sale of these houses but that act hardly found any buyer. Such arrangement made the person’s family live in the land until it was sold. After a few years again, a piece of land was bought by the taxpayer and was subdivided into units and finally sold.
The court held that the intention of purchasing this land was to make profit. In order to make profit by the realization of the capital asset, the asset is required to be held as an investment. It was also noted that a constant purchase of land was made, houses were constructed and sold, and so, it was a suggestive of a business. However, no isolated transaction were carried out there but the act of sale and purchase was constantly there. Hence, it was treated as a business income and was assessable under the ordinary income because it was a business income(Beer, 2001).

References

• Austaxpbr.com.au. (n.d.). Austax. [online] Available at: https://austaxpbr.com.au/document/PBR_6970 [Accessed 5 Oct. 2016].

• Beer, C. (2001). Property joint ventures – the tax issues. Brief. Real Est. Fin., 1(3), pp.219-230.

• Cahill, G. (2010). ATO determines that developer of 22 lot subdivision does not have to register for GST - Cooper Grace Ward. [online] Cgw.com.au. Available at: http://www.cgw.com.au/publication/ato-determines-that-developer-of-22-lot-subdivision-does-not-have-to-register-for-gst/ [Accessed 5 Oct. 2016].

• Pearson, G. (2009). Financial services law and compliance in Australia. Port Melbourne, Vic.: Cambridge University Press.

• Prebble, J. (n.d.). Structural Flaws of Income as a Base for Taxation. SSRN Electronic Journal.

• Smith, D. and Richardson, G. (2005). The Readability of Australia's Taxation Laws and Supplementary Materials: An Empirical Investigation. Fiscal Studies, 20(3), pp.321-349.