Taxation Practice Law Business Source

Question: Case study 1: Residence and source Fred, an executive of a British corporation specializing in management consultancy, comes to Australia to set up a branch of his company. Although the length of his stay is not certain, he leases a residence in Melbourne for 12 months. His wife accompanies him on the trip but his teenage sons, having just commenced college, stay in London. Fred rents out the family home. Apart from the absence of his children, Freds daily behavior is relatively similar to his behavior before entering Australia. As well as the rent on the UK property, Fred earns interest from investments he has in France. Because of ill health Fred returns to the UK 11 months after arriving in Australia. Requirement Discuss whether Fred is a resident of Australia for taxation purposes. Case study 2: ordinary income Explanations of the respective outcomes reached by the courts in the following cases which all involving sales of land I. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159II. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188III. FC of T v Whitfords Beach Pty Ltd (1982) 150 CLRIV. Statham Anor v FC of T 89 ATC 4070V. Casimaty v FC of T 97 ATC 5135VI. Moana Sand Pty Ltd v FC of T 88 ATC 4897VII. Crow v FC of T 88 ATC 4620VIII. McCurry Anor v FC of T 98 ATC 4487(16 marks, max. 2000 words). Answer: 1. This case highlights the provisions relating to residence and source in Australia. Fred is an executive of a British Corporation who had specialization in management consultancy. He came to Australia to set up a branch of his company. The length of his stay was not at all certain so he had leased a residence in Melbourne for twelve months. He has accompanied his wife on the trip but his teenage sons, having just commenced college, stayed in London. His children didnt accompany him. Finally Fred had rented out his family home. Only his children was absent otherwise his behaviour in Australia was very similar to his behaviour before entering Australia. Apart from the business income and rental income he also had a property in U.K. From where he used to get rent. Apart from this he also had certain investments in France from where he earns interest. But due to his ill health he had to return back to London. He planned to live in Australia for twelve months but could stay for eleven mont hs due to his health.(Bobinozcom, 2016) As per Australian Taxation law there are certain provisions which a person need to be fulfilled to be considered as an Australian resident. The condition which needs to be fulfilled is discussed below: Family should be residing in Australia and even the business should be there. All the assets which the concerned person is having should be in Australia. The intention of the concerned person should be to stay in Australia. His living and social arrangements should also be in Australia. If a person has stayed in Australia for more than six months then he shall be considered as a resident of Australia.(Findlawcomau, 2016) If most of the above mentioned conditions are satisfied then the concerned person would be regarded as a resident of Australia. If we analyse the case of Fred then we can observe that he has satisfied most of the conditions mentioned above.(Tracy watkins, stuffconz, 2016) Fred had planned to stay in Australia for twelve months but unfortunately due to his bad health he had to stay for eleven months. This shows that he had stayed in Australia for more than six months. Even though his intention is not to stay in Australia permanently but he is opening a branch here and had also leased a residential home. He came to Australia with his wife but without his two teenage sons. Now since he has opening a branch in Australia, he would be frequently travelling to Australia and would also earn income from his business. He would be having certain assets in Australia as well. After considering all these factors it could be concluded that Fred is considered as a resident of Australia. Just that he didnt stayed in Australia for a long time does not say that he is not a resident, he has satisfied the basic condition which is to stay in Australia for more than six month. Hence, Fred is considered as a resident of Australia.(Austliieduau, 2016) 2. Californian Copper Syndicate Ltd v Harris If a person has investment and to gain some profit if he is selling it at a very high price then the difference between original cost and the selling price is to be considered as profit. This definition of profit is as per general principle. In such kind of a scenario the profit earned is considered as a part of business.(Atogovau, 2016) In the said case Court had declared that the transaction entered was for the profit purpose. The main reason behind this judgement was that the property was purchased for the purpose of being resold at a profit. Here the intention was to sell the property at profit and not a regular business transaction. If it would have been a regular business operation transaction then Court would have given judgement in favour of the assesse. But since the motive was to earn profit, it was chargeable as an ordinary income. Assess needs to pay tax on the profit earned. It would be taxable under the head Business Income. This is not a generic judgement given by the court; it was purely based on facts. The judgement could be taken as reference in other cases as well but should not be regarded as provisions. The judgement should vary based on the facts of the case.(Bondeduau, 2016) Scottish Australian Mining Co Ltd v FC of T The company had a mining land which it had purchased several years ago. But the problem was that the land was not at all doing well since nothing was there. So company decided to construct roads and several other attractions with the help of which land can be sold at a better price some of the portions were even given to public institutions like schools and churches. (Cchcomau, 2016) In this case Court had given a decision which was not in favour of the company, since Court had an assumption that the land was bought to earn profits. But the actual scenario was something else; company had bought land for some mining purpose. Since the mining land was not doing well, they had constructed roads, some other monuments as well. Since the court decision was not in favour of the company, it had appealed further to Judicial Terrain. Judicial Terrain held that the roads and other things were built since the land was not doing well. It had overturned the decision which was given by the company. The final decision which was given by Judicial was in favour of the company. Now the profits earned from the land would not be assessable and tax under Australian Income Tax law. So it shows that profits would be held taxable depending upon case to case basis.(Austaxpbrcomau, 2016) FC of T c Whitefords Beach Pty Ltd In the case between FCT v Whitefords Beach Pty Ltd (1982) 150 CLR original shareholders of the company sold shares to three development companies which acquired the company with an intention of subdividing, developing and selling the land at a profit. Even the articles of the companies to capture this intention. In the majority of the similar cases High Court had held that such profits would be assessable under Section 26(a) of the Income Tax Assessment Act 1936.(Tvednetau, 2016) This case is very similar to the above case of Scottish Australian Mining Co Ltd v FCT. Judge held that actions taken by the company was more than a mere realization of a capital asset and also constituted business of land development. Gibbs stated that if a taxpayer does no more than realise an asset then in such cases profits need not be taxable. It does not matter that how the taxpayer has gone to realise the asset in an enterprising way. Just that the taxpayer has realized an asset does not mean that it is converted into the business. But if the same is considered as an operation of business the all the realization and profits should be taxable. Then it would be considered as an ordinary income and would be taxable under the Income Tax Act. The said decision was completely different with the decision given in the Scottish case. As it was discussed in the Scottish case that in such cases decision needs to be taken based on the facts of the case, Decision will differ based on diffe rent facts of the case.(Lexisnexiscomau, 2016) Statham Anor v FC of T 89 ATC The said case was between Statham Anor v FC of T 89 ATC 4070, where the applicant said that the amount of $62,884 should not be considered as income as per the ordinary concepts. It should not be considered as a profit arising from the sale of any property. There were several conclusions drawn from the case like land became the property of the owners only at the time of partnership. Hence, there was no venturing of the land in any property development exercise. Owner had also decided to sell the land rather than keeping the land with themselves. After the death of the owner the deceased decided to sell the land rather than continuing with it and finally the nature of sale was not into venturing of capital in the business and it was neither a part of setting up of the business. (Atogovau, 2016) Finally the Court had given the following orders in respect to the said case: Commissioner should pay the costs of the appeal which applicant had to bear. Appeal should be allowed and objection which was raised in 1983 has to be upheld. The income which was derived in the said case would be reduced by the amount of $62,884.(Morsegroupcomau, 2016) Casimaty v FC of T 97 ATC 5135 This case was about a father and a son where a father had given his son an Action View farm. This farm was given as a gift to his son. The farm is mainly used by his son for some agricultural activities like dairy production, cropping and beef and sheep implementation. But the biggest issue in this case was that all these activities were not generating profit. So son had decided to sub-divide the land and sell it off. He was under a lot of debt, hence to reduce the debt he has decided to sell the land and earn some profit. The land was then divided into several sub-divisions. After this the commissioner had decided to tax the profit as per Section 25(1) of the Income Tax Assessment Act 1936. The basis on which this decision was taken was that land was sub-divided only for the reason to generate profits. Hence commissioner had decided to tax the earned profits.(Cchcomau, 2016) It was concluded that the tax payer was not carrying on the business of land development. The conclusion was on the basis that the sub-division of the farm was done on piecemeal basis to reduce debt. There was no plan made by the tax payer to dub-divide the land. If the farm was earning profits then he might not have sub-divided the land. He didnt have any intention to sub-divide the land. Even the largest part of the farm was not sub-divided, this shows that his intention was not to sub-divide or sell the land. Hence it was concluded that the taxpayer had acquired the land for residential and primary production purpose. (Cgwcomau, 2016) Moana Sand Pty Ltd v FC of T Moana Company had purchased a land which was full of sand and the purpose to purchase the land was to selling off the sand. Hence on the basis of this commissioner had decided to tax the profit earned based on the provisions of Section 25(1) and the second part of Section 26(a). But when the land was purchased initially it was taken for doing some business activities.(Atogovau, 2016) While the Court referred to the need for a main purpose of profit making by resale for the operation of the first limb under section 26(a), no rationale for excluding such. This case did not provide strong authority for the proposition even though it supports the Commissioners stance. This case was very different from the case of Kratzmann because the sale of land was the main purpose of the company. Hence at the end the appellant case of rejected since it was very different from the Kratzmann case. Hence the income derived from the sale of land needs to be charged under Income Tax Assessment Act.(Austaxpbrcomau, 2016) Crow v FC of T In the case of Crow v FC of T 88 ATC 4620 farmer had borrowed hefty amount of money so that he could purchase five blocks of land over a period of 10 years. The farmer had used the land for farming, growing crops and grazing but later on it was sub-divided. After the two years of purchase and then over a number of years he had almost sold around fifty-one blocks. By selling these fifty-one blocks he had earned an overall net-profit of $388,288. On the basis of these facts Court had held that land was used for earning profits. Since he was carrying on the business of land development. Court had acknowledged that in starting land was used as a farm but evidence was found that the farmer had known about the outset because of the size of the debts entered into that some kind of land would need to be sold. In this case various properties were purchased and then eventually sub-divided. These sale of parcels of land involved transactions which were very repetitive and systematic and had the features of continuing business of land development. This case was distinguished with the Scottish Australian Mining case that the property was used as a mine for much longer period of time than the farming business in the current case.(Cchcomau, 2016) All the transactions which were entered by the tax payer clearly show that his intention was to earn profit. His activities were viewed as carrying on business of land development and profit would be considered income as per the Section 25(1) of the Income Tax Assessment Act 1936. As per the Taxation Ruling TR 92/3 it was not clear that what the High Court meant by profits made in the ordinary course of business. Hence two types of office would come under such descriptions which are: Transaction not directly entered in its main business activity; instead it should be incident to the business activity of the tax payer. Profits and gains should be arrived from the latter. Profits arising from transactions which are a part of ordinary business.(Tvednetau, 2016) McCurry Anor v FC of T 98 ATC 4487 In this case McCurry had purchased a land on which an old house was already there. Then the company decided to remove the house and build three townhouses on the land. They had tried to advertise these townhouses for sale before its completion but unfortunately it was not successful. Due to this family had decided to move into two of the townhouses and live there for almost one year at which they were sold resulting in a total net profit of $150,000. Then after some time they purchased a second block of land where they constructed units and then sold them. On the basis of this court has decided that profits needs to be considered as assessable income since it was resulted from a commercial profit making activity. This case was gone beyond just a mere realization since properties were put in the market prior to the completion.(Atogovau, 2016) Hence the court held that the property was used for mere intention of selling the property. The income or profit derived from the sale needs to be taxed under the Income Tax Assessment Act. Both the brothers need to pay tax on the profit which was derived by selling the property.(Chefseitede, 2016) References Atogovau.(2016).Atogovau.Retrieved21 August, 2016,from https://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR923/NAT/ATO/00001 Atogovau.(2016).Atogovau.Retrieved21 August, 2016,from https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2002483/00001 Atogovau.(2016).Atogovau.Retrieved21 August, 2016,from https://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR923/NAT/ATO/00001 Atogovau.(2016).Atogovau.Retrieved21 August, 2016,from https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2002483/00001 Austliieduau.(2016).Austliieduau.Retrieved21 August, 2016,from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240 Austaxpbrcomau.(2016).Austaxpbrcomau.Retrieved21 August, 2016,from https://austaxpbr.com.au/document/PBR_36218 Austaxpbrcomau.(2016).Austaxpbrcomau.Retrieved21 August, 2016,from https://austaxpbr.com.au/document/PBR_3062 Bobinozcom.(2016).Bobinozcom.Retrieved21 August, 2016,from https://www.bobinoz.com/blog/807/6-ways-to-emigrate-to-australia Bondeduau.(2016).Bondeduau.Retrieved21 August, 2016,from https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1211 Cchcomau.(2016).Cchcomau.Retrieved21 August, 2016,from https://www.iknow.cch.com.au/document/atagUio549860sl16841994/federal-commissioner-of-taxation-v-whitfords-beach-pty-ltd-high-court-of-australia-17-march-1982 Cchcomau.(2016).Cchcomau.Retrieved21 August, 2016,from https://www.iknow.cch.com.au/document/atagUio539843sl16716249/casimaty-v-fc-of-t-federal-court-of-australia-10-december-1997 Cchcomau.(2016).Cchcomau.Retrieved21 August, 2016,from https://www.iknow.cch.com.au/document/atagUio545564sl16800674/crow-v-federal-commissioner-of-taxation-federal-court-of-australia-17-august-1988 Cgwcomau.(2016).Cgwcomau.Retrieved21 August, 2016,from https://www.cgw.com.au/wp-content/uploads/2015/07/Tax-and-GST-issues-with-small-property-developments-Greg-Cahill-May-2015.pdf Chefseitede.(2016).Chefseitede.Retrieved21 August, 2016,from https://chefseite.de/gb/index.php?sgb_option[suche] Lexisnexiscomau.(2016).Lexisnexiscomau.Retrieved21 August, 2016,from https://www.lexisnexis.com.au/campus/study-help/taxation/understanding-taxation-law-2012/documents/utl12solch14.pdf Morsegroupcomau.(2016).Morsegroupcomau.Retrieved21 August, 2016,from https://www.morsegroup.com.au/files/docs/white papers/morse group_white paper_selling the farm piecemeal.pdf Findlawcomau.(2016).Findlawcomau.Retrieved21 August, 2016,from https://www.findlaw.com.au/articles/4297/how-are-permanent-residency-visas-granted-in-austr.aspx Tracy watkins, stuffconz.(2016).Business Insider Australia.Retrieved21 August, 2016,from https://www.businessinsider.com.au/the-door-just-opened-for-thousands-of-new-zealanders-to-become-australian-citizens-2016-2 Tvednetau.(2016).Television Education Network.Retrieved21 August, 2016,from https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm