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HI6028 Taxation Theory and Practice Law Assignment
Case Study 1: Residence and Source
As per the taxation laws and provisions of Australia in case when a visitor comes in Australia for a period which is more than six months and during that period most of the time such person stays at a same place in Australia or during that period if he establish ties or already have any ties in the local community of that place in Australia in which he is staying, in such case the person will be considered as resident of Australia for tax purposes (Mangioni, 2015).
In the given case Fred is an executive working for a British company. He comes to Australia to set up a branch of his company in Australia. Fred leases a residence in Melbourne for 12 months. He came to Australia with his wife leaving his two teenage sons in London due to their newly commenced college. Also Fred rented out his family home in UK and the rental income was invested by him in France on which interest is being earned by him. The behaviour of Fred was similar to that of his behaviour before coming to Australia. However Fred fell ill and due to this he had to leave Australia after 11 months of his arrival.
In order to determine the residential status of Fred in Australia for the taxation purposes the following facts shall be considered:
1. He leases a residential house in Australia for more than 12 months
2. He intends to open a branch of his company in Australia which provide management consultancy with the view to establish business ties.
3. Fred rent out his family home in UK
4. The rental income from UK is invested by him in the investment in France on which he earns interest.
5. His behaviour in Australia was similar to his behaviour prior to coming to Australia
6. He had to return to UK after 12 months due to ill health
7. His wife also accompanied him to Australia and the children had to stay in London due to college.
From the above mentioned facts it can be concluded that Fred is an Australian resident for the taxation purpose in the year in which he arrived in Australia since he visited Australia for more than 6 months with the intention to establish business connections in Australia through his consulting company and also he stayed at the same place i.e., Melbourne for more than six months during his period of stay in Australia (Evans, 2012).
Case Study 2: Ordinary Income
I. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC
This case involves taxability of profit from sale of land. When an ordinary investment is realised for an amount over and above the amount for which it was acquired, then such excess amount shall not be assessable unless it relates to the carrying in or out of business of the owner of investment. Here the question arises as to whether the profit shall be considered as the profit earned by a person or an association of persons with the intention of buying and selling lands or securities speculatively or dealing in such investments as a business or not. In such a case the gain shall be taxable. However if the profit earned is not for the purpose of business or gain from speculation, then such profit shall be treated as an excess amount from realisation over the acquired value and therefore will not be assessable. The California Copper Principle emerged as the outcome of this case which suggests the applicability of a twofold test which relates to determination of nature of business and the gain arose as the result of such business activity so as to identify the assess ability of the gain for the purpose of Income Tax. Therefore the two considerations for the taxability of profit will be separated by the circumstances of each case and the facts which specifically relate to the case (Manyam, 2011).
II. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188
This case study relates to the decision of High Court for the Scottish Australian Mining Company Ltd. which is engaged in the operations of coal mining. The memorandum of association of the company stated the primary and essential purpose of the company to carry the business of coal mining and it also contained the power to sell, improve, manage, develop, and turn to account or dispose of any property of company. A land purchased by company in 1863 for the purpose of coal mining operations was sold in the year 1924 with a considerable profit. The outcome of the case as held by High Court was since the company was not engaged in the business of selling land therefore the sale of land shall be considered as profit realised from a capital asset and thus it will not be included in the assessable income of company. Thus the outcome suggests that sale of land by a coal mining company will be treated as profit from capital asset not taxable.
III. FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR
This case study relates to consideration of a single transaction as a complete business in appropriate circumstances. In this case the company was formed with the purpose of acquiring lands and fishing shacks which was later undertaken by three shareholders who changed the articles and included land development in it along with the subdivision and sale of land. High Court held that the estimated profit of $7 million for next three years will be assessable and since it was made under the intention of profit making scheme. The matter of calculation of profit was then remitted to federal court which followed the holding of High Court and agreed that land was not a trading stock and the profit was not earned from carrying business rather it was a profit making scheme.
IV. Statham & Anor v FC of T 89 ATC 4070
This case study relates to question that whether the loss from sale of an isolated property is deductible or not under subsection 51(1) of the Income Tax Assessment Act 1936. It was held that the loss incurred by the individual taxpayer and his spouse is a capital loss. Such loss can be deducted only from capital gain and not against business income. The owners of the land were not involved in the business of selling land therefore the sale of land shall be considered as sale of capital asset and therefore the profit or loss from such sale will be a capital profit or capital loss assessable separately under the capital gain tax regime. The income is not being earned for the purpose of sub section 25(1). Also it cannot be considered as profit earned any profit making scheme by the taxpayers. After leaving the purpose to use the property for farming purpose the asset in the hands of owners support the fact that it was sold only a realization and not for business or profit making purpose..
V. Casimaty v FC of T 97 ATC 5135
In this case it was held by the High Court that the profit from the subdivision and sale of land is assessable as the income of taxpayer under section 25(1) of the Income Tax Assessment Act 1936 since the subdivision and selling was part of carrying on business activity. However the Federal Court did not agree with the decision and held that the sale of subdivided blocks by the taxpayer was a mere realisation and not assessable income under section 25(1). This was so held since the subdivision of land ‘Action View’ was done by the taxpayer due to the circumstances of increased debt and deteriorating health. Therefore it cannot be considered as the plan of the taxpayer to maximise profit by piecemeal sale of the subdivided land. Also the fact that at the date of last assessment also more than one-third of the property was not subdivided (Smith, 2003). Ryan J. also supported the facts that the taxpayer did not have any office for the sale of property or other reasons which guide that the act of the taxpayer to sell the property was motivated by the expectation of profit rather the facts suggest that iota was the external circumstances that resulted in the sale of land for the taxpayer forcefully.
VI. Moana Sand Pty Ltd v FC of T 88 ATC 4897
This case involves purchase of land with the purpose of selling sand on such land. The land had to be held after exhaust5ion of sand until it is ripe for subdivision. But it was resumed by the company during this time period for $500,000. It was held by the federal court that the profit from the sale of land was taxable under section 25(1) as well as under section 26(a) of Income Tax Assessment Act 1936. The court assumed that it was not necessary for the company to subdivide and sale without any justified rationale. There shall be a reason to define the profit making purpose predominantly (Cassidy, 1994). Even if the sale and subdivision was not the main reason for purchase of property by the taxpayer the court did not have a rationale to exclude this requirement for imposing the taxability of profits under section 25(1).
VII. Crow v FC of T 88 ATC 4620
In this case it was held by the court that the repetitive and systematic transactions which were carried on by the taxpayer including purchase of many properties and their subsequent subdivision and sale in parcels was in the nature of intention to carry out a business by the taxpayer. Thus the court believed that the purchase and sale of properties was done by the taxpayer with the motive to earn profit. Since the activities define the acquisition of land, its development and subsequent sale with the profit motive, therefore the income from the sale of land shall be taxable under section 25(1) of Income Tax Assessment Act 1936. The facts of the case which support the decision of high court include the reason that continues developments were made by the taxpayer in the properties acquired and were sold purposefully after the developments and improvements. The losses which were incurred also were incurred as a result of making efforts or carrying outré business of earning the assessable income. Therefore the losses will also be deductible3 as the income is also taxable.
VIII. McCurry & Anor v FC of T 98 ATC 4487
In this case a land was purchased by two brothers who after the acquisition of land demolished the old house already built on that land and constructed three new townhouses. Before the completion they intended to sell the units but were not successful in the bid therefore they decided to live in these townhouses with their families until these could be sold. The units were sold by them after a year and half. The court considered it as a profit making scheme and thus taxable. The reasons for the decision of the court relates to the facts that the property was put in the market by the brothers even before its completion. Also no efforts were being made to acquire tenants for the townhouses. However the house for s0ome time was used for the residential purpose of livi9ng by the family members of the brothers but the motive was to sell the property and use the proceeds to pay the bank loan. Therefore it is purely considered as profit making scheme and since there was always an option available with the taxpayers to sell the property and earn profits.
Bishop, M. 2011, "Federal Court of Australia appeals from taxation decisions", Taxation in Australia, vol. 46, no. 6, pp. 254-258.
Cassidy, J (1994) "The Taxation of Isolated Sales under Section 25 (1) ITAA: TR 93/2 v Joint Submission," Revenue Law Journal: Vol. 4: Iss.1, Article 2.
Evans, C. 2012, "Reviewing the reviews: A comparison of recent tax reviews in Australia, the United Kingdom and New Zealand or "a funny thing happened on the way to the forum"",Journal of Australian Taxation, vol. 14, no. 2, pp. 146-182.
Hart, G 2007, "The Limited Impact Of Whitfords Beach In Urban Land Development.," Revenue Law Journal: Vol. 17: Iss.1,Article 4.
Mangioni, V. 2015, "A review of the practices of valuers in the assessment of land value for taxation in Australia", Journal of Property Tax Assessment & Administration, vol. 12, no. 2, pp. 5.
Manyam, J 2011, "Taxation Of Gains From Banking and Insurance Businesses In New Zealand," Revenue Law Journal: Vol. 20: Iss.1, Article 6.
Smith, A 2003, “Property Development,” For the Taxwise Professional, Taxation Institute of Australia