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HI6028 Taxation Theory Practice Law
Case study I - "Residence and Source"
In Australian Taxation system there are some different measures for imposing taxes over their visitors. Before imposing tax liability over their visitors they need to measure their residential status and for this purpose they have to satisfy the below required aspects such as:
1. Visitor stays within the Australia for a period more than six months.
2. Visitor stays at same place within Australia for a period more than six months.
3. Visitor must develop or ties relationship within the local community or build business relationship at the same place where he/she stays in Australia (Martin & Tran-Nam, 2012).
As if these conditions get fulfilled then the residential status get cleared and he/she is liable to pay taxes according to the taxation provision made by the Australian Income Tax Assessment Act 1936. For clearing the residential status it become very important for them to satisfy all three aspects (Martin & Tran-Nam, 2012).
The given case study stated that Fred an UK resident working in UK based organisation in London need to visit the Australia for the purpose of setting up company's branch office to enhance their management consultancy service within Australia also. The process of setting up branch office demands 12 months time and for this period Fred need to stay within Australia. For this duration Fred lease a residential property in Melbourne city and shifted to Australia with his wife. He left out his sons in London as they need to continue their college session. He rented his family house of UK. He also make investment in France by utilising the amount received in the form of rent. Fred was not able to spend his total 12 month duration as he fall ill and leave the Australia (Wilson-Rogers & Pinto, 2010). Now it become important to calculate his residential status in the Australia all three aspects get evaluated such as: -
1. Fred stays in Australia for a duration of more than 11 months. (first aspects meet)
2. Fred stays at Melbourne only for more than 11 months. (second aspect meet)
3. Fred open branch office that helps in establishing business relationship. And living for more than 11 months helps in building public relation with the local Australian community. (third aspect meet) (Wilson-Rogers & Pinto, 2010).
Fred meet all the three aspects stated in the Australian Income Tax Assessment Act 1936 as he stays in Melbourne for more than six years for the purpose of setting their branch office. In this time duration he build relation with the local community along with business relationship. With the effect of it he become eligible and need to pay taxes as per the Australian taxation system. Even he is UK resident but he spend adequate time period within Australia and meet all aspects to get eligible for paying taxes (Wilson-Rogers & Pinto, 2010).
Case study II - "ORDINARY INCOME"
I. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159
Above case focuses over the implication of tax over profit amount received by selling land. Company sold out the land and in return they get huge amount which was much higher as compare to the amount spend at the time of acquisition. it create a doubtful situation that whether the excessive amount get assessable for tax liability or not. Over this issue court suggest to determine the relationship of received amount with their business activities. If received amount have any relationship with business then the amount received get taxable otherwise it get denoted as capital gain and no tax liability get imposed over it (Wardell-Johnson, 2014).
Along with this if company receive funds from the speculation of investment or securities then that amount also get assessable for tax liability. For organisation court suggest twofold test in which they determine the nature of business as well as evaluate the relationship of received profit amount. Court identifies that was no such relation among the sale of land and business transactions that concluded that no tax get impose over the earned money (Wardell-Johnson, 2014). The amount earned with the help of the speculation of investments or securities get directly assessable for the purpose of taxation as it is clearly stated as the profit for them. Loss occurred in these transactions didn't get deducted from the capital gain nor even adjusted with the normal income of the organisation.
II. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188
Above case was related to the use of land for mining business and get sold out after getting exhausted and court impose tax liability over the revenue generated. There was a company Scottish Australian Mining Co. engaged into mining business and they perform their activities over 1771 acres of land which they bought in the year 1863-65. They perform continuous activities over it due to which land get exhausted and they sell it in 1924 because land become useless as per their business need. They make subdivision over land by incurring lots of expenses over it as they desire to get maximum price with the sale of it. High court review all the facts and figures related to the business and identified that they were not doing the business of purchasing and selling of land whereas their main business activity was mining for which they purchase the land and as the land get exhausted they decide to resale it. As per the decision of high court the income earned by selling land didn't get assessable or no income tax liability get imposed over it (Maples, 2012). It was clearly observed that their main business activities are related to the mining only and they didn't have any kind of relation with the sale or purchase of the land. So the earned income with the effect of the sale of land didn't get taxable under section 25(1).
III. FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR
Above case having focus over the profit making scheme. Company was engaged into the business of purchasing and selling of land under profit making scheme to attain huge profits. Whitfords Beach Pty Ltd. purchases the piece of land and start their business activities related to fishing shacks over it. Subsequently three development companies shows their interest in their business and purchase their all shares. They make effective changes in the memorandum and these changes were business activities get changed from fishing shacks to purchase and sale of land with the motive of earning profits. Their motive fall under profit making scheme and high court impose tax liability over their earned profit. They develop or subdivided the piece of land in order to maximise the amount of their earned revenues and that amount was much higher as compare to the amount invested for acquiring the land. High court identified this income assessable as per the section 25(1) of Income Tax Assessment Act 1936. The motive of all three companies was clear that they perform all these purchase and sale of land for getting higher profits. They were conducting business of purchasing and sales of land and due to this they need to pay taxes over the earned income (Campbell, 2015). The earned revenues or incomes or profits is the main motive behind their business activities and with this effect it is clearly stated that the amount of profit get assessable for taxation under section 25(1).
IV. Statham & Anor v FC of T 89 ATC 4070
Above case is focusing over the question that Under section 51(1) incurred loss (due to the sale of isolated property) is deductible or not?
Taxpayer and his wife get huge loss with the sale of land and this loss was denoted as capital loss. The amount of loss get deducted from their capital gain only and didn't get set off with their general income. Business of taxpayer was not involved in sale of land activities so the profit or loss attained after the sale of assets didn't get assessable under section 25(1). The profit get termed as capital gain and loss are denoted as capital loss and the amount of revenues become assessable under capital gain tax regime. Land was not sold under the profit making scheme and with this effect any kind of profit from it didn't get taxable under section 25(1). Earlier land was left out for the purpose of farming and then it get sold out without any intention of making profits and it also didn't related with the business activities (Bevacqua, 2015). The transaction related to the sale of the land didn't having any relation with the business activities that results into non-assessable for taxation purpose. The profits earned from the sale of land didn't get taxable.
V. Casimaty v FC of T 97 ATC 5135
Above case is in context to the inherited land. Inherited land was received by the taxpayers from his father and he make use of it for performing farming activities. He perform farming activities for a long duration and not able to earn profit from it. Every time he gets losses that results into increase in debt ratio. The pressure of loss and increase in debt affect adversely over his health and he fall ill. After these adverse situations he decide to sold out the land so that he become able to pay off the debt amount and meet out the expenses. But court rendered their decision that the amount earned with the sale of the land get taxable under section 25(1). Later on federal court reverse the decision and pass new decision that the amount attained by the individual should not be assessable because he gets this land from his father and continue farming over it. His business is related to the farming and the sale of land is not included under it. He make continuous use of land for farming activities from last 20 years and even his intention was not to make profit by selling the land. He sold out the land for the purpose of getting adequate amount for paying off debt amount and meet out other expenses (Kyle, 2015). It is clearly observed that they are engaged into the farming business and piece of land get sold out for the purpose of meeting the outstanding debt balance and also meet the normal expenditure. So with this effect court didn't impose tax over the earned amount from the sale of land.
VI. Moana Sand Pty Ltd v FC of T 88 ATC 4897
Above case is in context to the sale of exhausted land and implying taxes over the income received. As per this case Moana Sand Pty Ltd. run their business and perform activities of selling sand. In order to make sales of sand they purchase land for it but due to continuous usage of land it become exhausted and company took decision to sold it out. But before selling it they decided to subdivide it so that they get maximum price of it. There land get sold out prior the completion of the subdivision. Court impose tax liability over the amount earned by them with the sale of land and considered their income as assessable income under section 25(1). The purpose of owner was to run business related to the sale of sand not related to the make resale of it to get profits. Owner sold it out because it get exhausted and court was not able to make justification that why they impose tax over it. They can't justify the reason of imposing the taxes over the amount earned with the sale of exhausted land because transaction related to the sale of land is not having any kind of relation with their business activities (Wallace, et. al., 2013).
VII. Crow v FC of T 88 ATC 4620
Above case was related to the identification of transaction nature. Nature of transactions include that whether same transaction is occurring on continuous basis or not. If it performed on continuous basis then it get termed as business activities. Transaction nature get utilised for determining whether the income earned is taxable or not. Court stated that if transactions get repetitive in systematic manner and made for getting profits then the earned income considered as assessable income. The consistent sale and purchase transactions of land considered as the business activities and company need to pay tax over their earned profit as per the section 25(1). Company is also eligible for deducting the loss occurred with the sale of land and they use capital gain for the purpose of setting off losses (Dabner, 2016).
Court justifies that constant and systematic transactions shows clear motive of getting profits and this make the company eligible for paying taxes over their earned revenues and also get deductions for the loss amount (Dabner, 2016). The systematic and continuous transactions are related to the sale and purchase of the land that helps in taking decision that the attained profit get taxable under the section 25(1) and along with this they are also liable to deduct the share of loss from the capital gain amount. The motive behind these transactions is to earn adequate share of profit by making purchases and sales in effective manner.
VIII. McCurry & Anor v FC of T 98 ATC 4487
Above case was related to scheme of profit making. There were two brothers McCurry and Anor that run business of buying and selling piece of land to earn huge profits. They purchase piece of land for this purpose and decide to build three townhouses over it. There was one old house build over it which get demolish by them so that they build their townhouses. They put lots of efforts to make sales of their townhouses before its completion but they didn't get success because they didn't get any profitable deal. After this they started living with their family members in their newly build townhouses. They live for one and half year and then sold out them and get huge profits with it. Court impose tax over their earned revenues (or incomes) as there earned incomes fall under section 25(1) and considered as assessable income. For their decision court stated that the motive of both brothers was to earn profits by making sales of the land and in the end they sold it out and get huge amount against it. Brothers stated that they make use of it for their residential purpose but court ignore this fact as it was purchased by them for the purpose of selling and they earn huge revenue by selling it (Taylor, 2011). Due to the unfavourable circumstances they make use of the townhouses for the residential purpose and this will not considered for getting tax relaxation from the court. They need to pay tax liability over their profit amount as their income become assessable.
Bevacqua, J. 2015, "ATO accountability and taxpayer fairness : an assessment of the proposal to split the Australian Taxation Office", University of New South Wales Law Journal, The, vol. 38, no. 3, pp. 995-1014.
Campbell, S. 2015, "A mater of trusts: CGT issues when creating and dealing with UPEs",Taxation in Australia, vol. 50, no. 6, pp. 332-334.
Dabner, J. 2016, "Resolving Australian tax controversies: Does the tax jurisprudence under the European convention on human rights suggest a better way?", Australian Tax Forum,vol. 31, no. 2, pp. 213-256.
Kyle, T. 2015, "Practical application of the new Pt IVA", Tax Specialist, vol. 18, no. 3, pp. 104-123.
Maples, A. 2012, "Online sales and auction sites, isolated transactions and the Income Tax Act 2007 (NZ)", Journal of Australian Taxation, vol. 14, no. 1, pp. 57-88.
Martin, F. & Tran-Nam, B. 2012, "The mining withholding tax under Division 11C of the Income Tax Assessment Act 1936: It may be simple but is it equitable?", Australian Tax Forum, vol. 27, no. 1, pp. 149-174.
Taylor, C.J. 2011, "Some distinctive features of Australian tax treaty practice: An examination of their origins and interpretation", eJournal of Tax Research, vol. 9, no. 3, pp. 294.
Wallace, M., Hart, G. & Evans, C. 2013, "An evaluation of the contribution of Justice Hill to the provisions for the taxing of capital gains in Australia", Australian Tax Forum, vol. 28, no. 1, pp. 123-136.
Wardell-Johnson, G. 2014, "The "new" Part IVA", Tax Specialist, vol. 17, no. 3, pp. 118-129.
Wilson-Rogers, N. & Pinto, D. 2010, "Reviewing the Discretion in Part IV A of the Income Tax Assessment Act 1936: Why the Devil Is in the Lack of Detail - Part Two", Journal of Applied Law and Policy, , no. 2010, pp. 69-81