Hi6028 Taxation Theory Practice Assignment Answers

Case study 1: Residence and source

Kit is a permanent resident of Australia. He was born in Chile and retains his Chileancitizenship. Kit spends most of the year working off the coast of Indonesia on an oil rig for a United States company. He was recruited for this job in Australia and signed a contract with the company here. For the last four years, Kit’s wife has lived in Australia with their two children. They purchased a home in Australia three years ago. Kit and his  wife have a joint bank account with Westpac Bank. Kit’s salary is paid directly into his account. All of the family’s other investments, including a share portfolio that generates dividend income, remain in Chile. Kit gets one month off from work every third month and, on these occasions, he meets with his family either in Australia or on holidays around South America (usually in Chile where his parents reside).

Discuss whether Kit is a resident of Australia and how his salary and investment income would be taxed.

Case study 2: ordinary income

Explanations of the respective outcomes reached by the courts in the following cases which all involving sales of land:

1. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159
2. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188
3. FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR
4. Statham & Anor v FC of T 89 ATC 4070
5. Casimaty v FC of T 97 ATC 5135
6. Moana Sand Pty Ltd v FC of T 88 ATC 4897
7. Crow v FC of T 88 ATC 4620
8. McCurry & Anor v FC of T 98 ATC 4487

Case study 1: Residence and Source

The given article is associated to the residential status of Kit and the various assessments evaluate the employment income from the salary received during his employment status in Australian-based Company and to find out whether it is taxable in nature. Although Chile is the birthplace, the various depictions made by the study have been able to show that Kit is recognised as a permanent occupant of Australia. A person can be held for assessment of income in Australia based on “IT rulings 2650 under ITAA 1997”. (Piketty and Saez 2013).

It has been further observed that temporary residents of Australia along with overseas inhabitants are held for taxation based on Australian sources. One of the primary examples of the taxation is seen to be derived from an individual doing a job in Australia. In order to assess the tax liabilities associated to Kit, it is important to know the residence status for knowing whether it can be considered for taxation. Even though Kit is a permanent resident of Australia he cannot be regarded as a citizen of the country as he is seen to have a Chilean residential status for the purpose of determination of taxation (Gahvari and Micheletto 2016).

Domicile Test:

“Domicile Act 1982” is a legal model for establishment of residential status. According to the common law, the various proceedings of the rule, place of birth of an individual form his or her domicile place. Although some sections of this law is restricted to a few exceptions. The rule accounts for an individual to maintain the domicile status unless he or she decides to acquire a domicile in some other country. A person’s domicile place is seen to be the place or region where he/she decides to build a home indeterminately, this is based on rulings under “Henderson v. Henderson [1965] 1 All E.R.179”. The main rulings for It has been evident from the present study as Kit not only bought a house three years ago in Australia but also decided with his children and wife. (Feld, Heckemeyer and Overesch 2013).

As per the “section 6 (1) of the taxation rulings 2650”, at the time of determining the permanent domicile place it is necessary to consider the intention of an individual where he or she decides to build a home indefinitely (Auerbach and Hassett 2015). Despite of being an employee at oil rig of Indonesian caused often went to see his wife and children who stayed in Australia and this particular case has been assumed under “section 6 (1) of the ITAA 1936”,  that;

1. The permanent residency status of Kit in Australia satisfies with the compliances and conditions as stated in the law.
2. Kit held his position of being a resident in Australia for more than half of the income year. He is further seen to satisfy his residential place status in Australia and comply with the domicile test (Conesa and Domínguez 2013).

183 days test:

Based on this test, the person residing in Australia for a period more than half of the income year shall be considered as an Australian resident. The 183 days test further shows that a person can do this either in brakes are continuously. It has been apparent that as Kit was transferred to oil rig based in Indonesia and visited his family once a month in every quarter. This adds up to 120 days annually of his stay outside or within Australia. Despite of this cannot be ruled of being a permanent occupant of Australia and will be regarded as the same because he has purchased a house three years ago and lives with his wife and children. As per the stated rulings under “F .C. of T. v. Applegate (79 ATC 4307; (1979) 9 ATR 899”, the fact that Kit had a permanent place of residency in Australia cannot be overruled (Saez 2013). The given case study clearly identifies the intention of Kit for making Australia is place of adobe, and satisfying the criteria for staying there for more than 183 days (Stantcheva 2014).

Assessment of Income tax:

The residency status of a taxpayer is seen as the foundation for tax liability which is in compliance to the evidence is applicable in income year. In case the taxpayer is seen to be in conformity with ordinary elements of residential test then a person will be assessed for taxation based on the status of residential occupancy. In the given scenario, the salary received from the Westpac bank is considered as an Australian income source for Kit. As he has entered into an Australian contract is salary shall be subjected to tax. Furthermore, he has also obtained substantial portion of income from investments made in share portfolio which is also considered for taxation purposes (Golosov et al. 2013).

As per the rulings of “Applegate per Franki J 79 ATC”, as Kit is seen to be a resident of Australia is required to mention his overseas income during income tax lodgement. As the residential test confirms that he is a resident of Australia the income on during the income year will be taken into consideration for the final assessment of tax. However, certain situations associated to double taxation can be avoided by claiming exemption on the portfolio of shares. This is mainly due to the fact that Australia has signed several cities with more than 40 other nations which is seen to provide relief from cases of double taxation (Niemann and Sureth 2013).

Case Study 2: Ordinary Income

I. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159

The various types of outcomes associated to the case has been able to find that the capital which was available to the taxpayer was once not taken into account for sufficient amount of fun to comment the activities of business for mining. The decision held by the court for the disposal of the land is seen to constitute the trading act and did not take into consideration the meagre replacement of one form of investment with another (Guvenen, Kuruscu and Ozkan 2013).

II. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188

This particular case is seen to be dealing with issues which links to the proceedings of business and finds out whether subdivision and selling of the land used by mining company will be included for income assessment or an ordinary realisation of property. The arguments brought forward by the taxpayer have stated that it had simply realised the capital based on the beneficial manner and profit of the business was not included for assessment. The court in its deficient further implied that the asset realisation took into consideration capital account. (Kopczuk 2013).

III. FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR

The finding of the case is considered for finding out whether subdivided land selling is to be considered under capital. The taxpayer’s argument has stated that the various types of activities for realisation of profit and property are not to be considered for assessment of tax. Furthermore, the taxpayer has been assessed under section 25 (1) through the income generated from selling of property as per statement given by Gibbs CJ, Mason, Murphy and Wilson JJ. Based on the declaration of the court, the taxpayer activities constituted of going through several commercial activities associated to an ameliorating the land. The overall outcome has been brought forward by stating that income should be assessed in form of assessable income of the taxpayer which is in compliance with the general accounting phenomena (Taylor and Richardson 2013).

IV. Statham &Anor v FC of T 89 ATC 4070

The following case has been able to emphasise on the issue associated to the selling of subdivided property and judging whether the same can be assessed as income under the rulings of 25 (1) or 26 (a). It has been further seen that argument brought by the taxpayer regarding stating of not entering into profitable scheme of land was not put to use for business purpose. It has been stated that the subdivision of the land took place without involving the taxpayer in any kind of profit-making scheme. Henceforth, the degree of realisation associated to the taxpayer was not constituted of any commercial proceedings. It has been further worth mentioning that the extent of realisation is seen to be relevant for considering the manner in which land was realised (Cho 2014).

V. Casimaty v FC of T 97 ATC 5135

The given case is considered as per the rulings of section 25 (1) or 25 A. Based on the verdict stated by the court the sale of a portion of the land and the subdivision of it was not seen to be held for taxable purpose under the aforementioned sections. Based on the decisions of federal court, the taxpayer is seen to have taken action view with the intention that no income from the disposal of property was considered for assessments with regards to 1st limb of section 25A (1). The second limb was not seen to have any consequence, as the selling of land did not take place during normal course of the business (Adam, Kammas and Lagou 2013).

VI. Moana Sand Pty Ltd v FC of T 88 ATC 4897

The particular case is seen to be considered under “Section 25 (1) or 26 (a)” for the purpose of determining of taxpayer’s income which is related to the receiving of the income as a result of sale of the land. The findings of the aforementioned sections is seen to be applicable for considering the income of taxpayer for being a sum of $370,000 which was seen to be received as a result of sale of property. On referring to case of “FC of T v The Emporium Ltd 87 ATC 4363 the court passed its verdict by stating under section 25 (1)”, the profit is seen as an ordinary income and therefore it is taxable income (Bell and Hindmoor 2013).

VII. Crow v FC of T 88 ATC 4620

The aforementioned case is concerned with determination of taxable income after deserving of profit as a result of sale of property near Hobart. The findings of the case are based on “Subsection 25 (1) or sec 26 (a) of the ITAA 1936”. It has been further seen that the court has recognized its result as a burden of debt which has constrained the taxpayer to dispose the land. However, various types of commercial activities associated to the development of land has fetched a considerable amount of profit, hence this needs to be considered for taxation purpose (Smailes and Mcdermott 2013).

VIII. McCurry &Anor v FC of T 98 ATC 4487

The following case seen to deal with various types of issues associated to income derived from property disposal as stated under Section 25 (1). The main assesses are identified as the brothers who built a House on the land based on the bank loan. The main finding of the case has seen with the taxpayer to have a venture which was formed to execute the various types of business activities associated with generate income. Based on the court rulings, the taxpayers are seen to enter into the commercial undertaking by considering themselves in various types of activities for land development.

Reference list:

Adam, A., Kammas, P. and Lagou, A. (2013) ‘The effect of globalization on capital taxation: What have we learned after 20years of empirical studies?’, Journal of Macroeconomics, 35(1), pp. 199–209. doi: 10.1016/j.jmacro.2012.09.003.

Auerbach, A. J. and Hassett, K. (2015) ‘Capital Taxation in the Twenty-First Century †’, American Economic Review, 105(5), pp. 38–42. doi: 10.1257/aer.p20151058.

Bell, S. and Hindmoor, A. (2013) ‘The Structural Power of Business and the Power of Ideas: The Strange Case of the Australian Mining Tax’, New Political Economy, 19(3), pp. 470–486. doi: 10.1080/13563467.2013.796452.

Cho, M. (2014) ‘The effect of capital gains taxation on small business transfers and start-ups’, Economic Modelling, 36, pp. 447–454. doi: 10.1016/j.econmod.2013.09.002.

Conesa, J. C. and Domínguez, B. (2013) ‘Intangible investment and Ramsey capital taxation’, Journal of Monetary Economics, 60(8), pp. 983–995. doi: 10.1016/j.jmoneco.2013.09.004.

Feld, L. P., Heckemeyer, J. H. and Overesch, M. (2013) ‘Capital structure choice and company taxation: A meta-study’, Journal of Banking and Finance, 37(8), pp. 2850–2866. doi: 10.1016/j.jbankfin.2013.03.017.

Gahvari, F. and Micheletto, L. (2016) ‘Capital income taxation and the Atkinson???Stiglitz theorem’, Economics Letters, 147, pp. 86–89. doi: 10.1016/j.econlet.2016.08.021.

Golosov, M., Troshkin, M., Tsyvinski, A. and Weinzierl, M. (2013) ‘Preference heterogeneity and optimal capital income taxation’, Journal of Public Economics, 97(1), pp. 160–175. doi: 10.1016/j.jpubeco.2012.10.006.

Guvenen, F., Kuruscu, B. and Ozkan, S. (2013) ‘Taxation of human capital and wage inequality: A cross-country analysis’, Review of Economic Studies, 81(2), pp. 818–850. doi: 10.1093/restud/rdt042.

Kopczuk, W. (2013) ‘Taxation of intergenerational transfers and wealth’, Handbook of Public Economics, 5, pp. 329–390. doi: 10.1016/B978-0-444-53759-1.00006-6.

Niemann, R. and Sureth, C. (2013) ‘Sooner or Later? – Paradoxical Investment Effects of Capital Gains Taxation under Simultaneous Investment and Abandonment Flexibility’, European Accounting Review, 22(2), pp. 367–390. doi: 10.1080/09638180.2012.682781.

Piketty, T. and Saez, E. (2013) ‘A Theory of Optimal Capital Taxation’, Econometrica, 81(5), pp. 1851–1886. doi: 10.3982/ECTA10712.

Saez, E. (2013) ‘Optimal progressive capital income taxes in the infinite horizon model’, Journal of Public Economics, 97(1), pp. 61–74. doi: 10.1016/j.jpubeco.2012.09.002.

SMAILES, A. and MCDERMOTT, P. M. (2013) ‘The Uniformity Of Taxation Penalties In Australia.’, Monash University Law Review, 39(1), pp. 213–245. Available at: https://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=90278272&lang=es&site=ehost-live.

Stantcheva, S. (2014) ‘Optimal Taxation and Human Capital Policies over the Life Cycle’, Unpublished Working Paper. doi: 10.3386/w21207.

Taylor, G. and Richardson, G. (2013) ‘The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms’, Journal of International Accounting, Auditing and Taxation, 22(1), pp. 12–25. doi: 10.1016/j.intaccaudtax.2013.02.005.