Foundation of Taxation Law Professional Obligations

Question: Describe about the Foundation of Taxation Law for Professional Obligations. Answer: 1. Issue Fred is an English resident and following points are noteworthy is his case. He has come to Australia to discharge his professional obligations, The duration of stay is not fixed but the same has continued for 11 months and likely to continue in the future. His wife also has moved to Australia while his children had to stay back due to college in London. Taking the above into consideration, the tax residency of Fred for the current year needs to be determined. Rule The various relevant tests that are available for the determination of tax residency are highlighted as per the tax ruling TR98/17 and also subsection 6(1), ITAA 1936 (Deutsch et. al, 2016). Domicile Test The given test is applicable for residents of Australia as being a domicile holder of Australia is the primary condition for passing this test. Additional requirement is that permanent residence of the taxpayer must be located in Australia only (Woellner, 2013). Resides Test The given test is applicable for foreign residents only and decides tax residency based on the below mentioned factors (Barkoczy, 2014). Visit Purpose Significant purposes of visit include long term employment (in excess of 6 months), education courses Frequency with which the taxpayer goes to the country of origin and the purpose and duration of the same. The ties that the taxpayer has in professional, personal and business sphere while in Australia. 183 Day Test The above test is applied for determining tax residency of foreign residents staying in Australia. These residents need to comply with the following two conditions (Coleman, 2011). Physical presence of the concerned taxpayer in Australia for atleast 183 days. Intention on taxpayers behalf to make Australia as permanent home in the future. Superannuation Test The above test is applicable only to determine tax residency of Australian government employees stationed outside Australia based on whether or not they contribute to the specific superannuation fund (Sadiq et. al., 2016). Application As Fred is an English resident working for a British company, thus domicile test and superannuation test hold no utility. The relevant tests are as discussed below. Residency Test Fred satisfies the test as explained below. Employment of 11 months amounts to significant reason to come to Australia. Not even a single visit to England in 11 months before moving there when ill. Life and behaviour of Fred in England and Australia is comparable as wife is also with Fred. 183 Test Even though the minimum stay condition is satisfied but still fails to clear the rest as Fred has no plans to settle in Australia. This may be inferred from his lack of any investment of fixed nature in Australia besides keeping his home in England on rent and not disposing off the same. Conclusion Fred would be classified as a tax resident of Australia for the current financial year. 2. I. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159 The given company purchased a copper mine in New Zealand but could not begin copper mining as the company was short on funds. This shortage of funds was known to the personnel of the company before they made the decision to buy the mine. Despite lack of funds to operate the mine, the taxpayer purchased this asset as the same could be sold to the rival mining company and in the process the company could realise gains. The company meticulously executed its plan and by giving away the mining land obtained a small stake in the other company whose market valuation was much higher than the proceeds spent on buying the land. The company in defence claimed that transaction should not attract any tax burden as the company has altered between two capital assets i.e. land and shares (Nethercott, Richardson Devos, 2016). As the tax authorities believed that the gains would be assessable, the matter landed in court where it was advocated that the income realised by the company through sale of mining land for the shares ownership would be assessable for tax. The central reasoning offered by the court in this regards was that the company executed the whole transaction in a meticulous manner with profit intention and the gains from this isolated transaction were held taxable (Gilders et. al., 2015). II. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188 As per the relevant details of the case, the taxpayer (company) purchased a land to engage in coal mining which was continued for a long period stretching into multiple decades. However, as the coal reserves progressively deteriorated on the land and therefore a time came when commercial mining was not feasible. The company decided that it would be best served by selling this land but due to coal mining it was in such shape that selling it in that form was not viable. Hence, a plethora of development activities were undertaken which involved plotting, making provisions for road, parks which ensured that the land could be sold. In the process, sizable gains were made by the company (Jade, 2016). The matter was brought to the notice of the court which opined that it is apparent that the land was used for its intended purpose for as long as possible and the selling of land afterwards amounts to realisation of capital asset. As a result, the proceeds were termed as capital and non -assessable for tax purpose (Sadiq et. al., 2016). III. FCT v Whitfords Beach Pty Ltd (1982) 150 CLR A fishing company bought a land situated alongside the beach as it required a land for drying of the fishing equipment. During the initial period, the land was used for this purpose only and there was no intention on the part of the shareholders to develop this land. However, subsequently the shareholders decided to quit the business and hence sold the company to three land development companies which bought it primarily for the land which they considered highly valuable. These new shareholders commenced development of plots on this land along with requisite development activities for value enhancement. They also introduced modifications in the AoA of the company so as to reflect land development. Subsequently, the plots were sold and the taxpayers reaped humongous profits (CCh, 2016a). The court in this matter opined that with regards to the new shareholders, it is apparent that the land development was carried out as part of the business as the same was inducted into the AoA. Also, it goes well with the nature of business of shareholders which also were real estate development companies. Thus, the receipts from sale of plots were classified as ordinary income and assessable (CCh, 2016a). Statham Anor v FC of T 89 ATC 4070 A landestate was passed on to Statham Anor who decided to commence a cattle business on this piece of land. However, due to lack of experience their business could not flourish and eventually it floundered. But the taxpayers needed money to sustain their living and hence had no option but to liquidate the land asset that they possessed. Before liquidating the same, the taxpayers divided the land into various plots so as to easily sell these to prospective investors and retail customers. The taxpayers advocated that they were not involved in any land business and hence the proceeds derived must not be tax assessable (CCh, 2016b). The court passed the verdict in agreement with the taxpayer and highlighted that the land sale was essentially forced and the taxpayers did not engage in any advertisement or major development work to enhance the proceeds available from the land. Hence, the actions of the taxpayer could be characterised as realisation of the capital asset and thus proceeds derived would not be assessable (CCh, 2016b). V. Casimaty v FC of T 97 ATC 5135 In this case, the taxpayer (Casimaty) inherited a large parcel of land from his father which he planned to use in his family business of farming. He took loan from the bank so as to make a decent living income from farming. However, due to unexpected brought, the production of crops was adversely impacted which eventually led to very little income which was not sufficient to service the outstanding debt. Also, in the meanwhile, his physical health deteriorated and in order to manage the same, more loan was assumed. Soon he was caught up in a debt trap and hence to get out of this deplorable situation, he decided to sell off a huge portion of the land. The proceeds were used to settle the outstanding debt liabilities. Casimaty continued practicing farming on the remaining land (CCh, 2016c). The court in the given case ruled that the selling of the land amounted to realisation of the capital asset as the taxpayer did not liquidate the land asset with profit intention and the sale of land was not preceded in a commercial manner by taking land development activities and advertisement. Hence, due to financial distress he was forced into making the sale of land. Further, his continued involvement of farming in the remaining land indicated that no business intention was present. Thus, the proceeds were held as non assessable.(CCh, 2016c). VI. Moana Sand Pty Ltd v FC of T 88 ATC 4897 As per the case details, Moana Sand Pty purchased a piece of land with the intention of carrying out sand mining. The company also obtained approvals and required permission from the government to carry on with the same. However, due to continuous mining the sand content got depleted to such an extent that commercial mining became unfeasible. In such a scenario, the company made the decision to sell the land but due to mining it was in such shape that without carrying out filling activities, the same was not possible. However, the company went ahead and did significant investment in the various development activities on the property and developed a whole township. In the process, the company was able to derive huge gains (Deutsch et. al., 2016). The court in this matter opined that while it is correct that the original intent of the taxpayer was to do mining which it indeed performed, however, the development of land by investment of significant capital amounts to change in intention and hence the proceeds from the land development project would be considered as assessable as the company specifically deployed capital to derive gains from this isolated transaction (CCH, 2014). VII. Crow v FC of T 88 ATC 4620 In this case, the taxpayer using borrowed money purchased five blocks of land for farming, The taxpayer did commence farming but within a short period of time began sub-division of the land and sold the plots at huge profits. This process continued unabated over year when there was continuous buying and selling of land while the taxpayer did not conduct farming again. The relevant tax authority opined that business was being carried out and hence proceeds are taxable. The taxpayer disagreed and opined that he was selling land to discharge outstanding debt, The court disagreed with the explanation offered by the taxpayer and ruled that proceeds would be assessable as the original intention of taxpayer was to engage in land development business which he knew would offer more lucrative returns than farming (CCh, 2016d). Case 8: McCurry Anor v FC of T 98 ATC 4487 In this case, the taxpayers were two brothers i.e. McCurry and Anor who had bought a land which had some old establishments. The taxpayers took some loan from the bank and carried out construction of three townhouses on the piece of land. Further, while the construction process was ongoing, the taxpayers engaged in advertisement so as to find the best buyer for the townhouses. However, despite their advertisement, they were not able to liquidate these as they were not getting the expected returns. They decided to hold on the townhouses and meanwhile even used one for their personal dwelling. Within a year, all the townhouses were liquidated and taxpayers made huge profits (CCh, 2016e). The taxpayers advocated that the proceeds should not be assessable as they sold capital assets for paying their debts. However, the court disagreed with their argument and opined that the land was purchased with the explicit intent of profiteering for which there was indulgence in advertisement and attempts of profit maximisation. Thus, the income from the sale was held assessable as per relevant provisions of ITAA 1936 (CCh, 2016e). References Barkoczy,S 2014,Foundation of Taxation Law 2014,6th eds., CCH Publications, North Ryde CCh 2016a, FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR, Available online 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 (Accessed on September 15, 2016) CCh 2016b, Statham Anor v FC of T 89 ATC 4070, Available online from https://www.iknow.cch.com.au/document/atagUio544343sl16788832/statham-anor-v-federal-commissioner-of-taxation-federal-court-of-australia-full-court-23-december-1988 (Accessed on September 15, 2016) CCh 2016c, Casimaty v FC of T 97 ATC 5135, Available online from https://www.iknow.cch.com.au/document/atagUio539843sl16716249/casimaty-v-fc-of-t-federal-court-of-australia-10-december-1997 (Accessed on September 15, 2016) CCb 2016d, Crow v FC of T 88 ATC 4620, Available online from https://www.iknow.cch.com.au/document/atagUio545564sl16800674/crow-v-federal-commissioner-of-taxation-federal-court-of-australia-17-august-1988 (Accessed on September 15, 2016) CCh 2016e, McCurry Anor v FC of T 98 ATC 4487, Available online from https://www.iknow.cch.com.au/document/atagUio539084sl16707683/mccurry-anor-v-fc-of-t-federal-court-of-australia-15-may-1998 (Accessed on September 15, 2016) CCH 2014, Australian Master Tax Guide 2014, 52nd eds., Wolters Kluwer, Sydney Coleman, C 2011, Australian Tax Analysis, 4th eds., Thomson Reuters (Professional) Australia, Sydney Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, Snape, T 2016, Australian tax handbook 9th eds., Thomson Reuters, Pymont Gilders, F, Taylor, J, Walpole, M, Burton, M. 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