Taxation Law and Ordinary Income

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. ( maximum 450 words) Case study 2: ordinary income Explanations of the respective outcomes reached by the courts in the following cases which all involving sales of land Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159 Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188 III. FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR Statham Anor v FC of T 89 ATC 4070 Casimaty v FC of T 97 ATC 5135 Moana Sand Pty Ltd v FC of T 88 ATC 4897 VII. Crow v FC of T 88 ATC 4620 VIII. McCurry Anor v FC of T 98 ATC 4487 Answer: Case Study 1- Residence and Source Fred will be taxed as resident in Australia as because he has lived in Australia for eleven months before returning back to England and the income, which is earned, from France during his employment in England will also be taken into the considerations at the time of Australian tax assessment. It should be noted that the issues of residency is complicated to assess and it is much likely dependent upon the individual personal circumstances. However, it must be noted that one should not put enough stress on the significance of lucidity regarding the subject of nationality and immigrants attaining suitable advice rather in advance of a particular business venture or undertaking a contract. Fred is principally an Australian regarding taxation purpose as he as spent more than 183 days. A migrant concerning their terms of their emigrant visa who lives in Australia for more than 183 days incessantly or sporadically is liable to be taxed. Fred also held a land on a lease of 12 months and stayed with his wife before returning to his native country due to ill health. According to Australian tax agency, an individual is only spared by the commissioned to tax when he satisfied because his natural place of dwelling is outside Australia and he hardly had any intentions of taking up the residence. According to the domicile test it is to be understood that Taxation rulings of Income Tax 2650 defines that the nation state in which an individual is born unless one travels to other country and then one adopts a residence of his own choice. Under the given case study, Fred who is a British resident intends to set up his business in Australia. However, the term of stay is not sufficient meanwhile; he also took a house on lease for a period of twelve months and stayed in Australia for a period of eleven months before returning to his native land as a result of ill health. Freds residential status is determined based on his stay in Australia and the residency test provides the fact that the tax liability is dependent on the circumstances of his stay. It also takes into the account that if an individual comes back to the nation of his origin then the occurrence, reliability and period concerning those journey and their objectives can be important feature. If the solitary reason behind an individual absence from Australia is business, this should not be enough to assist the claims that an individual is not an inhabitant. Hence, the degree of Freds commercial ties and his family in Australia is sufficient to be taxed under the Income Tax Act. Case study 2 Ordinary Income I. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159 The above stated case takes into the account the issues of realization of capital assets and whether such the income from the sale of property can be subjugated for its minerals in the form of ordinary income or capital. Law: The rulings provide the direction in determining the weather profits generated from isolated dealings are profits and are assessed under subsequent 25(1) of the Income Tax Assessment Act 1936 (Arthur 2016). Isolated transactions can be defined as; Those transactions occurring outside the ordinary business transactions of a tax payer who is carrying out the trade and commerce activities and; Transactions, which are entered into non-business taxpayers. Outcome: The outcome of the case states that the taxpayer was assessable on the grounds of profits occurring from the sale of land in the form of profits that were of income nature. It is understood that the taxpayer was endeavoring to generate profits from the sale of land. It is understood that the taxpayer indicated that it never had adequate money to dig for mining on the land. According to the lord of Justice, it is understood that a well set of principle while dealing with the question of evaluation of Income tax. It is understood that the owner of an ordinary investment decides to comprehend it so that the taxpayer attains a higher price when he initially acquires it in improved cost and not the profit in the Sense of Schedule D of the Income Tax Act of 1842, which is assessable to income tax (Arthur 2016). I. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188 The above-mentioned case considers the issues that are identified from business income and whether any subdivision or sale of land, which has been used for mine by the mining company and was assessable in the form of ordinary income or it was just the realization of capital. Law: Capital Gains Tax: A capital gains or capital loss can be made if a CGT event happens to any capital gains assets. As per section 108-5(1) of the income tax assessment act 1997 that a capital gains assets is described as any form of property or a legal equitable right which is not a property (Barnett and Harder 2014). Outcomes: The decision passed by authority can be long cited for the proposition that a meager realization of an asset in an enterprising way was on capital. It is understood that common law reports shows that the case took two long days to hear and the judgements was passed after six days. It clearly states that there cannot be a prolonged factual enquiry into the activities of the taxpayer or extensive disputes concerning the accounting and issues surrounded the case (Barnett and Harder 2014). The outcomes of this case state explain that a substantial commercial exercise was treated as a mere realization of capital assets. II. FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR The case study takes into the account that whether the taxpayer was assessable on the grounds of profits on sale of subdivided land under section 25(1) or 26(a) or the tax payer was merely realizing the capital assets. Law: The rulings of this law offers direction in determining the proceeds generated from Isolated transactions are treated as income or assessable under subsection 25 (1) of the Income Tax Act Assessment Act 1936 (Fleischer 2015). The rulings on the other hand does not takes into the account the application of section 25 A of the capital gains and capital losses under provision (Part IIIA) or Division of Part III. Outcomes: As per the verdict passed by the Gibbs CJ, Mason, Murohy and Wilson JJ, the taxpayer was assessable on the ground of profits generated from the sale of land as defined under section 25 (1). The high court said that the profit had went beyond the merely realizing a capital asset and its activities which constituted on executing the business activities based on development of land. The profits derived from the sale of land was assessable under the second limb of section 26 (a) in the form of profit arising out of any undertaking or scheme. However, Gibbs and Mason J specifies that the second limb operates when section 25 (1) does not takes into account profits yielded from gross income (Fleischer 2015). The outcomes of this case states that profits was to be premeditated by subtracting from the gross proceeds generated from the sales value of land at the date when it was ventured in the taxpayers land expansion business. III. Statham Anor v FC of T 89 ATC 4070 The above-mentioned case study questions about the proceeds which is received from the disposal of the subdivided lots constitute quantifiable income under or either section 25 (1) or 26 (a). Law: Assessable income: Sales from subdivided land originally acquired and was used for farming along with the proceeds derived from carrying on a business represented any sheer realization of assets (Davison et al. 2016). Outcomes: The Federal Court ruled the net proceeds generated from the sale of subdivided land did not comprises of the taxable income under section 25 (1) or 26 (a). According to Woodward, Lockhart and Hartigan JJ it was well understood that meager sale of an asset on profit does not essentially render the taxable income. They stated that profit should arise from executing the business activities or any business undertakings (Davison et al. 2016). The mere degree of realization does not convert it into business undertakings or schemes however the scale of realization activities must be considered while determining the nature of undertakings under (ATC p 4075) IV. Casimaty v FC of T 97 ATC 5135 The above-mentioned case study determines the profit generated from subdivision and sale of parts of property which is assessable either under section 25 (1) or 25A. Law: The case study falls under the subheadings of assessable income, which defines the sales of subdivided land initially obtained and used for farming (Davison et al. 2016). The law questions whether the profits generated from executing business activities or from any mere realization of capital assets. Outcomes: The federal court ruled that the earnings was not derived from any commercial subdivision of land or from any profit making undertaking or scheme. The court ruled that the profits were derived from a part of mere realization of capital asset of the taxpayer. It is evident from the case that the taxpayer had always conducted his commercial activities of agricultural and fencing in collaboration with his wife and sons. However, the case ruled that he made no effort to bring Action View into account as a partnership asset (Davison et al. 2016). Nor the taxpayer seeks to claim the business expenses in the form of interest, which is borrowed to settle the sub divisional costs. The court passed the verdict by concluding that the action view was acquired by the tax payer with the objective of primary production that no profit from sales is assessable in accordance with the first limb of Section 25A (1). The court also ruled that neither did the second limb of sub-section have any applicatio ns as because sales did not take place during the business course on execution or carrying on of profit making scheme. V. Moana Sand Pty Ltd v FC of T 88 ATC 4897 The case study questions whether section 25 (1) or 26 (a) is applied to include the tax payer assessable income in contrast to the amount received by the tax payer from subtracting the relevant cost to derive the profit arising from the sale of land. Law: The ruling offers guidance in determining the profits generated from isolated income as to whether they are assessable under section 25(1) of the income tax Assessment Act 1936. However, it must be noted that the rulings does not takes into account the application of section 25A of the tax payers capital gains or capital losses under the provision (Part IIIA) or division 6A of Part III (Morse 2013). Outcomes: The court ruled that the amount received by the taxpayer was received in the form of isolated transactions. The relevant profit was considered as income in terms of the ordinary concept in compliance with the high court decision passed in FC of T v The Emporium LTD 87 ATC 4363 and hence it is constituted as assessable income under section 25(1). Under the given case, the taxpayer acquitted the land to work and sell the sand on the land and subsequently sell it on profit. The profit, which was generated from the resumption of land by the coast protection board, was still an assessable profit notwithstanding that the taxpayer had not originally intended to dispose of the land in this particular way but rather sold the land when it became mature for subdivision (Morse 2013). The court ruled that profit was also assessable under the second limbs of section 26 (a) as it aroused on the execution of profit making undertaking or scheme. VI. Crow v FC of T 88 ATC 4620 The above stated case questions the application of subsection 25 (1) or section 26 (a) of the Income Tax Assessment Act 1936 which operates to include under the heads of assessable income of the taxpayer profit derived by him from the sale of land near Hobart (Graham et al. 2012). Law: Assessable income: Sale of subdivided capital assets or land initially acquired and used for the purpose of farming along with the profits resulting from carrying on a business activity or illustrated a meager sale of a capital assets. Outcomes: The decision passed under the case was distinguished on the basis that the property was used in the form of mine for much longer time that the farming business activities in the current case. The court ruled that the taxpayer borrowed heavily to purchase five large blocks of land and then conducted farming activities (Graham et al. 2012). In the latter stages, the taxpayer sold off some of the portion of land and the taxpayer was assessable on the profit as he was carrying on a business of land development. VII. McCurry Anor v FC of T 98 ATC 4487 The above-mentioned case is questions the profit generated from the sale of land, which is taxable under section 25 (1). Law: Assessable income: The taxpayer are assessed under the section 25 (1) of the Income Tax Assessable Act 1936 on the profit from the sale of land on the basis that it was derived from a profit making undertaking scheme (Duncan 2012). However, this section is not applicable concerning the sale of property acquired on or after 20 September 1985. Outcomes: The case study reflects that taxpayers were brothers and used their own funds together with a loan from bank to purchase land on which an old house stood. The taxpayer on the other hand removed the old house, which enabled them to construct three townhouses on the land. The court ruled that if a belongings is obtained during the course of business or profitable dealing with the objective of gaining profit from its development of sale that business enterprise will not be considered as an investment and the proceeds generated is considered as income for the purpose of sec 25 (1) (Duncan 2012). 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