Acc30005 Taxation | Business Of Assessment Answers

Question one

Lin is an auditor who works for the Australian subsidiary of a global shipping company. Lin moved from Malaysia to Australia with his spouse and children several years ago and purchased a home in Melbourne for the family to live. His job occasionally requires an extended overseas assignment, but ultimately he intends to settle in Australia. In July 2015 he was posted to the Singapore subsidiary of his company for a definite period of two years with a possibility it might extend a further two years. Lin was keen to take this option if it arose because the pay and working conditions were good. Lin took a two year lease on an apartment in Singapore for himself to live in, while his family remained in Melbourne where his children go to school.

During his short holiday breaks his family would travel to stay with him in Singapore. Lin did not return to Australia during the income year.

The Singapore subsidiary paid Lin an annual salary in Singapore dollars equivalent to AU$200,000. Most of his savings were sent home to support his family and to make accelerated payments on the family home loan. During the year he purchased some Commonwealth Bank shares for AU$50,000 and sold them for AU$100,000.

Required:

(i) he is a resident of Australia for income tax purposes in the period during the income year to 30 June 2017;

(ii) the effect this decision might have on his income tax liabilities in Australia

Explain the alternative residency arguments using quality legal references, and form an opinion as to which is the better view from the facts.

Explain how he would be assessed on his salary and capital gains if he was a resident and alternatively if he was a non-resident.

Question two

In 2015 Winnie, an Australian resident individual, sold her horse breeding business based in the south eastern suburbs of Melbourne.

The purchaser of the business did not want to buy the land. The real estate comprises 10 hectares which cost her $1m in 2005.

Winnie put the entire real estate up for auction but it failed to reach her reserve price of $10m and was passed in. Her real estate agent had suggested the reserve was a fair market value but at the moment no buyers were interested in such a large parcel of land. She sought advice from agents and accountants who suggested that smaller blocks of land would be more affordable for home buyers. Potentially, 10 vacant one hectare blocks would sell for $2m each and would require minimal costs to subdivide.

However, Winnie was also advised that 50 townhouses could be built at a cost of $100,000 each and they could sell for $1m each.

In July 2016, Winnie installed office cabins on the site and personally managed the entire construction, sales and marketing activities. 50 townhouses on equal size and value blocks were constructed and by 30 June 2017 half of these had been sold for a total of $25m.

Required:

Advise Winnie of the possible income tax consequences of the $25m real estate sales this year.

You should discuss any alternative views based on the facts, using quality legal references.

Determine the assessable income resulting from each alternative view.

Finally, provide your opinion on which you think is the better or correct outcome.

Answer to Question 1

Summary of key facts

In this case, Lin works an am auditor in an Australian subsidiary of global shipping company. Lin moved to Australia several years ago and has a home in Melbourne where family resides. However, he has to stay outside Australia for an extended period of but he has the intentions to settle in Australia. He was posted to Singapore subsidiary of the company for two years but his family remained in Australia. He was paid an annual salary of $200000. However, most of the savings was used for supporting the family and repaying the family loan. He purchase the share of Commonwealth bank forAU$50,000 and was sold at AU$100,000. The summary of the key findings of the case are given below:

• Lin is resident of Australia currently staying in Singapore for 2 years.
• He has the intention to settle in Australia.
• His annual salary is $200000.
• His expenses were mainly for family and repayment of loan.
• He has made a profit from selling of shares of commonwealth bank.

Issue that needs to be decided

In this case, the first issue that has to be determined is whether Lin is a resident of Australia for the purpose of tax for the current income years. The next issue that has to be determined is the effect of the residential status on the salary income and capital gain income made by Lin during the current income year. The income tax liability of Lina for the current income year has to be ascertained.

Law

The laws and legal reference that have been used in determining the issue is given below:

• section 6-5 of the Income Tax Assessment Act 1997;
• section 6- 10 of the Income Tax Assessment Act 1997;
• section 995-1 of the Income Tax Assessment Act 1936;
• Taxation Ruling 98/17;
• Taxation Ruling IT 2650;

Arguments for determining the issue

 The section 6-5(2) and section 6-10(4) of the Income Tax Assessment Act 1997 provides that if an individual is regarded as resident of Australia for the purpose of tax then all the income received from Australian sources and sources outside Australia is taxable. On the other hand, if the individual is regarded as a non-resident then only the income that have sources in Australia is taxable (Saad 2014). Therefore, it is important to determine the residential status of the individual for the purpose of tax. . The residential status is a matter of fact that affects the tax liability of the taxpayer so it is necessary to determine the residential status on a year-to-year basis. The section 995-1 provides that the term Australian resident mean a person who is resident of Australia for the purpose of Tax under income tax assessment act 1936. The Para 11 of the Taxation Ruling 98/17 provides that the primary test for determining the residential status is to ascertain whether the individual is a resident for the purpose of tax within the ordinary meaning of the word reside (Birt et al. 2014). If the taxpayer is a resident in accordance with the ordinary meaning of the word reside then there is no additional requirement for determining the residential status with any other methods. The definition of the term resident as per section 6-1 of the Income Tax Assessment Act 1936 provides four tests for determining the residential status of the individual for the purpose of tax. These tests are:

• Resident according to the ordinary concept;
• The domicile test or test for permanent place of abode;
• The 183 days test; and
• The superannuation fund test;

The para 34 of the Taxation Ruling 98/17 provide that if an individual is generally an Australian resident for the purpose of tax then domicile test is applied to determine the residential status if the individual was not living in Australia for the current income year (James et al. 2015). The domicile test provides that if an individual has domicile or permanent place of abode in Australia then taxpayer is regarded as an Australian resident for the purpose of tax. The Taxation Ruling IT 2650 deals with the determination of residential status of an individual leaving Australia temporary for working in overseas assignment (Tran-Nam et al. 2014). This ruling mainly focus on determining the residential status based on the domicile test for permanent place of abode. If an individual takes up work overseas but retain the domicile in Australia then after considering other relevant facts the Australian taxation office may consider that individual as a resident for the purpose of tax. On the other hand, if the taxpayer rents the domicile or divests part of the domicile because of extended stay in the overseas then the taxpayer will be regarded as a foreign resident for the purpose of tax (Peres et al. 2015). However, it should be noted that in this case the determination of the residential status depends on the case-to-case basis. In this case, Lina is posted in Singapore for two years but his family stayed back in Australia where children went to school. Therefore based on the above discussion it can be said that Lin is an Australian resident for the purpose of tax because he has permanent place of abode in Australia. In addition to this his family live in Australia in the permanent place of abode so it was not rented out. Based on this it can be said that Lin should be regarded as a resident for the purpose of tax (Kucukvar et al. 2014).

If an individual remains resident for the purpose of tax then any income received from outside Australia is taxable and it is regarded as income from foreign employment. The income from foreign employment can include wages, salary, bonuses, commissions and allowances. The individual as a resident taxpayer should include the income from foreign employment in the assessable income and tax should be paid on those incomes. It should be noted that in some cases an individual is required to pay taxes on the foreign employment income (Taylor and Richardson, 2013). In that case, the taxes paid overseas can be claimed as a foreign tax credit. This will ensure that the individual does not have to pay double taxes on the income. This is referred to as the foreign Income Tax offset. In this case, Lin has received a salary of AU$200,000 as salary from the Singapore Company. The salary should be taxable as foreign employment income. In addition to this, Lin has also made a short-term capital gain from the purchase and sale of shares of the Commonwealth bank. The individual is required to pay tax on the capital gain. The calculation showing the taxable income of Lin is given below:

Table 1: Taxable Income

(Source: Created by Author)

The table above shows that the taxable income of Lin for the year ended 30 June 2017 is $300000. However, it should be noted that if Lin was not a resident taxpayer then he is taxable income would be AUD 100000.

Conclusion

Based on the above discussion it can be concluded that Lin is an Australian resident for the purpose of tax. The main reasons for arriving at these conclusions are:

• Lin has a domicile in Australia.
• The domicile has not been rented out.
• The family of Lin leaves in Australia.
• Lin does not have a permanent place of Abode outside Australia.
• Lin does not have an intention to reside prominently outside Australia

The taxable income of Lin is $300000. The main reasons for arriving at his income are given below:

• The section 6-5 of the Income Tax Assessment Act 1997provides that in case of resident taxpayer the income received from sources outside Australia is also taxable.
• The salary received is a foreign employment income and it is taxable in Australia under section 6-5 of the Income Tax Assessment Act 1997.
• The income from capital gain is taxable and should be included in the assessable income.

Answer to Question 2

Summary of key facts

In this case, Winne sold the business of horse breeding but the purchaser was unwilling to buy the land. She tried to sell the estate in option but failed to reach the resort price. The real estate agent advised her to sell the land in smaller blocks. She was engaged in developing the land into townhouses. She personally managed the entire construction, marketing and sales work. Therefore the main facts of the cases that can be noted are:

• Winne had a large piece of land;
• She divided the land into blocks.
• She developed the land into property and sold it into the market.

Issue that needs to be decided

The issue here is to determine the tax consequences for the sale of real estate as isolated transaction. It is also required to determine the assessable income from the various alternatives.

Laws

The laws that have been applied for addressing the issue in this case are:

• Taxation Ruling 92/3;
• section 25(1) of the Income Tax Assessment Act 1936;
• Westfield Ltd v FCT;
• section 102-5 of the Income Tax Assessment Act 1997;

Arguments for determining the issue

In this case, the Taxation Ruling 92/3 is applicable that deals with the determination of profit as isolated transactions. The ruling also determines whether the profit from isolated transaction should be included in the assessable income under section 25(1) of the Income Tax Assessment Act 1936. The term-isolated transaction means those transactions that forms outside the ordinary course of business activity of the taxpayer (Fitzsimons and Carr 2014). The transaction enter into by the non-business taxpayer is also included within the meaning of isolated transactions. The ruling states that whether profit from isolated transactions should be treated as income under the ordinary concept and usage of mankind depends on the situations of the individual cases. The Para 6 of the ruling provides that profit from isolated transaction should be treated as income if the following two elements are present in the transaction (Richardson et al. 2013). The first element is that the taxpayer has entered into the transaction with the intention of making profit or gain. The second element is that the profit was made in the course of carrying on business activity or commercial transaction. The Para 8 of the ruling states that profit making is not required to be the only intention for entering into the transaction. However, profit making should be the significant purpose for entering into the transaction. The Para 11 of the ruling states that it is necessary that the transaction takes place in the course of carrying on the business activity. However, the transaction can be outside the normal course of business activity. The Para 13 of the ruling provides the relevant matters that should be considered at the time of determining whether an isolated transaction is a commercial transaction are:

• The nature and characteristics of the entity entering into the transaction;
• The scale and nature of the operation undertaken by the entity;
• The scale, complexity and nature of the transaction;

In this case, Winnie has entered into an isolated transaction of making profit through developing and selling of land. However, she was not engaged in the business of developing property. In the case of Westfield Ltd v FCT a distinction is made between the transaction that is a part of business operation and the transaction that is outside the business operation known as commercial transactions (Carney 2014). However, the tax commissioner states that profit from sale of property will be regarded as an income under both ways only the intention to make profit from the transaction should be present. In this transactions Winnie intended to make profit from the sale of the land. In addition to this, the profit was made from selling of land in the course of carrying on business activity. Therefore, it can be said that the transaction entered into by Winnie is an isolated transaction (Taylor and Richardson 2014). The profit that has been made from the isolated transaction should be included in the ordinary income. The assessable income under this method for treatment of selling of land is:

Table 2: Assessable Income

(Source: created by Author)

The section 102-5 of the Income Tax Assessment Act 1997 provides that net capital gains should be included in the assessable income. The Capital Gain Tax event arises from the sale of Capital Gain Tax assets. The section 100-25 of the Income Tax Assessment Act 1997 provides a list of CGT Assets and land is one of such asset (Borowski 2013). Therefore, in this case capital gain and loss can be calculated for the sale of land. The land was purchased on 2005 so discount method is only applicable for calculating the capital gain. The calculation of capital gain is given below

Table 3: capital gain

(Source: Created by Author)

The above calculation shows that the assessable income is less under the capital gain method of determining income. Therefore, the sale of land should be treated as capital gain and an amount of AUD 10.75 million should be included in the assessable income. That means income from the sale of land should not be considered as an income from isolated transactions.

Conclusion

From the above discussion, it can be concluded that the profit of selling land is an income from isolated transaction because of the following reasons:

• Winne entered into the transaction with the intention of making profit; and
• The transaction is in the ordinary course of business

The capital gain was calculated from the sale of land because of the following reasons:

• The land is a capital gain tax asset;
• As a result the selling of land is a capital gain tax event;
• The discount method of capital gain was applied as the land was purchased on 2005;

It can be seen that the income from sale of Land is included as a capital gain in the accessible income because of the following reasons:

• The capital gain amount is less than the profit from isolated triangle action;
• The amount included in the assessable income is less because if you 50% discount is available under the discount method of calculating capital gain tax.

Reference

Birt, J., Chalmers, K., Maloney, S., Brooks, A., Oliver, J. and Janson, P., 2014. Accounting: Business Reporting for Decision Making 5e.

Borowski, A., 2013. Risky by design: The mandatory private pillar of Australia's retirement income system. Social Policy & Administration, 47(6), pp.749-764.

Carney, T., 2014. Where Now Australia's Welfare State?.

Daley, J. and Coates, B., 2015. Property taxes. Grattan Institute.

Fitzsimons, J.A. and Carr, C.B., 2014. Conservation covenants on private land: issues with measuring and achieving biodiversity outcomes in Australia. Environmental management, 54(3), pp.606-616.

James, S., Sawyer, A. and Wallschutzky, I., 2015. Tax simplification: A review of initiatives in Australia, New Zealand and the United Kingdom. eJournal of Tax Research, 13(1), p.280.

Kucukvar, M., Egilmez, G. and Tatari, O., 2014. Sustainability assessment of US final consumption and investments: triple-bottom-line input–output analysis. Journal of Cleaner Production, 81, pp.234-243.

McCluskey, W.J. and Franzsen, R.C., 2017. Land value taxation: An applied analysis. Routledge.

Obeng-Odoom, F., 2014. Urban property taxation, revenue generation and redistribution in a frontier oil city. Cities, 36, pp.58-64.

Peres, M.A., Luzzi, L., Peres, K.G., Sabbah, W., Antunes, J.L. and Do, L.G., 2015. Income?related inequalities in inadequate dentition over time in Australia, Brazil and USA adults. Community dentistry and oral epidemiology, 43(3), pp.217-225.

Richardson, G., Taylor, G. and Lanis, R., 2013. The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis. Journal of Accounting and Public Policy, 32(3), pp.68-88.

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

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.

Taylor, G. and Richardson, G., 2014. Incentives for corporate tax planning and reporting: Empirical evidence from Australia. Journal of Contemporary Accounting & Economics, 10(1), pp.1-15.

Tran-Nam, B., Evans, C. and Lignier, P., 2014. Personal taxpayer compliance costs: Recent evidence from Australia. Austl. Tax F., 29, p.137.