HI6028 Taxation Theory Practice and Law for Non-Resident Income Tax
Case study 1: Residence and Source
Kit is a permanent resident of Australia. He was born in Chile and retains his Chilean citizenship. 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:
I. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159
II. 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
IV. Statham & Anor v FC of T 89 ATC 4070
V. Casimaty v FC of T 97 ATC 5135
VI. 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
Answers
Case Study 1: Residence and Source
The tax base for a person holding duo- citizenship as kit is a permanent resident in Australia but still holds his Chilean citizenship. The tax base for a person who is domiciled in Australia and lives solely in Australia is levied on the total income earned. However, for Kit he works in Indonesia at the coast while his employer is American and signed the terms and conditions for the job in Australia (Engdahl, 2011). His family lives in Australia therefore they are permanent residents in Australia. Income gained in Indonesia and obtains capital gains are taken to Australia. The income derived from outside Australia and capital gains obtained outside Australia regardless of whether they are sent to Australia or not are exempt from taxation.
The tax rate in the income of Kit assuming that his income is from the American based employer attracts a progressive tax rate with a maximum of 35%. There are many expatriates and people who are non-resident and married to Australian citizens hence becoming citizens by naturalization (Hannaford and Wallace, n.d.).
There are various programs that are tax oriented to attract people like Kit who is a resident in Australia but works as an expatriate elsewhere
a) Residence program
b) Global Residency Program
c) Regime for attracting highly qualified managers
Individuals with nationality who are not domiciled in Australia m
ay apply to join this program in order to qualify for a special tax regime for income obtained abroad and sent to Australia at a fixed rate of 15%, which provides for the possibility of adding Mechanisms to eliminate international double taxation(Manley, 2003).
Persons not resident in Australia who own or possess any urban property located in Australian territory must be taxed by said property in the Tax on the Income of non-Residents, by the Tax on Real Estate (IBI) and by the Tax on the Property.
When a property is owned by one or more natural persons who use the property for their own use, they must be declared as income imputation. The yield to be declared will be of a general nature of 2% on the cadastral value. If the cadastral value has been revised or modified in the current tax period or in the previous ten years, the yield to be declared will be 1.1% over the cadastral value (Parsons, 2011).
ay apply to join this program in order to qualify for a special tax regime for income obtained abroad and sent to Australia at a fixed rate of 15%, which provides for the possibility of adding Mechanisms to eliminate international double taxation(Manley, 2003).
Persons not resident in Australia who own or possess any urban property located in Australian territory must be taxed by said property in the Tax on the Income of non-Residents, by the Tax on Real Estate (IBI) and by the Tax on the Property.
Non-Resident Income Tax
In reference to the Non-Resident Income Tax, when a property is owned by a non-resident without a permanent establishment and is leased, the yield to be declared will be the entire amount received without deducting any expense. However, in the case of taxpayers residing in another Member State in relation to income obtained from 1 January 2015, to determine the taxable amount natural persons may deduct expenses (Insurance, conservation expenses, financing interest, etc.) provided that they are shown to be directly related to the income. In the case of entities, the expenses provided for in the Corporate Income Tax Law may be deducted provided they are shown to be directly related to income.
When a property is owned by one or more natural persons who use the property for their own use, they must be declared as income imputation. The yield to be declared will be of a general nature of 2% on the cadastral value. If the cadastral value has been revised or modified in the current tax period or in the previous ten years, the yield to be declared will be 1.1% over the cadastral value (Parsons, 2011).
In the event that the transfer of a property by a non-resident in Australia is taxed by equity gain in the IRNR. In other words, it is an income subject to IRNR tax to obtain equity gain after the sale of a property. In general, the gain will be determined by the difference between the acquisition value (plus expenses and taxes of the acquisition) and the value of transmission (reducing costs and taxes of transmission).
However, for those citizens within the block the non-resident taxpayer is allowed to be excluded from the tax on the capital gain obtained provided that the amount obtained in the transfer is reversed in the acquisition of a new habitual residence.
Income obtained without permanent establishment
The rules for determining the tax bases for non-resident non-residents without permanent establishment are modified. These taxpayers are distinguished between natural persons or legal entities, the expenses deductible for the calculation of the taxable base, by reference of the LIRPF and the LISO, respectively (Ramsey, 2008).
The current rule allows the deduction of the expenses foreseen in the LIRPF (even if they are corporations), both for individuals and for legal entities, provided that such expenses are directly related to income obtained in Australia.
Income obtained through a permanent establishment
In the case of income obtained by non-residents with permanent establishment, the difference between the market value and the book value of the following assets will be included in the tax base:
Those who are assigned to an establishment that ceases its activity.
Those who are previously assigned to an EP located in Australian territory are transferred abroad. In this case, the payment of the tax debt, if the elements are transferred to another member of the Economic Area with which there is effective exchange of tax information, will be deferred by the Tax Administration until the date of Its transmission to third parties. The request for deferment must be submitted by the taxpayer and provide sufficient guarantees for the acceptance of the same. This shall not relieve the accrual of default interest.
In cases where a double taxation agreement is applied it will allow the deduction of estimated expenses for internal operations with the central house outside Australian territory.
The income imputed to the central house corresponding to the estimated costs mentioned above, will be considered income obtained in Australian territory without a permanent establishment (Ramsey, 2008).
The tax of said income will accrue to December 31 of each year.
The permanent establishment must practice retention for such expenses that are assigned to an establishment that ceases in its activity.
Equity gains by transfer of shares or shares
With respect to these gains, to which the tax regime for change of residence would have been applicable (see in the IRPF reform), the profits will be computed taking as acquisition value the market value of the shares used for the purposes of the aforementioned New regime.
Option to tax as residents
It includes a new case in addition to the one currently in force, allowing taxpayers resident in other member States, or in with an effective exchange of tax information with Australia, to choose to tax as taxpayers of Australia.
The rule is aimed at non-resident taxpayers with low incomes, who want to ensure that they can enjoy, as well as residents, the exemption of a certain minimum amount of their income. Said optional scheme is granted when the income obtained during the year in Australia has been less than 90 percent of the personal and family minimum that would have corresponded to him in accordance with his personal and family circumstances of having been resident in Australia whenever that income has taxed effectively during the period by the IRNR and that the income obtained outside Australia was also below the personal and family minimum (Tet?ak, n.d.).
Case Study 2: Ordinary income
Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159When the recipient of the money is provided for the payment, it will only be considered if the money is ascertained if it is a receipt on the company’s revenue or not. The character of a receipt or payment of an asset is determined by the sales price of the particular asset. The money received is established in consideration and payment of the asset. Therefore it is determined that the consideration for the sale was not required for the profit making or the capital account used in the business. In determining why and how a receipt of income is used in consideration where there is unusual or arrangement of special contract (Tet?ak, n.d.).
Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188
In this case the coal mining company has the powers to sell and buy land. Land purchased for the purpose of coal mining operations. Taxable income should be determined in the selling and the material facts of the sale and acquisition of land thereof. There should be full disclosure of the income received from the sale of land which is taxable. Land is subdivided and amenities are improved and provided. The Scottish land bought capital assets and the profits from the assessable income. Therefore it is determined that the consideration for the sale was not required for the profit making or the capital account used in the business (Tet?ak, n.d.).
FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR
The ruling on this case determines whether the profits from the isolated transactions are income which is taxable and assessable under the income tax assessment Act of the year 1936. In this ruling. In this ruling, there are terms such as the isolated transaction which refers to
- Transactions outside the ordinary business transaction and taxpayers carrying on a business
- Transactions that are carried out by a non- business taxpayer in the country.
Statham & Anor v FC of T89 ATC 4070
The taxpayers argued that the sales proceeds were not ordinary income since the indicated parties activities were not conducting a profit making business under the scheme. The farming business had failed the owners who had decided to sell the land not necessarily for the realization of the business profit but the asset income realizable became taxable. The taxpayer consequently decided to subdivide the land and sell it at a profit due to a non- performing business where the realizable profits are taxable (Toward tax reform, 2009). The taxpayers were of the argument that proceeds from the sales were not ordinary income or profit making plan.
Casimaty v FC of T97 ATC 5135
The taxpayer had inherited land from his father for business in business farming in a period of 20 years. But due to ill health and a increasing debt the taxpayer decided to subdivide the land he was given by the father and sell a very big portion of land after subdivision. In the process of subdivision the taxpayer divided the land into 8 portions and constructed roads, fences, sewerage facilities and water (Toward tax reform, 2009). The commissioner for taxpayer said that the subdivision money was profit money and therefore taxable. The appeal court said that the money received was capital in nature and the purpose of the land had not originally changed.
Moana Sand Pty Ltd v FC of T88 ATC 4897
The case is based on distinguishing between an income and capital item disposal. The purpose of this was to determine whether gain realized from a taxpayer was revenue or capital in nature. The consideration is determined in two fronts, the first is in respect to the item is received and the second is quality of the receipt as a flow. The taxpayers were of the argument that proceeds from the sales were not ordinary income or profit making plan. The profits from sale of land are taxable.
Crowv FC of T88ATC 4620
The current rule allows the deduction of the expenses foreseen in the case (even if they are corporations), both for individuals and for legal entities, provided that such expenses are directly related to income obtained in Australia. Capital gains are not taxable but income on business activities if it is a sale will be taxable.in this case the judgment was that the sale of land was for business and therefore any income received from the proceeds are taxable since they are not capital in nature (Toward tax reform, 2009).
McCurry & Anor v FC of T 98 ATC 4487
The taxpayer consequently decided to subdivide the land and sell it at a profit due to a non- performing business where the realizable profits are taxable. Therefore it is determined that the consideration for the sale was not required for the profit making or the capital account used in the business (Tet?ak, n.d.). In determining why and how a receipt of income is used in consideration where there is unusual or arrangement of special contract.
References
Engdahl, S. (2011). Taxation. Farmington Hills, MI: Greenhaven Press.
Hannaford, S. and Wallace, E. (n.d.). Federal proposals for tax reform.
Karas, G. (2005). On earth. New York: G.P. Putnam's Sons.
Manley, J. (2003). Legislative proposals relating to the Income Tax Act. [Ottawa]: Department of Finance Canada.
Parsons, R. (2011). Income taxation in Australia. 1st ed. Sydney, NSW: Thomson Reuters.
Prince, J. (2013). Tax For Australians For Dummies. Hoboken: Wiley.
Ramsey, C. (2008). Land rich, cash poor. 1st ed. [Place of publication not identified]: [Electronic & Database Pub.].
Tet?ak, K. (n.d.). Taxation of international sportsmen.
Toward tax reform. (2009). [Falls Church, Va.]: Tax Analysts.
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