HI6028 Taxation Theory Practice and Law- Foreign Tax Resident

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.

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

Answers

Case Study 1 (Tax Residency)

Issue

The issue is to find the tax residency position of a Chilean citizen Kit for the respective tax year and the available taxation provisions applicable on the income received by taxpayer Kit during this tax year.

Law

Tax residency position of a taxpayer is considered to be an essential aspect while deciding the tax treatment on the income received by the taxpayer during the respective tax year. It is because if the taxpayer is known to be an Australia tax resident, then the foreign income as well as domestic income would be taken into consideration for taxation under section 6-5(2) ITAA 1997 (Gilders et. al., 2016). While, if the taxpayer is known to be a foreign tax resident then no taxation would be applied on the foreign income. The income received from Australia would be taken into consideration and would be taxed under section 6-5(3) ITAA 1997 (Sadiq et. al., 2016).

Therefore, the tax residency of taxpayer is an imperative factor that needs to be determined. Section 6(1) of Income Tax Assessment Act 1936 provides the aspects related to the tax residency position of the taxpayer. Additionally, TR 98/17 highlights four major residency tests that would be applied on to a taxpayer to check the tax residency position. A taxpayer would be known as Australian tax resident if he/she would complete the terms of any of these residency tests (Barkoczy, 2016).

183 day Test

Applied - Foreign Tax Resident

A taxpayer would be termed as Australian tax resident when he has resided in Australia for a minimum duration of “183 days” in the respective tax year and have clear intent to permanently settle in Australia going ahead. If the taxpayer has completed the above highlighted aspects, then he would be recognised as tax resident of Australian for the tax year. Further, it is not imperative that taxpayer has resided in Australian in one single stay it can be in several small stay but the total duration must be equal to a minimum of 183 days (Deutsch et. al., 2016).

Resides Test

Applied - Foreign Tax Resident

There is no specific meaning of “Resides word” is describes in Australian tax rule or law. Therefore, the judgements of case laws would be taken into consideration while checking the tax residency position via resides test. The aspects of resides test are as furnished below (Barkoczy, 2016).

• Visit purpose of the concerned taxpayer
• Magnitude of the personal, social educational or professional bonds of the taxpayer with Australia
• Purpose and frequency of visits in Australian and in other countries

 Superannuation Test

Applied–Officers of Federal Government

The taxpayer must be an officer of Australian government working outside Australia and maintaining the contribution in the superannuation scheme of Australian government. If these terms are completed by the taxpayer then he would be designated tax resident of Australia (Sadiq et.al., 2016)

Domicile Test

Applied – Australian Resident

When Australian resident has resided in the other country due to any reasons, then the below highlighted conditions would be taken into consideration under domicile test (Gilders et. al. 2016).

• Taxpayer who is residing in other country must be in possession of the Australian domicile under the clause of Australian Domicile Act 1982.
• Permanent residence of the taxpayer must be on Australian land for the tax year.

The critical terms of defining location of permanent abode or residence are highlighted in the IT 2650, would also be verified by the tax commissioner and are as listed below (Barkoczy, 2016).

• Location of fixed assets of the taxpayer
• Intention or activity that would show the taxpayers willingness to migrate from Australia
• Number of foreign visits. It would be critical if the foreign place is country of origin of taxpayer
• Strength of various ties of taxpayer with Australian and with the country where he has resided
• Different between the real and expected abode in foreign land by taxpayer in one tax year

Application

183 day Test

Kit is a PR (permanent resident) of Australia and therefore, it would not applicable.

Resides Test

Kit is a PR (permanent resident) of Australia and resides test applicable only for foreign resident therefore, it would not applicable.

Superannuation Test

Taxpayer is an employee of US based company not an Australian officer and superannuation test is applied only to officers of Federal Government.  Therefore, it would not applicable for Kit.

Domicile test

This is the only test applicable for taxpayer Kit because it is validated only for Australian resident and Kit is a permanent resident of Australia but resided in foreign land. Further, the task is to check whether Kit is completed the critical terms of Domicile Test.

• For the tax year, Kit has Australian domicile and hence first condition is satisfied.
• Kit is staying on foreign land but his permanent abode is in Australia only and thus, second term is satisfied.

The applicability of essential terms of domicile test under IT 2650 is given below:

• Location of fixed asset - Kit has acquired a house in Australia three years ago. In this house only his kids and wife lived. Moreover, Kit is also lived in this house before leaving for employment duties.
• Number of foreign visits – He is provided with a month leave every three months of employment and either visits to Australia or in South America for holiday with family.
• Strength of ties–He has strong personal relations with Australia because his family is residing there. Moreover, he has salary account in Australian bank only.
• Difference between stay – It is apparent that once the employment duties would complete he would return back to Australia.

Conclusion

Kit would be known as Australian tax resident for the tax year based on the domicile test. Hence, the foreign income and domestic (Australian) income would be both considered for taxation under the rulings of section 6-5(2), ITAA 1997.  This implies that his income from employment by working at the oil rig for a US based company and also foreign company dividends would attract tax burden in Australia. 

Case Study 2 (Ordinary Income)

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

Investors of Californian Company owned a copper mine land and also acquired the mining licence from Australian government. However, the investors knew that they were not in the stage to start mining due to lack of funds. Within one year, the land was sold to other premium mining company. Investors received shares of this company. The market worth of shares was significantly higher than the investment in mine and an attractive profit was generated for investors. Court cited that the land should have been owned for mining not to generate the profit from liquidation. However, with limited working fund, investors acquired the mine so that they could sell it. Therefore, the activity of investors is considered to be business and profit would be assessable income (Barkoczy, 2016).

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

In 1860, investors of Scottish Company purchased a coal mine and conducted coal mining for several decades. After that it had been observed that coal reserves were finished and mining would not be possible. Hence in 1924, company sold the land for domestic usage. A mined land is not useful due to its irregular shape and topography and hence, company developed the land so that the land could be used for residential view. Court had noticed the intention and work on behalf of the investors and opined that the act of development would be categorised as “realisation of land capital asset”. Therefore, the proceeds from the sale of land would be classified as capital receipts not assessable income (Jade, 2017).

3. FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR

A beach side land was purchased by Whit Fords Company. The main business of the company was fishing and it was required to dry shacks. However, the company was later sold to a consortium of land developers who bought the company due to the beach land. After acquiring the beach land, shareholders of company divided the land and made some value addition activity to enhance the overall value and sold it. They also made necessary alteration in “Article of Association (AOA)” regarding the business of the company. Investors claimed that profit would be capital income. Court decided and ruled that company acquired the land for making profits. They used the beach land for their business and also made the alteration in AOA. Hence, the profit would be business income from land trading and termed as ordinary income (CCH, 2017a).

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

Taxpayers had received a deceased land from their uncle. In order to use the land, they collect fund sand started a new cattle business. Further, both the taxpayers were not in the position to sustain a business due to less experience and skill and hence, the business failed. This resulted in critical money shortage and thus, in order to sustain the living they were forced to sell a part of land. They did not make any development on land and sold a significant part. Court had noticed the conditions of taxpayers and related evidence and cited that the act of selling the land would be classified as “realisation of capital asset”. Because, there was no motive on behalf of the taxpayer to create profit and thus, the income would be categorised as capital income (CCH, 2017b).

5. Casimaty v FC of T 97 ATC 5135

A land was used for farming by taxpayer Casimaty. He took loan to start the farming and assumed that he would repay the loan after he would receive the income from farming. However, farming was not productive because of drought and thus, he was unable to pay the outstanding loan. This caused bad impact on his health. He did not have any other option to derive income and hence, decided to divide the land and liquidate. The received income was consumed against the treatment of his bad health and to repay the loan. Court had opined that the purpose of Casimaty was to resolve the issues (treatment, loan payment) and not to make profits. Therefore, the income would be known as capital income and exempt from assessable income. However, capital gains would be applicable (CCH, 2017c).

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

Company owned a land only for conducting the sand extraction. However, after a period of time, they start developing the land because sand reserves finished and made several value addition installation such as plots, parks, roads, hospitals, parking, church, school, public amenities, bus and railway stand and so forth. The plots were sold at premium prices to different buyers. Court cited that the act of shareholder was of business nature of generating income. Hence, the income would be known as ordinary income from isolated transaction (Deutsch et. al., 2016).

7. Crow v FC of T 88 ATC 4620

Crow acquired a land for doing farming and he started the same. However, he observed that it would be profitable if he liquidate the land after subdivision. He stopped doing farming and started subdivision and land selling. From the farm land block, he creates 51 small sized blocks and sold it. Further with these proceeds, he bought more land and thus systematically started selling them so as to derive premium pricing. Court cited that Crow was performing land trading businesson the land which was supposed to use for farming. Therefore, the ordinary income (profit) would be assessable for the purposes of tax (CCH, 2017d).

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

Taxpayers owned land on which some small old houses were built. They borrowed amount from bank and used the amount to construct new houses. Three houses were developed on the land. The remaining amount was used for advertisement. However, they could not found any potential buyer as per their expectation and hence, decided to hold the houses. After a period nearly one year, the houses were sold and attractive income was received by McCurry and Anor. They argued that they bought a capital asset and the act of selling was “realisation of asset”. However, court did not accept the request and cited that the reason behind the purchase of land was purely commercial and making profit. Also, the development, advertisement and holding the asset till prices improve proved to bear the testimony of profit intention. Therefore, the income was considered assessable (CCH, 2017e).

References

Barkoczy, S 2016, Foundation of Taxation Law 2016, 8^th eds., North Ryde: CCH Publications,

CCH 2017a, 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 April 20, 2017]

CCH 2017b, 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 April 20, 2017]

CCH 2017c, 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 April 20, 2017]

CCH 2017d, 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 April 20, 2017]

CCH 2017e, 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 April 20, 2017]

Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2016, Australian tax handbook 9th eds., Pymont:Thomson Reuters,

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2016, Understanding taxation law 2016, 8th eds.,  Sydney: LexisNexis/Butterworths

Jade 2017, Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188, Available online from https://jade.io/j/?a=outline&id=64663 [Accessed April 20, 2017]

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 9^th eds., Pymont: Thomson Reuters,