Taxation Law Capital Taxation of Century

Question: Discuss about Taxation Law for Capital Taxation of Century. Answer: Case Study 1: Residence and Source Residential status of an Individual for the taxation purpose has been defined under Taxation Ruling (TR) 98/17 of Income Tax Assessment Act (ITAA) 1997. According to the ordinary meaning under subsection 6(1) of TR98/17, an individual is required to satisfy the resides test to determine the residential status within Australia. In case the person fails to satisfy the requirement of resides test then he shall be required to satisfy one of the three conditions of statutory test (Sharkey 2015). Resides Test: As per TR98/17, an individual is regarded as an ordinary resident for the purpose of tax if the person resides in Australia. Statutory Test If the individual fails to satisfy the resides test then the residential status shall be examined by considering any one out of three requirements that are as follows: Domicile Test: An individual is considered to be Australian resident if his place of permanent domicile or home is in Australia. 183- Day Test: If a person resides in Australia for more than 183 days whether or not continuously, he shall be said to have constructive residential status in Australia. Superannuation Test: Under this test, government employees of Australia working overseas are required to be treated as resident of Australia. In the provided case, Fred, a management consultant of British Corporation came to Australia to set up an office branch and stayed for 11 months which was uncertain. During his stay in Australia, he was accompanied by his wife but his son stayed in London for studies whereas his daily behavior remained similar to that of his home country. Moreover, Fred earned rental income from UK property as well as interest on investments acquired in France. Considering the fact of the case, Fred is not an ordinary resident of Australia as per resides test condition under TR98/17 of ITAA 97 because he does not stay in Australia in ordinary course. Hence, to check his residential status in Australia for taxation purpose secondary test known as statutory tests shall be considered. Domicile test shall not be applied to check Freds residential status because he does not have any permanent home in Australia (Buse et al. 2016). Secondly, superannuation test shall not apply because Fred is not an Australian government employee. Hence, 183- day test shall be considered to examine his residential status which requires a persons stay in Australia for more than half of current tax year. Since, Fred stayed in the territory for more than 183 days i.e. for 11 months, he shall be considered as Australian resident for taxation purpose (Zelinsky 2016). Even though Freds stay in Australia was not certain yet his total stay was more than six months and he had leased a residence to stay in Melbourne for 12 months. Accordingly, based on the case of Levene v IRC (1928) AC 217 Fred is an Australian resident for tax purpose under subsection 6(1) TR 98/17 ITAA 97. Case Study 2: Ordinary Income I. Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159 Fact of the case: The taxpayer had provided an object clause in its memorandum of association about the acquisition of copper bearing land in California. The company disposed off the maximum value of its share capital for the acquisition of land. Further, the company lacked sufficient funds to conduct work on land and eventually sold a part of the land (480 acres) to Fresno, another copper company against its fully paid shares. Issue of the case: Whether the income earned on the sale of land was capital income or revenue income as an assessable income of ITAA 36. Decision of the case: The taxpayer contended that the surplus amount earned from the sale of land should be capital income rather than assessable income as the transaction was a mere substitution of capital asset. On the contrary, the commissioner of income tax contended the surplus amount to be assessable in the income of the taxpayer. Observing the facts, the transaction on sale of land it was concluded that the taxpayer has entered into the sales transaction as a speculative business in order to incur profit (Hughes et al. 2015). Accordingly, the Federal court in its verdict stated that the intention of the company was to evade tax liability by disclosing it as a substitution of investments. However, the sale of land was actually a business transaction and the income earned by the company is recognized as an ordinary income and not as capital income. II. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188 Fact of the case: Scottish Australian Mining Company, the taxpayer operated the business of mining coal on a part of 1771 acres of land acquired in the year 1860. As the main coal seam had exhausted in few years of mining, the taxpayer had decided to sell it off after the year 1924. In order to obtain attractive sales revenue, the company had spent considerable expenses for the development of land and subdivided the same in various parts. The company sold the subdivided land parts and incurred surplus which was considered by the taxpayer as capital income. Issue of the case: Consideration on sale of land should be recognized as capital income or assessable income as per section 25(1) ITAA 36. Judgment of the case: It was stated by the courts judgment that the company cannot divert its intention and business activity from its main objective. Hence, the use of land should be only for mining coal and not for any other purpose or business activity. The court did not agree with the companys view on realizing the capital asset in the most advantageous manner should be considered as capital transaction (Auerbach and Hassett 2015). Accordingly, it was decided that the income on sale of land should be revenue income because the intention of company was to form business operation on land and to incur profit from its sale. III. FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR Facts of the case: The taxpayer, Whitfords acquired the land for the benefit of its original shareholders for accessing shacks rather than any other business activity for the purpose of generating profit. However, for some unforeseen reasons the taxpayer along with the other there companies sold the land amounted to $1.6 million and incurred profit more than its projection. The taxpayer contended that the income from such sale should be regarded as capital income and not as assessable income under section 25(1) of ITAA36 because the sale transaction was in regard to the ordinary usage. Issue of the case: Whether the income from sale of land should be considered as capital income or revenue income for the purpose of taxation system. Decision of the case: The Company argued that it had not conducted any business activity on the land accordingly, the surplus realization should be considered as capital income. On the contrary, the commissioner and the court argued based on the case of Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188, that the intention of the taxpayer was generating profit. The contention of the taxpayer on subdivision of land for its best utilization and for realization of capital asset was not tenable as per the courts decision subject to the intention of company to enter the sale transaction (Piketty 2015). Therefore, the surplus amount from the sale of land should be considered as assessable income under section 25(1) of ITAA36. IV. Statham Anor v FC of T 89 ATC 4070 Fact of the case: In this case, a traditional farmer had acquired a farmland to raise his family according to the rural environment and to conduct farming. The farmer entered into partnership to raise the cattle on the farmland but the owner could not achieve the target. Apparently, the owner decided to divide the land and sell it off during the period 1980 to 1986. For this purpose, the owner marketed the subdivided land through local real-estate agents during the period and eventually sold off the land by incurring profit. Issue of the case: Whether the surplus amount generated from the sale of land should be assessable income under section 25(1) of ITAA36 or as capital income. Decision of the case: As argued by the court on assessability of the income earned on the sale of land by the farmer, it was observed that the sale transaction by farmer was not a business activity. Further, the intention of the taxpayer for sale of land was not to generate profits therefore, mere subdivision of land and its sale cannot be regarded as taxable income (Jones 2015). In the present case, the objective of the farmer did not involve continuous purchase and sale of land as a business activity. Hence, the court decided that the income received by the farmer from the sale of land should be regarded as capital income. V. Casimaty v FC of T 97 ATC 5135 Fact of the case: George Casimaty acquired a farmland property of around 988 acres from his father by making the payments in installments in 1955. The farmer acquired further 40 acres of land in the year 1956. In order to conduct business of farming and fences the farmer formed a homestead on the acquired land without an intention to sell the land. Further, the farmer carried on the dairy operation business until the year 1965 but due to bad health, he incurred substantial losses, huge debts and eventually sold the two- third parts of land. Issue of the case: Whether the income from the sale of land should be included in the assessable income of the taxpayer or in the capital income in ITAA36 Decision of the case: The taxpayer contented that the sale of land does not constitute a business activity hence should not be included in the taxable income under section 25(1) ITAA36 (Mares and Queralt 2015). However, the court observed that the intention of the farmer was not to incur profit from the sale of land as well as the farmer had not acquired any further land as a means of stock. The owner also did not conduct any business activity by further acquisition of the land. Therefore, based on the decided case of Hudson's Bay Co. Ltd.v.Stevens(1909) 5 Tax Case 424 it was concluded that the income earned by the farmer would not constitute assessable income. The surplus amount should be considered as a capital income for the purpose of taxation system in ITAA36. VI. Moana Sand Pty Ltd v FC of T 88 ATC 4897 Fact of the case: This case covered the business operation of sand extraction from the land acquired by the taxpayer, which was bought by the beachside in 1958. After the extraction of sand, the owner decided to sell the land to its related company as the land was not sufficient to further extraction. However, in the year 1979 the land was resumed for $500,000, which was paid in the beginning of 1980 with the payment of balance in later years. Eventually, the owner sold the land and contended that the income on such sale shall be capital income and not a revenue income. Issue of the case: Income on sale of land should be considered as capital income or revenue income Decision of the case: It was argued by the court that the sole objective of the company as to conduct the business of sand extraction and to generate profit. Additionally, the resumption of land was also a part of the business activity hence, the transaction on sale of land would constitute revenue income (Hardy and Kelsey 2015). Accordingly, it was concluded that the income earned by the taxpayer should be assessable income rather than the capital income. VII. Crow v FC of T 88 ATC 4620 Fact of the case: The taxpayer acquired the 300 acres of farmland from the borrowed fund costing $45,000 in 1962. The owner acquired another 556 acres of land on lease near Clifton Beach and subdivided the acquired land into fifty- one subparts. The owner sold off the subdivided parts in subsequent years at high rates amounted to $226,185 during 1968 to 1980, which was a continuous process to earn profit in the business activity. The company earned approximate profit of $388,288 from the sale of several parts of land. Issue of the case: If the profit on sale is considered to be assessable income or capital income. Decision of the case: It was clear from the given fact of the case that the intention and objective of the taxpayer was to incur profit from the continuous business activity on sale and purchase of land. Based on the case of California Copper Syndicate vs. Harris (1904) 5 TC 159 the federal court concluded that the income from sale of land constitutes assessable income and not capital income (Vijayabaskar and Menon 2015). VIII. McCurry Anor v FC of T 98 ATC 4487 Fact of the case: The case is about two brother who acquired a land from their own funds and bank loan where an old house was constructed already. The owners demolished the old one and built and three new units of townhouses with the intention to sell it off. Due to unfavorable market structure the owners could not sell the units therefore used two unites for family residence. Apparently, the owners could sell the houses in December 1988 by incurring profit of $75,811 attributed to each of the brothers. Issue of the case: Recognition of income as capital income or revenue income under section 25(1) of ITAA36 Decision of the case: It was observed that the transaction entered by the taxpayers is of business venture and a commercial deal. The purpose of acquisition and sale of land and construction of house units was earning profit through the business activity (Stadelmann and Billon 2015). 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