Income Tax Assessment

QUESTION 1

In order to be considered a resident, the following four tests of residency need to be satisfied as per the Income Tax Assessment Act of 1936.

The first test that determines an individual’s Australian residence for taxation purposes is the Domicile Test. According to the Domicile test, the first step is to determine whether the Individual’s domicile, which is defined as the place which is considered by law to be the individual’s permanent home. The three types of domiciles established by common law and statutes which are domicile by origin, domicile by choice and domicile by operation of law.

As per the given scenario, Fred does not meet the first and third types of domiciles established by common law. However, he meets the second type of domicile as he has recently changed his residence by leasing a residence in Melbourne. Further, although the stay was not permanent, the stay was not certain, i.e it was indefinite.

The second step of the domicile test requires the determination of the permanent place of abode which is defined not as everlasting or forever, but is opposed to a temporary or transitory residence. Since Fred’s permanent residence is in Melbourne, therefore, Fred fails the second part of the domicile test. As a result of this, the domicile test is not satisfied.

The second test that determines an individual’s Australian residence for taxation purposes is the 183 Day Test. Under this test, any individual who is present within Australia whether continuously or intermittently for 183 days or more within one tax year shall be considered a resident unless it can be proved that the individual’s usual place of abode is outside Australia or that the individual has no intention of taking up residence in Australia.

As per the given scenario, Fred is present in Australia for 11 of the 12 months of the year, therefore he meets the 183 day test. However, it needs to be seen whether the remaining two conditions are met. Fred’s lives within the leased residence for 11 months, therefore, it may be established that Fred’s usual place of abode is within Australia. However, as mentioned in the question, Fred has come to Australia to set up a branch for his company. Further, he has not sold off his house within the UK. Therefore, it may be construed that Fred has no intention of taking up residence in Australia. Therefore the 183 Day Rule is not satisfied.

The third test that determines an individual’s Australian residence for taxation purposes is the Superannuation Test. According to the test, an individual’s tax residence can be determined if he is a member of the superannuation scheme established under the Superannuation Act, 1990, or is an employee, for the purposes of the Superannuation Act, 1976. In the absence of given information, we can assume that Fred does not fall in either of the aforementioned categories. Therefore, the Superannuation test is not satisfied.

The fourth test that determines an individual’s Australian residence for taxation purposes is the Resides Test. As per the test, residence depends upon the ordinary meaning of the word. Those who enter Australia on pre-arranged employment contracts may be considered resident. However, no time duration has been established in the given scenario for the maximum time that Fred may spend in Australia. The behavior of the individual entering Australia may also be considered to determine whether the same is a resident for taxation purposes or not. For example, incurring economic activities such as leasing a residence for 12 months reveals that the stay was going to be a lengthy one. Social and living arrangements may also be considered in determining whether the individual is to be considered a resident for tax purposes. However, as per the given scenario, Fred’s daily behavior is similar to that when he was in the UK. Further, the fact that he left Australia after 11 months can be construed to show that he is not a resident. Therefore, we can see that the Resides Test is subjective and can be used to determine Fred’s residency or lack thereof.

In conclusion, due to some of the actions taken by Fred, such as taking up residence on a lease of 12 months, as well as travelling with his spouse may be consistent with that of being a resident, however, Fred does not satisfy three of the aforementioned residency tests.  Nevertheless, due to Fred’s behavior and actions, he may be considered to be a resident of Australia for taxation purposes.

QUESTION 2

The final decision reached in Egerton-Warburton & Ors v DFC of T (1934) 51 CLR 568 was that the receipts ought to be included in the assessable income of Randle Egerton-Warburton and that no part of the said sum would be excluded from the assessable income.

The reason for the same was that the judge assessed that the payment received from selling the land was not of a capital nature as the same was an income receipt. The reason for the same was decided that the capital receipts from the selling of the land had been converted into an income receipt (an annuity). While at the same time, the receipts in IRC vs Ramsey, the receipts had not converted into income.

We can therefore conclude that the reason the receipts in Egerton-Warburton & Ors v DFC of T (1934) 51 CLR 568 were assessable, but the receipts in IRC v Ramsay (1935) 1 All ER 847 were treated as capital amounts is because the capital amount in the former had been transformed into income while the same was not the case in the latter.

 

QUESTION 3

Net capital gain or net capital loss during a particular tax year can be considered to be the difference between the capital gains during the year and the capital losses during the year. Following points in regards to the given scenario are relevant:

  • Block of vacant land: The cost base of the land includes the cost initially paid for it, which is $100,000. The costs of local council, water and sewerage rates and land taxes during her period of ownership of the land amounting to $20,000 will form part of the cost base being the cost of maintaining the asset. The time of disposal of the land, i.e. the CGT asset will be at the time of signing of contract (June 3). The capital proceeds in this case shall be the sum of the amount paid to her when the contract is signed ($20,000) and the remaining amount to be paid ($300,000). Therefore, the capital gain on this transaction amounts to $200,000 (300000+20000-100000-20000).
  • Antique bed: The cost base in this example would be the amount for which the antique bed was purchased ($3,500) and the costs and expenditure she incurred to increase the value of the bed ($1,500). While the capital proceeds will be the amount that she was entitled to in respect of the stolen bed, which was $11,000. Therefore the capital gain on the transaction would be $6,000 (11000-3500-1500).
  • Painting: No capital gain or loss is required to be calculated on the painting as the same was acquired prior to September 20, 1985.
  • Shares of Common Bank Limited: The cost base for the transaction would be the $15 paid to acquire each share as well as the amount of brokerage fee on sale and stamp duty on purchase ($550 and $750 respectively). As a result the total cost base will be $16,300 (15*1000+750+550). The capital receipt in regards to the same is $47,000 (47*1000). Therefore the capital gain on the transaction would be $30,700 (47000-16300).
  • Shares of PHB Iron Ore Limited: The cost base for these shares would be the cost on acquisition which is $6,000 (1200*5) as well as the brokerage fee and the stamp duty on purchase (100 and 500). Therefore the capital loss on the transaction is $6,000 (0.5*1200-6000-100-500).
  • Shares of Share Build Limited: The cost base of the shares would be $10,000 (1*10000) as well as the brokerage fee and the stamp duty amounting to $2,000. The total cost base would be 12,000 (2000+10000). The capital proceeds amount to $2.5 per share which means the capital proceeds amount to $25,000. The capital gain on the transaction would be $13,000 (25000-12000).
  • Violin: The capital gain on the violin would be the difference between the cost base of $5,500 and the capital proceeds of $12,000. The total gain on the transaction would be $6,500 (12000-5500).

The total capital gain earned during the year amounts to $256,200 (200000+6000+30700+13000). The capital loss during the year amounted to $6,000. The loss of $1,500 on a collectible can be adjusted with the gain made on the disposal of the violin, whereas the previous losses of $8,500 can be set off against the other capital gain during the year. Therefore the revised capital gain would amount to $246,200 (256200-1500-8500). The loss for the year amounts to $6,000. Therefore, the net capital gain for the year amounts to $240,600 (240600-6000).

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