Residency Test and Relevant Factors

The taxation ruling of IT 2607 is aimed at establishing the guidelines in ascertaining whether the residency status of an individual that are entering Australian will be considered for taxation purpose (Woellner et al. 2016). The ruling generally includes individuals that are foreign working visitors in Australia for a limited period of time, migrants, individuals that are on holiday and individuals visiting for academic’s purpose. The study revolves around determining the residential status of Nida as she was born in Vietnam and carried out her business there. However, she visited Australia in June 2017 and came with her family to perhaps migrate in Australia and commence her business. The case study also provides that Nida bought a family dwelling in Melbourne so that she can live with her husband and children.

In accordance with “section 6-5 (2), (6-10 (4) of the ITAA 1997” a person who is a resident of Australia are held for taxation depending upon the income generated based on the ordinary or statutory concepts (Barkoczy 2016). Agreeing to the “section 6-5 (3) (a) and 6-10 (5) (a) of the ITAA 1997” an overseas resident or those that are not a resident of Australia are held for assessment depending on the ordinary and statutory income derived from the all the sources in Australia.

The meaning of the term “resident”, resident of Australia” and “non-resident” is explained under the “Subsection 6 (1) of the ITAA 1936”. “Section 995-1 of the ITAA 1997” refers to Australian resident that are consist of the person that have their actual resident in Australia (Tan et al. 2016). The “Taxation ruling of IT 2681” explains that an individual would be held as the Australian resident that has been originally present in Australia. This includes a continuous or intermittently existence for greater than one-half of the income year except the commissioner is pleased that an individual usual place of abode is out of Australia or that he or she does not have the intention of taking up the dwelling in Australia.

Considering the situation of Nida the study will perform three resident test to arrive at the decisions whether she is an Australian resident with reference to “section 995-1 of the ITAA 1936” or “ITAA 1997”;

1. Resident as per Ordinary meaning  
2. The Domicile Test
3. The 183-day test

Whether the person constitutes an Australian resident represents the question of fact that has to be defined in regard to the circumstances of each situation. To help in ascertaining during the year of income whether the business migrant is held as resident as per the ordinary concepts there are relevant factors that should be considered (Cao et al. 2015). If an individual return to the nation of origin, the frequency, regularity and duration of those trips and their purpose may form a conclusive influence. Additionally, if the migrant is accompanied by their family or children to Australia and the nation of origin. Once the test is satisfied there is no need of conducting any more test to determining the status of residency for an individual. The federal court in “Miller v Federal Commissioner of Taxation (1946)” explained the relevance of fact and degree that is necessarily surrounds the case (Braithwaite 2017). The test of Resident as per ordinary concepts determines the quality and character of a personage’s behaviour during their stay in Australia.

Resident as per Ordinary Concepts Test

According to the “taxation ruling of TR 98/17” provides guidelines in understanding the residential status of a person under the Resident as per ordinary meaning which includes;

1. The taxpayer’s family or the business relations
2. The physical and the communal arrangement by the taxpayer
3. The objective and usual intention of staying in Australia
4. Time elapsed till the physical existence of the taxpayer is an important element in understanding the residential status of a person. Nevertheless, the period of time should not be held as the detrimental issue.

Instances gained from the situation surrounding the case of Nida provides that she migrated to Australia ultimately with objective of perhaps migrating and starting the business. As denoted that Nida purchased a house so that she can live in with her husband and kids. Citing the reference of “Macrea v Macrea (1949)” migrants that comes to Australia and perhaps settle with their family is usually held as residing in Australia commencing from the day when the person arrived to Australia (Davis et al. 2015). The commissioner views that a person trade or personal interest might necessitate them to remain out of Australia for a considerable time period. For example, if a person migrants from overseas nation to Australia with their family and children and purchases home is held as Australian resident. Additionally, a person maintaining a business in their native state and regularly returning to the native state for performing the business activities for a two or three months, such persons are held as Australian resident.

Denoting the fact from the existing situation of Nida, it is noticed that she migrated to Australia eventually with the interest of starting business and to reside with her family. She goes back to Hanoi for business purpose. Consequently, Nida would not be held as the Australian resident under the ordinary meaning for the income year 2017-18 because Nida did not took the residency in Australia for permanent purpose. Therefore, the status of residency for Nida along with her partner and children is held as the separate subject.

The test associated to domicile is largely associated with the person that are ordinarily residing in Australia but they are not actually residing in Australia in the income year (Miller and Oats 2016). The “taxation ruling of IT 2681” under the domicile test provides that a business migrant is held as the resident of Australia and under the domicile test if a person has their domicile in Australia except when the taxation commissioner is content that an individual’s permanent place of abode is not in Australia. As defined under the “Domicile Act of 1982” an individual acquires the domicile of their choice in Australia given the person intention is to make their home in Australia indefinitely.

The circumstances surrounding the situation of Nida outlines that, Nida has the permanent residence in Vietnam. Nida originally visited to Australia with the purpose of living until further notice and starting her business. Later events suggest that Nida purchase a house so that she can live in with her husband and children however her duration of stay in Australia was not continuous and was intermittent. Referring to the judgment of “Applegate v FCT (1979)” Nida did not abandoned any of her residence or place of residence in Australia and comes back to Australia following the execution of business activities (Saad 2014).

Domicile Test

The federal court in “Henderson v Henderson (1965)”, defined that a person retains the domicile of their native country unless the person acquires the residence in another nation. Considering the circumstances surrounding the situation of Nida she cannot be held as the resident of Australia for taxation purpose under the meaning of “Domicile Act 1982” (Robin and Barkoczy 2018). More prominently, it may appear that Nida is a resident of Australian however the residency status of Nida and her children are held as independent for the income tax purpose for income year of 2017-18. Therefore, she is not held as resident of Australia for the purpose of assessment under the domicile test.

The circumstantial to and the base of the 183-day test is defined in the paragraph 8 of the Taxation ruling of IT 2268 (Robin 2017). Where an individual does not live in Australia in the ordinary concept test, the person would however be held as the Australian resident if the person is existent in Australia for a period of six months of more given the commissioner is content that the normal residence is in not in Australia with no objective of taking the residence in Australia.

The meaning of place of residence refers to the physical surrounding where an individual is residence is. The test of 183-day test is important in understanding whether the person has started living in Australia. Denoting the evidence surrounding the situation of Nida she was only present in Australia for 120 days. A person will only be held as the Australia resident if the person has fulfilled the criteria of 183 days and satisfies the explanation of “subsection 6 (1) of the ITAA 1997” (Fry 2017). A vital consideration is that a person will be held assessable under the 183 days’ test if the person has been in Australia for a minimum of 183 days of the income year. Nida in this respect is not regarded as the Australian resident since she was not present for 183 days in Australia. Conclusively the residency status of Nida and her family is an independent and a separate matter.

The court of law in “FCT v Nathan (1918)” held that in ascertain the original source of income is a matter of practical and difficult subject (Coleman and Sadiq 2013). The court in “United Aircraft Corp (1943), held that a business income represents the place from where the business is carried on or the goods are sold.

183-day Test

Denoting from the state of affairs of Nida, on conducting the relevant test it was held that she was not the resident of Australia for assessment purpose for the year ended 2017-18. Nida will be held as the overseas resident because the amount of time spend in Australia is only 120 days and fails to provide a continuity or routine in her behaviour during her stay in Australia. The revenues or the profits from Hanoi business operations is subjected to taxation. As a foreign resident Nida would be required to file income tax return relating to earnings from investment obtained from sources in Australia.  

According to the Australian taxation office there are several instances where the land owners possess the chance of subdividing the land and selling the same that have been owned by them over the long time span. Such occurrence is common where the primary producers have the land at the outskirts of the town centres and residential expansion represents that the best usage of land constitute for residential purpose instead of using it for farming purpose (Grange et al. 2014). In some situations, such property developments are considered to be substantial with the deriving large sum of profit from the property development.

Denoting from the instances of Hassan the present situation is based on ascertaining the alternatives that are involved in assessing the proceeds derived from the sale of town house under the provision of ITAA (James 2014). Instances obtained from the case study provides that Hassan decides to retire from the farming business and indulge in activities of property development. Hassan ceased the farming activities and subdivides the land for the sale.

Denoting from the above instances small and medium subdivision meet the requirements of mere realization of the land when the project may be regarded as the profit making scheme (James and Nobes 2014). The commissioner in “Westfield Limited v Commissioner of Taxation (1991)”, states that the single asset sale which is not purchase for resale at profit or land development meet the requirement of capital receipt.

Symbolizing the situation of Jack subdividing the land which was employed for farming and developing land for townhouse and selling the same have the considerable association in generation of large sum of profit from land development. Signifying the instances of Hassan there are certain alternatives for considering the revenue from sale of land as a taxable earnings under the ITAA which includes;

1. A capital asset is held as the mere realization when the land qualifies for the mere subdivision
2. The extent of carrying on the business in a manner that it is held as the property development by the taxpayer
3. The activities of development may surpass the meaning of mere realization of land however the same may fall short of the condition of performing of business activities. In such circumstances, it may be categorized as the scheme of profit making.

Preceding from the alternative that has been presented, the same can be employed in determining the tax consequences of sale of townhouse by Jack in respect of the ITAA. As evident form the above stated alternative the alternative of mere realization of the capital asset is applicable in the case of Hassan.

Referring to the court decision in the “Federal Commissioner of Taxation v Allied Pastoral Holdings (1983)” the principles of mere realisation of asset has been defined (Jover-Ledesma 2014). The court decisions stated that an individual taxpayer holding the land is regarded as the capital asset and developing the land in an enterprising manner is held as the profit generated from the capital asset given the development is not greeter than the mere realization of the capital asset.

Determining the Original Source of Income

Before forming a detailed analysis of the Hassan state of affairs in understanding that the development of house on the land represents the mere realisation to ascertain whether Hassan bought the land with the objective of reselling and generating profit (Kenny 2013). Irrespective of the sale of land the profit that would be produced from the disposal of land is considered for assessment. While advising Hassan it is obligatory to understand whether there was any prevalent intention of making profit when the property was acquired.

The federal court in “Commissioner of Taxation v Reiger” have numerated the identical problem relating to the mere realisation of the capital asset. The taxpayer stated his disagreement that the land was acquired to carry out the activities of palm nursery. The taxpayer fixed palm trees on the land but did not carried out a business (Krever 2013). The statement of intention associated to the subdivision of land was held as an important reason for bringing the argument by the taxpayer which described the purpose of beginning commercial activities on the land.

According to the “taxation ruling of 92/3” defines that the Australian Taxation Office have the considered necessary issues in determining whether the person that have decided to undertake or undertaken the land development would be regarded as the mere realization of the capital asset. The taxation commissioner explained the concept of mere realization of capital asset in “Californian Cooper Syndicates v Harris (1904)” (Sadiq et al. 2014). A precise principle is enumerated in the ascertainment of the income tax where the taxpayer ordinary investment undertakes the decision of realising the land and gaining a higher profit would be held as the taxable income.

Referring the judgement made in “Commissioner of Taxation v Westfield” that the court of law passed its verdict that the activity of purchase of land and selling the land leading to profit cannot be considered as the activity of under the ordinary business course (Woellner 2013). Otherwise, in an ordinary course of business the profit which is in question would form the part of the taxable income under the ordinary concept if the taxpayer has the purpose of making profit when the property was acquired. The taxation commissioner further elaborated that the profit deriving purpose may lack depth and the means of getting the profit may be viewed as the alternative through which the profit may be realised.

According to the “taxation ruling of 92/3” a taxable profits arises when the taxpayers enters in the profit making structure or by the act of law for the purpose of deriving profit through a single particular medium but derives income through alternative means (Woellner et al. 2014). The current situation of Hassan defines that whether the activities of the land development undertaken by the land owner has the element of business present in or possess the character of profit deriving transaction. considering the approach taken in taxation ruling of “TR 92/3”, the ATO has remained dependent on the opinion that has been stated in “Miscellaneous Taxation Ruling of MT 2006/1”. In determining whether the profits derived by the person is from the single subdivision of land it would be held as the mere realization of land or the profit deriving scheme (Pinto 2014). The ATO has established numerous factors under the “Miscellaneous Taxation Ruling of MT 2006/1” which are as follows;

Hassan’s Case Study Analysis

According to the ATO there cannot be any single factor that forms the decisive element. Viewpoints might vary that the subdividing the property in a small number of plots may be held as the realisation of land merely (Henry et al. 2014). Nevertheless, this is not the situation when the implementing the alternative of the mere realization of the land by Hassan. It is necessary to appreciate that the court decision in some of the cases reflects that developing the land and building house on it comprises of the mere realisation of the capital asset. The federal court in “Federal Commissioner of Taxation v Casimaty (1997)” the subdivision of land into 80 plots was held as the mere realisation of the capital asset (Fauziati and Kassim 2018). The court held its decision by stating that h property was employed for the purpose of farming for numerous years and the decision undertaken for the subdivision of land was due to rising debt and insufficient health of the taxpayer.

The court of law referred to another example of “Federal Commissioner of Taxation v McCorkell” held that the subdividing the land that was previously employed for plantation is held as the mere realisation of the property (Henry et al. 2014). Similarly, in the situation of “Federal Commissioner of Taxation v Statham (1989)” developed 105 lots of further than four stages were not regarded as the mere realisation of land. Denoting from the judgment of the above stated it can be stated that the land acquired by Hassan and subdividing the land to build townhouse is held as the mere realisation of the capital asset. The revenue that is generated from sale of the land by Hassan is held into the capital account and not in terms of the revenue account.    

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