Provisions related to residency and taxability under the Income Tax Act of Australia

Issue: In the given question we need to advice Kit, as an accountant, if he should be considered to be a resident of Australia. We also need to state how the investment income and salary of Kit is to be taxed.

Although Kit was not born in Australia, he is a permanent resident of Australia. Instead, Kit was born in Chile thus he has his Chilean Citizenship. Kit was working for a United States based company. He would spend most of his time working on an oil rig off the coast of Indonesia. He had originally been recruited for Australia, but he had spending most of his time working in Indonesia. Kit was a married man. He had three children and a home that he had bought three years ago. Kit had a joint account with his wife in the Westpac Bank where his salary would get credited. Kit also had several other investments, apart from his salary, from which he generated his dividend income. The investments made by Kit were not in Australia, they were in Chile instead. In every three months Kit would get a month off from work when he would go meet his family either in Australia or go for holidays around South America. Kit’s parents were actual residents of Chile. In order to provide answers to the given Casestudy, the provisions related to it need to be understood. 

Rule: The Australian Income Tax Act states that a person who is holding a permanent Australian Visa only can be considered as an Australian Citizen. Such a person is allowed to live, work and study in Australia without any restriction or difficulty. A person being a permanent resident of Australia when travelling abroad needs to be sure that he is carrying a permanent visa along with proper travel authority and an intention to return to Australia. If the person shows no interest of returning back to Australia, then he shall not be considered as a permanent resident of Australia. If a person is deemed a resident of Australia, he needs to declare all his income during the income tax return in Australia. It does not matter if one earns income in Australia or abroad, he needs to declare it as an Australian resident (Government, 2017). While filing one’s income statement, all such incomes are to be declared.

In Australia a person needs to pay tax on every source of income earned by him. It is not needed to declare all Australian sourced dividends and interest royalties if one is a foreign resident. There are some other situations on the basis of which a person it can be determined if a person is an Australian resident or not. The situations have been mentioned below-

• If a Australian citizen has gone abroad and has no intention to set up a permanent home in the foreign country that he is visiting, he is then considered to be a permanent resident of Australia.
• If a person who was actually a resident of Australia, has left the country permanently with no intention of returning then he is not taken to be an Australian resident.
• If a student comes to Australia from some other country for studies for more than six months period then he shall be deemed be a citizen of Australia for the purpose of taxation.
• If a person comes to Australia to do a job and has to stay in Australia for a period of more than six months then such a person is considered to be an Australian resident for taxation purposes.
• If a person who is a resident of a foreign country stays in Australia for less than six months or comes for a holiday to Australia then he is not considered to be a citizen of Australia. However, if the person resides for a period of more than six months he is considered to be a citizen of Australia.
• If a person, who is not a resident of Australia, has shifted to Australia and has an intention to stay in Australia permanently he is considered to be a resident of Australia.

Application: Residency determination and taxability of income for Kit

Section 6(1) of the Income Tax Assessment Act states that there are essentially four residency tests to find if a person is a citizen or not. If a person who is originally a resident of Australia earns income from another country, such income needs to be disclosed while filing the income tax return in Australia (Income Tax, 2017).

Application: from the Casestudy and above mentioned provisions we get to know that Kit is a permanent resident of Australia. He was born in Chile and came to Australia for work. He has been working in Australia for a United States based company that made him work in Indonesia most of the time. Kit bought a home in Australia. This clearly shows his intentions of staying in Australia on a permanent basis. As Kit travels a lot for his work, he needs to have a valid permanent visa at all times.

According to the provisions, a person carrying a valid permanent visa with him and also has the intentions to return back to Australia he is to be considered as a citizen of Australia for that financial year. Thus, Kit is to be regarded as the citizen of Australia. Kit gets his salary in his joint account with his wife in the Westpac Bank that shall be taxable as per the Income Tax Act of Australia. Kit also had some additional investments from which he derives dividend. These investments are based in Chile. The Income Tax Act of Australia clearly states that if a person has any income which has been generated by him but it is outside of Australia, that income is to be taxed at that particular year. Kit has to pay tax on the dividends he earned from Chile while filing income tax return in Australia (Australian Government, 2017).

Conclusion: The Income Tax Act and its provisions thus prove that Kit is an Australian Citizen. Now, since Kit is a permanent citizen of Australia all his income shall be taxed under the Income Tax Act of Australia, whether the income is earned within Australia or not. Hence while filing his Income Tax Return Kit needs to show two incomes: one from his salary and the other from the investments made by him Chile from which he earns dividends (Visa Solutions, 2017). 

Case1: In the given Casethe assesse company wishes to acquire mining rights, land and copper mines in California or some other places in the United States of America. The given Casestated that if a company sells its assets along with the objects for which the company had been essentially formed as a part of the business, the amount that is earned post the expenses of acquisition is incurred, shall be considered to be the gains and profits earned from the business. Thus Case1 deal with the rights involving minerals and concessions provided to company when it is selling its business objectives (Australian Tax Office, 2017). 

Conclusion

Case2: Case2 deals with the provisions that are related to the taxation of the income derived from business in Australia. It is stated in the given Casethat a land shall be considered as either ordinary income or even realization of capital asset if it has been used for mining purposes earlier. The mining land had been sold in the given Caseabove. The company also dealt in such other services for example subdivision. Thus, it was decided by the High Court that the land that had been earlier mined was to be realised by the company in such a manner that it proves to be advantageous for the company. Hence this made the profit thus derived to be inaccessible. The revenue that had been realised here is mainly on capital account and thus cannot be considered as revenue. However, we see that the Judicial Terrain at the end rules out the decision made by the High Court. 

Case3: the Casespecifies that a land that had been earlier utilised for mining purposes are to be either taken as ordinary income or for the purpose of realisation of a capital asset. We see in the given Casethat the mining land in question has been sold. The company was also interested in other work like subdivision. The High Court had passed a judgement that the company needs to realise the land in such a manner that it proves to be advantageous for the company thus making the profit inadmissible. The profit thus realised need not be taken as revenue since it is essentially on capital account. Towards the end it was seen that the decision of the High Court was ruled out by the Judicial Terrain. 

Case4: the decision of the court was backed by two main reasons. If a loss has been seen from an isolated transaction it is to be deducted under Section 51(1) (ITAA 1936). The two cases are mentioned below:

1. The taxpayer had either intended or expected to earn profit in the Casethat would be assessable.
2. A transaction that was incurred during a commercial transaction or carrying on of business or such business operation runs into a loss.

In the given situation as there was absence of assessable income, it was necessary to establish the fact that an expectation was there to produce assessable income. Eventually, it was seen that the taxpayers were unable to get advice as to how to run profitably a property development business. Thus, profit motive was absent from the given facts (Australian Government, 2017). 

Case5: the given Casespecifies that the father of the taxpayer has gifted him in the year 1955 with a farm. The tax payer further sold the land for business purposes. Thus the income that has been derived from it shall be charged under the Section 25 (1) of ITAA 1936. At the end it was concluded that as the transaction had not been carried on in business manner since the tax payer had not taken any work that was beyond what was required in order to obtain approval of the municipality. It was hence advised by the court that the tax payer can continue to hold the land for both production and residential purposes. 

Cases related to the taxation of income

Case6: The Court had given the judgement in the given Caseon 21^st of November, 1988. By selling the land of the shareholders profits were realised. Also there were profits from the anticipated sale of the capital issued from Malgor Pty Ltd. The decision in this Casewas made in the favour of the company. The scheme had not been updated to the extent of point of completion of sales. From the given Caseit can be made out that the sand mills must have been removed by the company before the completion of the sale. 

Case7: the taxpayer was involved in the given Casefor purchase of many properties in the given case. On the 17^th of August 1988 the court gave its judgement on this case. The main idea behind the Casegiven is to decide if the profit earned from selling of the land that is near Hobart is to be taken as income as under the Section 25(1) of the Income Tax Act. Thus from the given Caseit can be derived that the income cannot be considered under the Section 25 (1) of the given Act. If the income is to be taxed under the Section 26(a) of the Act then there is need for a profit making enterprise that is essential in order to make profit while the scheme is being carried out (Australian Taxation Office, 2017). 

Case8: in the given Casejudgment was given by the Federal Court on 15^th of May, 1988. In the given Casewe see that Brett and Bradley had to build three town houses on the Addison Avenue Property. Bradley and Brett wished to sell the first of the three townhouses for profit purposes. They wanted to keep the other two houses for residential purposes for themselves. Thus in the given Casethe judgement passed was that the house that was to be sold is not to be considered as assessable income and thus tax is to be levied on it. 

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