Taxation- Theory - Practice and Law ITAA 1997

Question: Describe about the Taxation- Theory, Practice and Law for ITAA 1997. Answer: Case study 1 The section 3-5(1) of the Income Tax Assessment Act 1997 provides that income tax is payable every year by each individual, company and some other entities on their assessable income. The ITAA 1997 classifies assessable income into ordinary income and statutory income. The section 6-5(2) and section 6-10(3) of the ITAA 1997 states that in case of Australian resident all the ordinary income and statutory income received directly or indirectly from sources inside and outside of Australia should be included in the assessable income. In case of foreign resident, the income received whether ordinary or statutory, from sources outside Australia is not included in the assessable income for the purposes of tax. It can be seen from the provisions of the ITAA 1997 that assessable income and hence the income tax payable varies according to the residential status of the taxpayer. Therefore, it is important to determine the residential status of the taxpayer (Neutze 2016). The Australian Taxation law provides four-residency test for determining the residential status of the taxpayer. This four tests are resides test, domicile test, 183 day test and superannuation test. The reside test is the primary test for determining tax residency. According to this test, if an individual resides in Australia then the individual is considered as Australian resident for tax purpose (Li et al. 2014). The domicile test provides that an individual be considered as Australian resident if the permanent place of abode of the taxpayer is within Australia. The 183-day test provides that if an individual stays 183 days or mare in Australia with or without break then the individual will be considered as Australian resident for the taxation purpose. The 183-day rule will not apply if it is established the taxpayer is willing to have a residence outside Australia and the taxpayer is not interested to take up residence in Australia. The superannuation tests are applicable to gove rnment employees of Australia working abroad so that they are treated as Australian resident for the tax purpose. It is to be noted that if an individual satisfies any of the above test then that individual is considered as resident for the taxation purpose (Schmid 2016). In the given case, Fred is an executive and he comes to Australia for setting up branch of his company. For this purpose, Fred leased a house in Melbourne. Fred stayed in Australia for 11 months and returned to UK after ill health. If the residence test are applied to determine the residential status of Fred it can be seen that as Fred has stayed in Australia for 11 months so he has satisfied the 183 day test. Further Fred has leased a residence in Australia so the domicile test is also satisfied (Perotti et al. 2014). The residency test clearly provides that if any of the above-mentioned tests is satisfied by an individual then it will be considered that the individual is Australian resident for the taxation purpose. Therefore based on the above analysis it can be concluded that Fred is an Australian resident for taxation purpose. Case study 2 Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159 Issue In this case, the issue was whether profit arising from the sale of property used in mining is taxable as ordinary income under or capital gain. Facts of the case In this case, the taxpayer was engaged in the acquiring of copper bearing lands in California. The taxpayer subsequently sold this land acquired to another company in liue of shares and subsequently in the process made substantial profit. The taxpayer argued that, as it has not realized profit so it should not be taxable. Outcome In the given case, it was held that the taxpayer is liable to pay tax on the profit arising from the sale of land. The profit should be considered as income and not capital gain because from the beginning the taxpayer used its capital for purchasing land for the purpose reselling it to another company (Forrest and Murie 2014). This ruling provided guidance whether income from isolated transactions should be considered as income under section 25(1) of the Income tax act 1936. The judgment also defined isolated transactions as transactions, which are outside the ordinary track of business, and it also includes transactions entered by non tax payers. Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188 Issue In this case, the issue is whether a sale of land used for mining by a mining company will be considered as ordinary income or capital asset realization. Facts of the Case The taxpayer is engaged in the mining business and the company purchased land for coal mining. As the coal in the mine exhausted the company sold the land after doing substantial improvement on that land. On the sale of land, company made substantial profit and the tax authority taxed the company. The company argued that it was not carrying on business of land development. It has sold land as a capital asset so the profit should not be taxed (Guy et al. 2014). Outcome In this case, it was held that the land sold was not commercial activity but was realization of capital assets. FC of T v Whit fords Beach Pty Ltd (1982) 150 CLR Issue In this case, the issue is whether profit from sales of land is of capital nature or ordinary income. Facts of the case The taxpayer is a company owned by a group of fisherman that purchased the land for getting access to the beach. The company later sold the land after changing it to residential property and earned huge profits. The authority assessed the taxpayer on the amount of profit made. The taxpayer however argued that profit should not be taxed as it sold the capital asset at the best possible price and did not carry a business of selling residential property (Wheeler et al. 2012). Outcome It was held in this case that the taxpayer is assessable under section 25(1) for profit on sale of land. It is because the activities of the taxpayer constitute business of land development and hence the selling of land cannot be held as mere realization of capital assets (McLaren 2014). This judgment provides the definition of isolated income and provides guidance whether it is taxable under section 25(1) of the Income tax act 1936. Statham Anor v FC of T 89 ATC 4070 Issue In this case, the issue is whether amount received from sale of land is taxable under section 26(a) or section 25(1). Facts of the case In the given case, the taxpayer is the trustee of the deceased. The deceased for the purpose of farming and raising the cattle initially purchased the property. Due to some unforeseen circumstances, this purpose was not fulfilled and it was decided to subdivide and sell the property (McLaren 2013). The commissioner included the amount received from sale of property as taxable income because it n argued although the property initially purchase for farming but later it was used for business. The taxpayer argued that the land was sold at the most advantageous means available and it should be not be assessable (Mabe and Kuusaana 2016). Outcome In this case, it was held that just because the taxpayer did not continue with farming and sold the land that does not necessarily mean that the profit becomes taxable. Therefore it was held that the amount received from sale of land is not an assessable income under section 25(1) or 26(a). Casimaty v FC of T 97 ATC 5135 Issue In this case, the issue is to consider whether the sale of land that was acquired for farming is taxable under section 25(1) or section 26(a). Facts of the case The taxpayer acquired farming property from his father. The taxpayer conducted various businesses of farming and fencing in the following years but eventually decided to sell the land, as the business was not profitable and high mortgage interest rate. The taxpayer sold the land by creating eight subdivisions (Prabhakar 2015). The commissioner taxed the profit from sale of land and it was argued by the taxpayer that the sale of the land was just realization of capital assets and hence it is not taxable. Outcome In this case, it was held that the taxpayer did not conduct the business of selling land the profit that was derived is just realization of capital assets. Therefore, it was held that the profit from sale of property is not taxable under either section 25 or section 26(a). Moana Sand Pty Ltd v FC of T 88 ATC 4897 Issue In this case, it is argued that whether profit from sale of land is taxable under section 25(1) or 26(a). Facts of the case The taxpayer acquired land for the purpose working and selling surplus sand. The taxpayer later sold the land to the costal protection board. The commissioner included the proceed received on the sale of land after deducting related expenses in the assessable income of the taxpayer (Kumar et al. 2016). The taxpayer argued that income is not assessable either under section 25(1) or 26(a). Outcome In this case it was held that although the amount received was as a result of single isolated transaction but the profit is taxable as ordinary income under section 25(1). Therefore in the assessable income of the tax payers profit from sale of land is included. Crow v FC of T 88 ATC 4620 Issue In this case, the issue is whether profit in sale of land is to be included in the section 25(1) or section 26(a) of the income tax assessment act 1936. Facts of case The taxpayer borrowed money to purchase land for farming. Then the taxpayer used the land for farming and later sold some portion of the land. The profit from the sale of land was included in the assessable income of the taxpayer as it was considered that the tax payer is engaged in the business of land development (Brooks and Krever 2015). Outcome In this case, it was held that the taxpayer is engaged in the business of continuous land development and hence the profit is taxable as ordinary income. McCurry Anor v FC of T 98 ATC 4487 Issue In this case, the issue is whether profit from sale of land is assessable under section 25(1). Facts of the case In this case, the taxpayers acquired a land with a house. They removed this house and constructed thee firm house on the land. The tax payer sold a unit and earned profit. The commissioner of tax included this profit from sale of land in then assessable income of the taxpayer. The taxpayer object to this and argued that unit was sold due to financial difficulty and they are not engaged in any profit-making venture (Sargeson 2016). Outcome In this case, it was held that the taxpayer entered into a profit-making venture and hence the sale of land is assessable under section 25(1) of the act. Reference Brooks, K. and Krever, R., 2015. The Troubling Role of Tax Treaties.Tax Design Issues Worldwide, Series on International Taxation,51, pp.159-178. Forrest, R. and Murie, A., 2014.Selling the welfare state: The privatisation of public housing. Routledge. Guy, J.A., McIlgorm, A. and Waterman, P., 2014. Aquaculture in Regional Australia: Responding to trade externalities. A Northern NSW case study.Journal of Economic Social Policy,16(1), p.115. Kumar, A., Roy, D., Tripathi, G., Joshi, P.K. and Adhikari, R.P., 2016. 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