OECD Model Tax Convention and Commentary

73

Requirement

Kit    is    a    permanent    resident    of    Australia.    He    was    born    in    Chile    and    retains    his    Chilean    citizenship.    Kit    spends    most    ofthe    year    working   off    the    coast    of    Indonesia    on    an    oil    rig    for    a    United    States    company.    He    was    recruited    for    this    job    in    Australia    and    signed    a    contract   with    the    company    here.    For    the    last    four    years,    Kit’s    wife    has    lived    in    Australia    with    their    two    children.    They    purchased    a    home    in   Australia    three    years    ago.    Kit    and    his    wife    have    a    joint    bank    account    with    Westpac    Bank.    Kit’s    salary    is    paid    directly    into    his    account.   All    of    the    family’s    other    investments,    including    a    share    portfolio    that    generates    dividend    income,    remain    in    Chile.    Kit    gets    one    month    off   from    work    every    third    month    and,    on    these    occasions,    he    meets    with    his    family    either    in    Australia    or    on    holidays    around    South    America   (usually    in    Chile    where    his    parents    reside).    
    
Discuss    whether    Kit    is    a    resident    of    Australia    and    how    his    salary    and    investment    income    would    be    taxed    (10    marks,    max.    1000    words).    
  
Case study 2: ordinary income 
    
Explanations    of    the    respective    outcomes    reached    by    the    courts    in    the    following    cases    which    all    involving        sales    of    land:        

I. Californian    Copper    Syndicate    Ltd    v    Harris    (Surveyor    of    Taxes)    (1904)    5    TC    159    
II. Scottish    Australian    Mining    Co    Ltd    v    FC    of    T    (1950)    81    CLR    188        
III. FC    of    T    v    Whitfords    Beach    Pty    Ltd    (1982)    150    CLR    
IV. Statham    &    Anor    v    FC    of    T    89    ATC    4070        
V. Casimaty    v    FC    of    T    97    ATC    5135    
VI. Moana    Sand    Pty    Ltd    v    FC    of    T    88    ATC    4897    
VII. Crow    v    FC    of    T    88    ATC    4620    
VIII. McCurry    &    Anor    v    FC    of    T    98    ATC    4487    

Solution

TAXATION THEORY, PRACTICE AND LAW

I.    Case Study 1: Residence and Source

A person is presumed be primarily a resident of Australia for taxation purposes if the said person resides in Australia within the ordinary meaning of the term “Resides”. Sub Section 6(1) of the Income tax Assessment Act, 1936 (“ITAA 1936”) lays down 4 tests of Residency in Australia. 

•    The term Australian Resident has beendefined inSection 995-1 ofthe Income Tax Assessment Act, 1997 whichrefers to the definition of “resident” provided by the Income tax Assessment Act, 1936.

•    The term resident or a resident of Australia is defined as per Sub Section 6(1) of the Income tax Assessment Act, 1936, as the following person:
1)    A person other than a Company who resides in Australia and includes a person:
a)    Whose domicile is in Australia
b)    Who has actually been in Australia for more than one-half of the income year whether continuously or intermittently
c)    Any person who is a member of the superannuation scheme  as per a deed under the Superannuation Act, 1990 and Eligible employee under the Superannuation Act, 1976

ATO Interpretative Decision ATO ID 2003/ 1195:

If any person exercises his employment duties completely outside Australia and such person is a dual citizen of the United States of America and Australia, then such person cannot be assessable to taxationas per Section 6-5 (2) of ITAA 97 as per the  ATO Interpretative Decision ATO ID 2003/1195. As per the decision, the relevant tax laws along with the double taxation avoidance agreements as per International tax Agreements Act, 1953. As per OECD Model Tax Convention and Commentary, with respect to interpretation of place of residency or place of abode, the particular individual should have arranged and retained such place for his permanent use as against staying at a certain place to show that the stay was intended to be of shorter length.As per the said Interpretative decision, all stays in each country should be considered to assign preference to a particular country. 

Convention between Australia and the Republic of Chile

Article 4(2) of the Convention between Australia and Republic of Chile dated 10 March 2010 provides a tie-breaker rule with respect to determination of Residency of a person. As per the said Article, if a person is resident of more than one state, then his residential status for the purpose of taxation shall be determined as follows:

Firstly, a person would be resident of the state in which the said person has a permanent home/ abode.

Secondly, if the said person has a permanent home in both the states, then the state where his personal and economic relations are closer, he would be resident of the said state. Mr. Kit’s parents reside in Chile and he is a Chilean Citizen. Mr. Kit has a permanent home in Australia as well in Chile. It is observed that, Mr. Kit has personal and economic ties both with Australia and Chile. Further,Mr. Kit is a Chilean citizen and has all other investments in Chile. Hence, it can be assumed that his personal and economic ties are closer with Chile than with Australia.Further, if the residency cannot be determined as per above methods, then as per Article 4(3) of the Convention, the person shall be resident of the country where he is Citizen i.e. Citizenship shall finally determine the tax residency of the person.  

Other Income:

Interest which is arising in a Contracting State and which is paid to a resident of the other Contracting State may be taxed in that other State as per Article 10 (1) of the Convention between Australia and Chile.  In the given case the Dividend has arisen in Chile and paid to a resident of Chile (for tax purposes). Hence, the dividends received from Chilean sources cannot be taxed as per Section 44(1) (a) of the Income tax Assessment Act, 1936. Similar issue was discussed in ATO interpretative Decision 2004/141 with respect to Australian and US dual resident.Since Mr. Kit is a Chilean Resident, the relevant tax laws do not grant Australia any taxing rights on the dividends received by Mr. Kit. 

Conclusion

It has been concluded that Mr. Kit would be treated as a Chilean resident for Taxation purposes and not an Australian Residentafter considering the facts and circumstances of the case, and the relevant treaty on avoidance of double taxation between Australia and Chile and the comparative Interpretative Circular issued by ATO, Hence, the salary received by Mr. Kit should be taxed in the country where he is regarded as a Resident for tax purposes i.e. Chile.

II.    Case Study 2: Ordinary Income

Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159

The principle laid down in Californian Copper Syndicate Case has consistently guided the decisions of the Court in sales and the assessment of related profits to tax. The said case differentiates between gains arising on sale of Investment being categorised as business Income assessable to tax and not assessable to tax.
If the owner of an ordinary investment sells the sameand obtains a higher price than the original purchase cost, such higher price is not profit which is assessable to Income Tax. However, it is also well established that enhanced values obtained from realisation/ sale/ conversion of securities may be so assessable to tax if what was done was not merely a realisation/ change of investment, but an act done is carrying onof a business. Each and every case should be considered according to its circumstances and facts.In order to ascertain the taxability of Income, it is to be considered whether the sum of gain that has been made is just an enhancement of values by realising the share/ investment, or is it a gain made in an operation of business in carrying out a profit making scheme. Hence, intention of the person making the sale along with facts and circumstances of each case need to be considered. 

Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188

Scottish Australian Mining Co. Ltd wasa coal mining Company which was formed for the purpose of acquiring coal assets in New South Wales from a related Company. However, the Company ceased carrying on the said business.  Early in its operational history, the Company sold all the land parcels available with it and made considerable profit on the same. The Company continued to earn royalties, interest income and other operational income over the period of time.   It was held by the Court that such income realised from selling of capital assets was not assessable as Business Income under Section 25(1) or 26(1) as the Company was not in the business of dealing in land parcels/ real estate even though large parcels of land were sold by the Company. The said act consisted of mere realisation of capital asset and not ordinary course of business. Further, the main object of the Company was Coal mining and not real estate.

FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR

The taxpayer in the said case was incorporated to acquire a block of land to guarantee access to a beachfront to its shareholders. 
It was observed that the Taxpayer conducted the business of land development. There should be a presence of the following for the said income to be taxed as Assessable Income as per Section 25(1) of the Income tax Assessment Act, 1936:

• a)    Profit-making scheme or undertaking – even if it lack the characteristic of repetitive nature.    

• b)    Arising from acquisition/ sale from the said property

• c)    Profit on sale

• d)    Profit-making intention 

Statham & Anor v FC of T 89 ATC 4070

The taxpayers in this case were trustees of the estate of the person who had obtained 240 acres of land for farming purposes in 1970.The said land was realised by way of sub-division after the death of tax payerby a Trustees. The said land was sold by listing it with the real estate agents. It was held that the Owners were not conducting any profit-making business or land-development business. Hence, the process of sale of land by sale would not lead to income generation for the purpose of Section 25(1). Further, it was also not a profit generation exercise arising out of a profit making scheme/ undertaking as the owners were content with selling the land as it was but were unable to do so. Hence, a person who acquires a land for other than land development purposes can obtain the services of others to facilitate sale of his land by sub-division or other structure and the said arrangement would not be treated as a Sale.  

Casimaty v FC of T 97 ATC 5135

The taxpayer sold farming land acquired by him from his father by way of a gift in 1955. The said land was sub-divided and sold out due to financial hardship and ill health.  It was held that the said sale was not assessable to Tax as there was not profit-making scheme/ undertaking as well as no intention to make profit arising out of the said transaction. The facts of the said case are similar to Statham Case. The activity would be classified as a mere realisation of asset in an enterprising manner and not a business transaction. The Court observed the passive role played by the taxpayer in the said sub-division of the sale reflecting the intent to simply realise the land and not make profits from the said transaction. 

Moana Sand Pty Ltd v FC of T 88 ATC 4897

The Companyobtained a coastal land for the purpose of selling sand mined from the said land and realise commercial profits from the same. However, the MOA of the Company stated that the object of the Company was to purchase and take over land parcelsto carryon a working and selling the sand business. It was held even if a particular land has been acquired for more than one motive, then the resultant gains on sale of such land would be assessable to tax under Section 25(1) of the Income Tax Assessment Act, 1936. As the intention of the said exercise was to make profit and the said arrangement was a profit-making scheme. It was held that it was not necessary that the sole/ dominant purpose of the said sale transaction is profit making.  

Crow v FC of T 88 ATC 4620

The tax payer in the given case acquired several blocks of land for the purpose of farming, grazing and growing crops. The tax payer sub-divided the land sold the same over a period of various years to meet the debts that he incurred in order to purchase the said lands. As per the judgement, in order to attract the second limb of Section 26(a), the ultimate subjective purpose of the taxpayer should be taken into account and also actual planning which is done during the course of the said transactions. Although the purpose of securing a profit was not the taxpayer's primary purpose, it will still be deemed to be a scheme amounting to a profit-making undertaking or scheme/ venture. 
It was held that the tax payer carried on the business of land development and hence, the gains realised on sale of the abovementioned lands were assessable to tax. It was held that even if the intention to carry own business or make profit would not have been present, the Taxpayer would be taxed because it would be presumed to be a profit-making scheme or an undertaking. 

McCurry & Anor v FC of T 98 ATC 4487

The taxpayers acquired a piece of land and built townhouses and then all the townhouses were sold for a profit.  It was observed that the land was acquired for the purpose of making a profit on the same thereby attracting tax under Section 25(1) of the Income tax Assessment Act, 1936. It was argued that there was no business venture or undertaking involved in the said arrangement. 

It was observed that if property is purchasedto make a profit in the most advantageous way that may present itself and the taxpayer adopts one of the many options, hence making a profit, he will rightly be said to be carrying out a business/ profit?making scheme:
Further, it was observed that it does not matter if the undertaking or business venture does not exist, the mere intention of the assesse to profit from sale of land would suffice the application of taxation.