ACC30005 Taxation

Case study Analysis

Case 1

Summary of key facts

In this scenario, Lin works as an auditor for a major shipping company’s Australian division. Lin owns a house in Melbourne, Australia, where he lives with his family. Despite this, he intends to reside in Australia in the long run. While he was stationed in Singapore for two years, he and his family stayed in Australia. He was compensated with a yearly salary of 200,000 dollars. The majority of the money, on the other hand, went toward providing for the family and paying back the family loan. It cost him $50,000 to buy a stake in Commonwealth bank, which he later put on the market for $100,000.

Issue required to be decided

Lin’s residency status for tax purposes in the current year is the first question that must be answered in this scenario. Lin’s wage and capital gain income for the current income year will be affected by his residential status, which must be established next. The current year’s income tax obligation for Lina must be determined.

Applicable Law

Sections 6-5(2) and 6-10(4) of the Income Tax Assessment Act 1997 is applicable in this case as it provides that if a person is considered an Australian resident for tax purposes. As per this section, all income received from non-Australian and Australian sources is taxed. If the person is a non-resident, only Australian-sourced income is taxed (CCH Australia Limited, 2011). Thus, determining a person’s residency status for tax purposes is critical. Because the residence status influences the taxpayer’s tax burden, it is required to identify the residential status annually. As per section 995-1, a resident in Australia is called an Australian Resident who give taxes in-country (McCouat, 2012).

Paragraph 11 of Taxation Ruling 98/17 states that the fundamental criteria for establishing residential status are whether the person is a resident for tax purposes (Maisto, 2010). If the taxpayer is a resident in the common sense of the word, then further ways of establishing residency are not required. According to Section 6-1 of the Income Tax Assessment Act 1936, four tests standards sets tax residency for a person (CCH Australia Limited, 2011):

• Resident as per the ordinary concept defined in law;
• Domicile test;
• 183 days test;
• Superannuation fund test

As per the analysis of the case, it can be stated that Lina spent two years in Singapore, while his family remained in Australia. Based on the foregoing, Lin is an Australian resident for tax purposes since he has a permanent place of habitation in Australia. Also, his family lives in Australia, so it was not leased. Based on this, Lin is a resident for tax purposes. Lin has been paid a salary of AU$200,000 by the Singapore Company in this particular instance, as remuneration. The remuneration should be considered foreign employment income for tax purposes. Lin has also accrued a short-term capital gain as a result of the acquisition and selling of shares in the Commonwealth Bank of Australia. It is the individual’s responsibility to pay income tax on the capital gain. The following is a computation of Lin’s taxable income, which is shown below:

Table: Calculation for Taxable Income

Source: Self-Made

As per the help of the above-presented table, it concluded that the total taxable income of Lin was $300000. However, he would only pay AUD 100000 as a tax if Lin was not a resident taxpayer.

Conclusion

As per the above discussion, it concluded that the total taxable income of Lin is $300000 because his income is governed as per section 6-5 of the Income Tax Assessment Act 1997, which described income received by residents from different outside sources from Australia.

Case 2

Summary of key facts

In this particular instance, Winne sold a horse breeding company, but the purchaser was doubtful to acquire the property on which the business was located. She attempted to sell the estate in option but was unable to get the resort price she desired. The real estate agent encouraged her to sell the property in smaller parcels rather than as a whole. She was in the process of converting the property into townhouses when we met. She was in charge of all aspects of the building, marketing, and sales job alone. As a result, the most important facts of the instances that may be noticed are as follows:

• Winne had a wide tract of property, which she split into portions for her use.
• She turned the land into a piece of real estate, which she then sold on the open market.

Issue to Decide

In this case, it is here to determine if the consequences of tax for a sale of real estate should treat to an isolated transaction. Further, it is required for determining the assessable income from different alternatives.

Applicable Laws

As per the above-defined situation, Taxation Ruling 92/3 is applied which deals with profit determination as an isolated transaction.

 Section 25(1) of the Income Tax Assessment Act 1936 is an effective rule to describe whether profit earned from the sources is assessable as isolated transactions (Australian Taxation Office, 2022). Illustrated are the terms “isolated transaction” and “extraordinary transaction”. An isolated transaction is one in which a non-business taxpayer engages. An individual’s circumstances determine whether or not profit from isolated transactions should be recognized as income under the general idea of income. To qualify as income, a transaction must include two aspects. The taxpayer engaged in the transaction intending to benefit. In addition, the profit was earned in the course of business. Paragraph 8 of the judgment emphasises that creating a profit is not the main aim. But creating a profit should be the main goal. A transaction must be made in the course of commercial activity, according to Paragraph 11 (Australian Taxation Office, 2022). The transaction might be out of the ordinary. For purposes of establishing whether a single transaction constitutes a commercial transaction, the judgment states in Paragraph 13 that:

• The type and features of the party transacting;
• The entity’s size and scope of operations;
• The transaction’s size, intricacy, and character;

In this scenario, Winnie has made a profit by developing and selling land. But she was not in the property development industry. In the case of Westfield Ltd v FCT, a difference is drawn between commercial transactions and business transactions (CCH Australia Limited, 2014). The tax commissioner argues that in both cases, the purpose to benefit from the transaction is required. Winnie hoped to benefit from the land’s sale. Moreover, profits from land sales were made in the course of business. Thus, Winnie’s transaction is unique. The isolated profit from the transaction should be included in regular income. The assessable income under this technique is presented below

Table: Assessable Income

Source: Self-Made

As per section 102-5 of the Income Tax Assessment Act 1997, net capital gains are to be included in the taxable income of an individual. It is the selling of Capital Gain Tax assets that trigger the Capital Gain Tax event. In the Income Tax Assessment Act of 1997, Section 100-25 offers a list of CGT Assets, including land (CCH Australia Limited, 2022). As a result, the sale of land may be used to determine capital gains and losses. Considering that the property was acquired in 2005, the discount approach is only appropriate for determining the gain on sale of a business. A breakdown of how capital gains are calculated is provided in the following paragraphs:

Table: Calculation for Capital Gain

Source: Self-Made

Calculation of capital gain

The capital gains technique of computing income results in a lower taxable income. A capital gain of AUD 10.75 million from the sale of land should be included in assessable income. Selling land does not count as independent transactional revenue; hence the money from it should not be included.

Conclusion

From the above discussion, it concluded that the discount method is applicable in capital gain in the context of the land that was purchased in 2005. Further, the capital gain is less than the profit from the isolated triangle action.

References

Australian Taxation Office (2022). Taxation ruling. Retrieved from https://www.ato.gov.au/law/view/document?DocID=TXR/TR927/NAT/ATO/00001&PiT=99991231235958

CCH Australia Limited. (2014). Westfield Ltd. v. Federal Commissioner of Taxation, Federal Court of Australia, 29 August 1990. Retrieved from https://iknow.cch.com.au/document/atagUio543830sl16773088/westfield-ltd-v-federal-commissioner-of-taxation

CCH Australia Limited. (2011). Australian Income Tax Legislation 2011: Income Tax Assessment Act 1997 (div 719 1-end). CCH Australia Limited.

CCH Australia Limited. (2022). SECTION 100-25 What are CGT assets? Retrieved from https://iknow.cch.com.au/360document/atagUio695785sl24364354/income-tax-assessment-act-1997-section-100-25-what-are-cgt-assets/overview

Maisto, G. (2010). Residence of Individuals Under Tax Treaties and EC Law. IBFD.

McCouat, P. (2012). Australian Master GST Guide 2012. CCH Australia Limited.