Taxable Income from Property Subdivision

This assignment analyzes a scenario involving Penny, an individual who subdivided land and constructed houses for sale. It assesses whether the profits from this activity constitute assessable income under Section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997). The analysis considers factors such as Penny's motive for subdividing, the use of marketing services, and relevant tax rulings to determine the tax implications of her actions.

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STUDENT ID:
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Question one
Introduction
The determination of tax residency for a taxpayer is very critical on account of the
differential treatment that is extended to a particular taxpayer based on the underlying tax
residency. This essentially is not limited to the sources of income that are taken into
consideration but also the tax rate that are applied. The ATO offers differential tax rates and
concessions for resident and non-resident taxpayers. In the wake of this differential treatment,
it becomes pivotal to outline the tax residency and then apply the same based on the given
facts of the taxpayer.
PART 1
Issue
The objective is to highlight if Minh for the year 2016/2017 would be considered as a tax
resident of Australia or not.
Relevant Rule
The nodal statute for tax residency status determination is subsection 6(1), ITAA 1936. This
section tends to highlight the various conditions which in turn determine the tax residency of
an individual for the financial year under consideration. Further, a tax ruling TR 98/17 is also
found to be useful as it lists down the various tests that are available to individual taxpayers.
For any individual, in order to get the tax residency, the only criterion is that one of those
tests needs to be satisfied (ATO, 1998). As per TR 98/17 along with the subsection 6(1),
ITAA 1936, the following tests for ascertaining individual residency status are available
(Barkoczy, 2017).
1) Domicile test
In order to oblige with this test, there are two main conditions that need to be fulfilled. The
first condition pertains to the respective taxpayer being an Australian domicile holder in
accordance with the applicable statute i.e. Domicile Act 1982. Another condition that needs
to be fulfilled is that the permanent abode of the individual taxpayer must be situated in
Australia for the year under consideration. Failure to comply with either of the conditions
would lead to non-fulfilment of this test and non-confirming of the Australian tax residency.

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Based on the underlying conditions, it becomes apparent that this is useful in determining tax
residency of Australian domicile holders who tend to stay abroad for extended length of
period on account of myriad reasons (Sadiq et.al., 2016).
2) Resides test
The word “reside” finds no mention in the statute law and hence reliance on various court
cases and tax rulings commentary is the only source to determine the underlying parameters
considered for this test. The key factors in this regards are outlined as follows (Nethercott,
Richardson and Devos, 2016).
 The first factor takes into account the reason for which the taxpayer enters into
Australia. In this regard, the higher the significance, the higher the chances of the
taxpayer being termed as Australian resident. The significant reasons could be
employment (more than six months preferably a year) along with education.
 In accordance with the IRC v Lysaght [1928] AC 234 case, another key parameter to
be considered is the visit frequency to country or origin along with the underlying
reason and the duration of such visits.
 The strength of personal and professional ties that the individual taxpayer has in
Australia and country of origin needs to be compared as it is indicative of the
commitment of an individual towards Australia.
 Also, the nature of social life that the taxpayer tends to reside in Australia and the
similarity of the same to the life in the country of origin is also a significant factor.
Along with the above factors, if required then the nationality of the taxpayer is also taken into
consideration for tax residency determination.
3) Superannuation test
This above test is very specific and applied only for those taxpayers who are government
employees and have to serve abroad due to foreign consignments or deputation on duty for
these employees. The tax residency of these employees is dependent on their participation in
the specific superannuation funds by way of regular contributions. If the obligation in relation
to the dedicated superannuation fund is complied with, then irrespective of other conditions
such as the duration of stay, visit of Australia, presence of family would not be considered
and the underlying taxpayer would be classified as Australian tax resident (Woellner, 2014).

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4) 183 day test
This given test is applied for determining the tax residency of foreign residents. In order to
comply with the given test, the respective taxpayer needs to fulfil the conditions that have
been outlined below (CCH, 2013).
 The respective taxpayer should have spent 183 days at a minimum in Australia being
physically present in the financial year for which the tax residency is under
consideration. It is not essential that this stay should be at one go or continuous and
hence can be done on intermittent basis.
 Also, it is essential that there must be intention on the part of the taxpayer to settle on
a permanent basis in Australia in the long term. This intention may be expressed
through actions in this regard or an explicit statement regarding the future intent.
Failure on the part of the taxpayer to comply with either of the two conditions outlined above
would imply that the concerned taxpayer would not be categorised as a tax resident of
Australia (Deutsch et. al., 2016).
Application
The relevant facts are summarised as indicated below.
 The country of origin for Minh is Malaysia.
 A work visa was granted to Minh in June 2016 and he migrated to Australia with
family with the intention of starting a business.
 A family home is purchased in Melbourne where he starts living with his wife and
children.
 However, Minh continues to have strong business interests in Malaysia and hence
needs to stay there for quite some time.
 Meanwhile his family continue to stay in Australia and the children are enrolled in
local school.
In the wake of the above facts, the tax residency of Minh (the taxpayer) needs to be
determined for 2016/17.
1) The domicile test would not be applicable for Minh as he does not possess a domicile of
Australia since he has just migrated to Australia on a work visa.

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2) Also, the superannuation test is not applicable in case of Minh as he is not a government
employee who is serving abroad.
3) Further, 183 day test would be applicable for Minh considering that that he is not an
Australia resident. However, based on the information provided, it is apparent that Minh
has spent only 120 days in Australia in the year FY2017 and thus fails to satisfy the
minimum stay period condition of 183 days. Further, the intention to settle in Australia is
also lacking on part of Minh. Hence, this test is failed.
4) The last test that is applicable is resides test. However, even though his reason for
migration is significant in terms of employment and subsequent business but he has not
established any business in Australia. Further, for more than half the year, he continues to
be in his country of origin maintaining very strong professional ties (stronger than
Australia). Also, he maintains a flat in Kuala Lumpur and has cultural and social ties as
well. Thus, considering the above, it would be fair to infer that this test is also failed.
Conclusion
On the basis of the above discussion, it would be fair to conclude that for the year 2017/18,
Minh would not be considered as an Australian tax resident and hence would be considered
as a foreign tax resident.
PART 2
Issue
The main concern is to determine the impact of residency of Minh on the tax treatment
extended to the investment income and assessibility of business income that is being earned
from Malaysia.
Relevant Rule
The tax residency is vital primarily because the assessable income determination is driven by
the same. In accordance to s. 6-5(2) ITAA 1997, in case the given taxpayer is not a tax
resident of Australia, then only the income arising from Australia would be taxable in
Australia (Barkoczy, 2017). The foreign income if any for such a taxpayer would not be
assessable in Australia. On the other hand, as per s. 6-5(3) ITAA 1997, in case the given
taxpayer in an Australian tax resident, then the income from all the sources (i.e. domestic and

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foreign) would be taken into consideration for computation of assessable income and
determining of the tax liability (Nethercott, Richardson and Devos, 2016).
Application
As has been highlighted above, Minh for the year 2016-17 is a foreign tax resident. Thus, in
accordance with the relevant statute, no foreign income would contribute to assessable
income. As a result, the business income along with investment income that is procured from
Malaysia would be considered as foreign income and hence would not be subject to any
taxation in Australia.
Conclusion
No tax would be levied on the income that Minh derives from Malaysia in the form of
investment and business income as these are categorised as foreign income and the same is
not assessable for foreign tax residents such as Minh.
Question two
Introduction
For deriving assessable income, there are various means that have been prescribed in the tax
law prevalent in Australia. In wake of the same, it is imperative that the various provisions
regarding the same are outlined and then applied to the given case. Further, the amount of tax
liability amounting from the application of different rules would also tend to vary which has
also been outlined. Besides, the most likely scenario in relation to application of statute
would be identified taking into consideration the available facts along with relevant case law
and tax rulings.
1) Issue
The key concern in this given case is to ascertain the three alternative ways in which the sales
proceeds arising from the three townhouse sales can be recognised with regards to tax
purpose.
Relevant Rule

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One of the key sections pertaining to assessable income is s. 6(5) ITAA 1997. It highlights
that the income derived from ordinary concepts are referred to as ordinary income. Based on
case laws and tax rulings, a plethora of sources have been identified in this regards. One of
these is business income which along with employment income contributes to assessable
income. However, it is essential to segregate business activity and hobby by considering the
various measures identified in the commentary of the Evans v. F.C. of T(1989) 20 ATR
922case (Gilders et. al., 2016).
While any regular business or employment activities for earning money is assessed under s.
6(5), any isolated transactions which has been enacted by the taxpayer in order to earn money
is assessed under s. 15(15) ITAA 1997. The only main criterion for this section is that from
the outset, there must be an intention to earn profit which has been the key driver prompting
the taxpayer to undertake the activity (Sadiq et. al., 2016).
Another contributor to assessable income is in the form of statutory income. As the name
suggests, for this particular income, there are dedicated statute which need to be referred to.
One of the key contributors to statutory income is in the form of capital gains. These typically
would realise when there is sale of any capital asset. Assuming that this sale does not
constitute the business of the underlying taxpayer, the proceeds would be capital in nature
and hence tax free (CCH, 2013). However, considering the asset cost base and the sale price
of the asset, it is possible that the capital gains may have been derived by the taxpayer under
s. 104-8 ITAA 1997. In case of these capital gains, these would contribute to the income of
the taxpayer which would be subjected to capital gains tax (Barkoczy, 2017).
Application
Alternative Way:1
In the light of the given facts where Penny’s profession is not stated, it could be assumed that
she is a contractor who deals in real estate properties. As a result, she borrowed money and
conducted business operations by constructing four identical homes and selling three of these
identical houses while retaining the fourth for her private use. Thus, the proceeds that would
be derived from sale of three houses would be termed as assessable income under s 6(5) and
taxable income would be derived post adjustment for deductible expenses.
Alternative Way:2

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In this case, it is assumed that Penny is not in the profession of contracting or dealing with
real estate properties. As a result, the profits that the taxpayer Penny derives on account of an
isolated transaction would be termed as assessable income under s.15(15). The presence of
profit motive behind sub-dividing is apparent. Also, the using of marketing services for
deriving the optimum selling price further indicates the intent to maximise profit which is
what prompted the construction of four houses at the first place.
Alternative Way: 3
In this case, it is assumed that intention to profit was not present for Penny and hence the
taxpayer has merely realised a capital asset which was purchased earlier. In such a scenario,
the proceeds from the sale of the house would be termed as capital proceeds which would not
be taxed. However, capital gains would be computed on the same and CGT would be paid on
the net capital gains available after any deduction and concessions that may be applicable.
Conclusion
Hence, the given transaction can be recognised through the use of s. 6(5) (Assessable
income), s. 15(15) (Isolated transaction profits) or s. 108(10) (Capital gains).
2) The assessable income under alternative approaches needs to be determined.
Alternative Approach 1: Assessable income (s. 6(5))
Total proceeds derived from the sale of the three houses = $ 3 million
Cost of construction for four houses = $ 1million
Assuming proportionate division of expenses, construction cost for three houses = (3/4) *1 =
$ 0.75 million
Further cost of the vacant land = $ 1 million
Assuming equal land area division for all the four houses, land cost for three houses = (3/4)
*1 = $ 0.75 million
Hence, deductions would be available for the above expenses and then taxable income would
be computed (Gilders et. al., 2017).

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Alternative Approach 2: Assessable income (s. 15(5))
Total proceeds derived from the sale of the three houses = $ 3 million
Cost of construction for four houses = $ 1million
Assuming proportionate division of expenses, construction cost for three houses = (3/4) *1 =
$ 0.75 million
Further cost of the vacant land = $ 1 million
Assuming equal land area division for all the four houses, land cost for three houses = (3/4)
*1 = $ 0.75 million
Hence, profits = 3-1.5 = $ 1.5 million
The above amount would be considered as assessable income under this approach (Woellner,
2014).
Alternative Approach 2: Assessable income (s. 108(10)
Cost base of the property = Cost of land + Cost of construction = $1 million + $ 1 million =
$2 million
However, the above is for the whole property which consists of four houses, hence the cost
base needs to be adjusted accordingly = (3/4)*2 = $ 1.5 million
Proceeds from the sale of the three houses = $ 3 million
Hence, capital gains = 3-1.5 = $ 1.5 million
Assuming that the sale happened within 12 months of purchase of land, hence the discount
method is not applicable and hence CGT would be applicable on the complete capital gains
of $ 1.5 million derived above (CCH, 2013). It is noteworthy that the marketing cost for sale
of house has been considered to be zero for this computation.
3) It would be inappropriate to assume that Penny is a builder or contractor and therefore the
derived proceeds should not be considered as assessable income under s. 6(5). In relation

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to capital gains, it would have to be assumed that the activity of Penny particularly in
relation to sub-division was not related to profit making. Clearly, this is not the case since
she borrowed money as she clearly had the hope that she can sell these houses for a higher
amount and hence make profits from land subdivision. Thus, while the purchase of land
was essentially not driven by profit, it is very apparent that construction of the four
identical house and relevant subdivision coupled with marketing are driven by profit
motive (Barkocy, 2017). Hence, it would be appropriate to realise the profits from this
isolated transaction as assessable income under s 15(15).
Conclusion
On the basis of the above discussion, it is apparent that the given sale of subdivided houses
would be regarded under the aegis of s. 15-15 ITAA 1997. This is because the sub-dividing
activity seems to be driven from profit motive which is confirmed through the use of
marketing services for higher price extraction. Hence, the assessable income would
essentially comprise of the profits that the taxpayer tends to derive on the sale of the three
houses.

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References
ATO (1998), Rulings: TR98/17, ATO Website, [online] available at
https://www.ato.gov.au/law/view/document?Docid=TXR/TR9817/NAT/ATO/00001
[Accessed September 25, 2017]
Barkoczy, S. (2017), Foundation of Taxation Law 2017, 9thed.,North Ryde: CCH
Publications
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian tax
handbook 8th ed., Pymont: Thomson Reuters,
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding taxation
law 2016, 9th ed., Sydney: LexisNexis/Butterworths.
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual
2016, 4th ed., Sydney: Oxford University Press
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A
(2016) , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia