Tax Implications of Mining Operations

The assignment examines various court cases related to taxation of income from the sale of land and capital assets. The courts have held that if the intention behind buying the land is to make a profit through business activities, such as mining or sub-division, then the income generated will be taxable as ordinary income. However, if the land was bought with no intention of making a profit, but rather for personal use or farming purposes, then the income from its sale may not be taxable as ordinary income. The assignment also highlights the importance of distinguishing between isolated transactions and business activities in determining the tax implications.

Question 1
Issue
Fred is new in Australia for the purpose of setting up a branch of his own company. The house
that he is residing in during his stay, has been put on lease for 12 months by the owner. He is
being accompanied by his wife, while he left his sons back home. So, will he be an Australian
resident for taxation purposes?
Law
The above scenario entails the laws that are applicable in Australia for the tax purposes. So, the
relevant applicable laws are:
Taxation Ruling 98/17, and
ITAA 1936.
Application
The Ruling 98/17 explicitly talks about the residency and the “resides test” that is used to figure
out whether anyone can reside in Australia (Smith and Richardson, 2005). This definition of the
residency for taxation purposes is also underlined by subsection 6(1) of Income Tax Assessment
Act (1936). The ruling spells out the meaning for resident of Australia in the following ways:
a. Residency in Australia: an individual who is provided with a place to live in the country or
has been residing Australia for a long time.
b. Domicile in the country: if the persons place of living is in the territory of the country and
that has been a permanent place of his stay. Also, it is required that there should be no other
place to live other than Australia then only be the person considered a resident
(Austaxpbr.com.au, n.d.).
c. He/she has been residing in the country for more than half of the period of the taxation. For
the purpose of taxation, the number of days to be counted should be counted from the very
first day of the financial year, which is 1st July of the current year and 30th June of the next
year.
d. Superannuation Fund Test can be used on the basis of his/her registration under
Superannuation Act, 1990. Employee test under Long Service Leave (Commonwealth
Employees) Act 1976. It is also tested that whether the person is a spouse or a child below
the age of 16 years.
The residency status is an important criteria that determines a person’s liability towards
Australian Taxation. So, any individual who passes any of the above tests, shall be considered as
a tax resident of Australia. Section 6(1) of ITAA clearly espouse that all the residents of the
country are taxable for the incomes they earn in the country.
The general meaning of the word “reside” even encompasses the people who are migrating
permanently as well those whose are coming to live for a considerable time. If the migrant comes

for the purpose of permanent stay, his taxation shall start from the first day. However, for first
test, Fred intends to reside for the period of 12 months and possess a place to live in the country.
As for the second test, he doesn’t have domicile of country and his permanent place of residence
is outside the territory of Australia. He fulfills the third test as he has been living for more than
half of the period of taxation.
Conclusion
Fred fulfills two out of four tests, so he is tax resident of Australia.
Question 2
Issue
To determine the existence of the ordinary incomes in the following cases.
Discussion
1. Californian Copper Syndicate ltd v Harris (1904):
The Taxation Ruling 92/3, is applicable in this case where a group of people constituted a
company for the purpose of buying a mining property. The clear intention behind their decision
of buying the minefield was making profit. However, no business was carried out from the mine
and the purchase was a onetime event. Now, a personal exertion is required for the incomes to be
able to become ordinary incomes. The ordinary income comprises of income from employment,
income from business activity or income earned from renting a property or dividends (Prebble,
n.d.). It also consists of certain transactions that were conducted just to make profit. The present
case does not seem to be qualifying of having personal exertion in it as no operations were being
conducting in the mine and hence no business activity took place there. However, the
observations made by the court were that even if a onetime transaction was made, but that
transaction was made for the purpose of profit. Therefore, it had to fall under the category of
ordinary incomes. Also, the proceedings from such sale of mining were to be assessed as per
ordinary income.
2. Scottish Australian Mining co ltd v FC of T
As per the facts, a company made a decision of selling a property on which mining operations
were carried out. The memorandum of the company clearly mentioned that mining will remain
the main object of the company and it is deciding to buy the properties that are rich in mineral
production. As the company is also involved in investment of the capital, so what it does it
purchases the property and use it completely till the time of exhaustion completes. The company
fared soundly in terms of output and the activity was done in a manner, which is suggestive of
business. It was observed that the initial intentions of the company were not to make any profit
by selling the land but only performing mining operations.

In this case, no isolated transactions were made and therefore the sale will transpire to be a sale
of capital asset (Pearson, 2009). Therefore, it was concluded by the court that the sale of land
will not be going raise any tax implications and the income earned in this manner shall not be
assessed as per the rule of ordinary income. Incomes of this kind shall be taxable under head
capital gains.
3. FC of T v. Whit fords Beach Pty Ltd (1982)
The facts say that a company was formed in order to acquire a land. After some time, when the
shareholders of the company were changed, the land development took place and then sold. Later
on the company applied for rezoning in order to make the sub-divisions and finally selling it in
the market. The land was developed as per the requirements and the stakeholders involved in it
were expected to make profits.
As per law, the operations are called business when the activities carried out in it allow the
people to make profits. So, in this case the company was performing land development work and
changing its category into different zones as well as selling it again indicates that business
operations were taking place. The given transaction, however, was not a onetime event and the
new stakeholders were those people who were in the business of developing and selling the land.
Therefore, as per the court observation, the income was taxable or assessable as per ordinary
income.
4. Statham & Anor v FC of T 89
In this case, there were some taxpayers who were trustees of a diseased land. An acquisition of
the piece of a land was made that was used for the purpose of farming. After few years, half of
that land was sold to the people of a company and they were the members of the family of the
deceased. So, as the land acquired by these family members, was being used for raising cattle in
partnership. Finally, due to the non-performance of the partnership, the land was sub-divided and
sold in the market.
So, it was observed that the property was not bought with an intention of making profit and there
was no existence of isolated transaction. The family members were not involved in performing
any type of business activity due to the fact that there was no existence of trade on a regular
basis. As we have already stated that income is usually assessed as per ordinary income, which
should have generated either by making profit due to business activities or any form of isolated
transaction. In this case, none of the above conditions were fulfilled. Therefore, the sale of land’s
income shall not be taxable as per the ordinary income.
5. Casimaty v FC of T 97

As per the facts of this case, a person acquires a land from his father, which was used for the
purpose of farming by father himself, but the intention of the son was to acquire the land for the
purpose of carrying out business activity. However, the rising debt of the person coupled with his
illness, the land was rendered unused and was subsequently sold. It was divided into smaller
pieces and then sold. But before the sale was made, the person had built roads and other facilities
in the land.
The court decided that the building of road and creation of facilities indicated that a business
activity was done, but the capital assets were realized due to the fact that the land was originally
acquired for the purpose of doing farming and living. Also, the court observed that the sale of the
land generated no income whatsoever. Therefore, it declared no taxable ordinary income and
capital gains would be declared if it was sold above the cost of the property.
6. Moana Sand pty ltd v FC of T 88
The facts of this case say a company bought a land in order to sell sand on it. The members of
the company first obtained an application regarding government’s plans for purchasing such a
land. In order to carry out mining, the taxpayer made an appeal that such a land would be
acquired for the purpose of selling it later on in sub-divided buildings. The government in turn
made the payment to the company with an amount of $500,000 in two installments for
preserving the land. It was felt that such income fell under the category of ordinary income
because the intentions of the taxpayer were to make profits by selling the land in the form of sub-
division.
The court held that such a transaction came under isolated transaction, however, the intention of
the sale was profit. Therefore, income was taxable as per the ordinary incomes.
7. Crow v FC of T 88
As per the facts of this case, a significant piece of land was bought for a period of ten years on
loan amount. The purpose of the land was farming, growing crops and grazing. Then,
subdivisions of that land were made and sold as many as 51 blocks by making certain profit. The
court held that due to the fact that the taxpayer knew he would be in debt and would be unable to
pay the loan by the farming activities. Which is why, the sale was done by the process of sub-
division. The activities of sub-division were in continuity that was the suggestive of a business.
Therefore, the profit was made out of this activity and hence was considered taxable under
business income as well as ordinary income (Cahill, 2010).
Hence, the court was of the view that an isolation transaction had been made, however, it was
also felt that there was no business activity performed.
8. McCurry & Anor v FC of T 98

As per the facts of this case, a taxpayer bought a land in order to build a house on it. Then the
house was removed and three townhouses were created instead. An advertisement was put for
the sale of these houses but that act hardly found any buyer. Such arrangement made the person’s
family live in the land until it was sold. After a few years again, a piece of land was bought by
the taxpayer and was subdivided into units and finally sold.
The court held that the intention of purchasing this land was to make profit. In order to make
profit by the realization of the capital asset, the asset is required to be held as an investment. It
was also noted that a constant purchase of land was made, houses were constructed and sold, and
so, it was a suggestive of a business. However, no isolated transaction were carried out there but
the act of sale and purchase was constantly there. Hence, it was treated as a business income and
was assessable under the ordinary income because it was a business income (Beer, 2001).

References
Austaxpbr.com.au. (n.d.). Austax. [online] Available at:
https://austaxpbr.com.au/document/PBR_6970 [Accessed 5 Oct. 2016].
Beer, C. (2001). Property joint ventures – the tax issues. Brief. Real Est. Fin., 1(3), pp.219-230.
Cahill, G. (2010). ATO determines that developer of 22 lot subdivision does not have to register
for GST - Cooper Grace Ward. [online] Cgw.com.au. Available at:
http://www.cgw.com.au/publication/ato-determines-that-developer-of-22-lot-subdivision-
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Pearson, G. (2009). Financial services law and compliance in Australia. Port Melbourne, Vic.:
Cambridge University Press.
Prebble, J. (n.d.). Structural Flaws of Income as a Base for Taxation. SSRN Electronic Journal.
Smith, D. and Richardson, G. (2005). The Readability of Australia's Taxation Laws and
Supplementary Materials: An Empirical Investigation. Fiscal Studies, 20(3), pp.321-349.