Taxation Law: Permanent Establishment, Resident Status, Capital Gains and Deductible Expenses

This article discusses the concepts of permanent establishment, resident status, capital gains and deductible expenses in taxation law. It covers relevant sections of the ITAA 1936 and 1997, as well as case law and ATO rulings. The article provides answers to hypothetical scenarios and calculations of capital gains.

Running head: TAXATION LAW
Taxation Law
Name of the Student
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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to A:..........................................................................................................................2
Answer to B:..........................................................................................................................2
Answer to C:..........................................................................................................................2
Answer to question 2:.................................................................................................................3
Answer to 1:...........................................................................................................................3
Answer to 2:...........................................................................................................................4
Answer to 3:...........................................................................................................................4
Answer to 4:...........................................................................................................................4
Answer to 3:...............................................................................................................................5
First Strand of Myer:..............................................................................................................5
Answer to question 4:.................................................................................................................7
Answer to question 5:.................................................................................................................8
Answer to A:..........................................................................................................................8
Answer to B:..........................................................................................................................9
Answer to C:..........................................................................................................................9
Answer to question 6:.................................................................................................................9
References:...............................................................................................................................11

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Answer to question 1:
Answer to A:
As per the Australian Taxation Office, the word permanent establishment is explained
under in “subsection 6 (1) of the ITAA 1936”. Permanent establishment refers to carrying of
business by an Australian resident entity through the fixed place of business in another nation
(Grange et al., 2014). Permanent establishment means the business operations which is
carried on by the foreign resident entity in Australia through a fixed place of business.
Answer to B:
According to “Australian/UK DTA (Double Taxation Agreement) 1946” profits of
business of contracting nation would attract tax liability in that country only given the
enterprise is performing the business in other contracting state through the permanent
establishment situated in other country (James, 2014). Given the business is conducted in a
country in an enterprising way and the profits of that company may be held for taxation in
another country but till the extent that is attributable to that permanent establishment.
To determine the permanent establishment profits, the enterprise should be allowed to
claim an allowable deduction for expenses which is occurred from permanent establishment.
As per the explanation of “Australia/UK DTA 1946” companies that are established in UK
and performing the business in Australia then the profits should be taxed in the other country
but merely to the amount that is resultant from the permanent establishment.
Answer to C:
As per the “Article 5 (5) of the OECD” the activities of making contracts does not
lead to permanent establishment given the contracts is performed by the independent agent
that are acting on behalf of the business course.

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Answer to question 2:
Answer to 1:
The definition of resident and resident of Australia is defined in “subsection 6 (1) of
the ITAA 1936”. According to the “subsection 6 (1)” an individual beside company that are
the resident of Australia comprises of person that have their domicile in Australia given the
commissioner is satisfied that the person has their permanent place of abode out of Australia
(Jover-Ledesma, 2014). As per the “subsection 6 (1)” an individual will be considered as the
Australian resident that is residing in Australia, either constantly or intermittently for at least
one-half of the income year, except the commissioner is satisfied that an individual’s place of
residence is out of Australia and he or she do not have any intention of taking up the
residency out of Australia.
Domicile is regarded as the legal concept which is stated in “Domicile Act 1982”.
However, the common rule is that an individual legally acquires the domicile of their origin
by virtue of their country of his or her birth. Citing the case of “Applegate v FCT (1979)” the
court of law upheld that permanent do not mean everlasting or forever and objectivity is
assessed each year (Kenny, 2013). The taxpayer in Applegate had the permanent place of
dwelling outside Australia.
As evident in the present case of Andrew it is understood that he was born in
Australia, Adelaide and travelled to America and Mexico to play leagues for 2 and 15 months
respectively. Andrew then came back to Australia to play for Adelaide. Citing the
explanation of “Domicile Act 1982” Andrew obtained the Domicile of their origin because
he was born in Adelaide, Australia. Furthermore, the stay of Andrew in America and Mexico
was transitory in nature.

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With respect to “subsection 6 (1) of the ITAA 1936” Andrew should be treated as the
Australian resident and also meets the criteria of “Domicile Act 1982” for having domicile in
Australia.
Answer to 2:
Given the taxpayer is the overseas resident, the taxpayer would be held liable for tax
for the ordinary and statutory income which is sourced in Australia. Denoting the judgement
in “FC of T v French (1957)” source means the place where the services are actually carried
out (Krever, 2015). Evidently, the sum of $145,000 that was paid to Andrew related to
baseball skills was sourced in Australia. Andrew will be taxable for the receipt of sign-on
fees that was sourced in Australia.
Answer to 3:
As stated under “taxation ruling of TR 98/17” benefits obtained from the sporting
indulgence would be regarded as taxable income if the receipt of payment is related to the
services provided in regard to employment or services provided. As held in “FC of T v
Reuter (1993)” the taxable income includes the wages, salaries, sign-on fees or retention
payment which is received for continuance of services (Morgan et al., 2013). The payments
would be considered taxable because it constitutes the use of personal ability in a commercial
way for the purpose of obtaining reward. Similarly, the receipt of sign on fees of $145,000 by
Andrew from his sporting involvement is an ordinary income that are taxable under “section
6-5 of the ITAA 1997”. The sum received was for commercial use of skills that was
developed and used for sporting excellence.
Answer to 4:
An individual who is a dweller of Australia would be required to pay tax for income
that is acquired from all corners of world. During Andrew’s stay in America he bought a

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house to use it as his base during home and away season. The house was rented out by
Andrew and derived rental income. Citing the law court judgement in “FCT v Adelaide
Fruit and Produce Exchange Co Ltd” the periodic receipt that is obtained from the rental
properties would be held taxable (Sadiq & Coleman, 2013). As a result, the receipt of rental
income derived from the rental property in America will be treated as ordinary income within
the meaning of “section 6-5, ITAA 1997” and hence will attract tax liability.
Answer to 3:
First Strand of Myer:
As per the principle of Myer, extraordinary or isolated transaction that satisfies the
three specific criteria will be treated as ordinary income. The conditions include the
following;
a. There should be business functions or profitable transaction
b. Profit making purpose was prevalent while entering into the transaction
c. The profit was made in consistent with the original intention
A: Profit as a result of business operations:
A business occurs an extraordinary transaction when the activities give rise to revenue
which is not obtained from the ordinary business course. The transaction was entered into by
the business which ultimately results in meeting of requirements (Sadiq et al., 2014).
Furthermore, the criteria of isolated transaction are met when the first criteria of commercial
transaction are met. The requirements are met when the transaction entered is of commercial
in nature. Nevertheless, the condition is less likely to satisfy the criteria if the transaction is in
the type that the wage earner might enter in.

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B: Profit making intention while forming transaction:
Citing the case of “Cooling v FCT (1990)” the profit making purpose should not be
the sole intent of taxpayers (Woellner, 2013). If the transaction that is entered by taxpayer did
not had any profit making purpose while buying the asset, however the profit making purpose
while selling the asset. As a result, the second requirement of the first strand is not met.
C: Profit made in agreement with the original intention:
To meet the first strand of Myer, the way based on which the profit is obtained in
consistent with the original intention of making profit by the taxpayer at the time of entering
transaction.
Referring to “Westfield v Ltd (1991)” a piece of land was bought by the taxpayer with
the intent of developing the shopping centre (Robin, 2017). A possibility of selling the land
was known to the taxpayer and did not had the original intention of selling the land. The court
of law held that the profits from the land was an ordinary income because the transaction was
short of commercial intention and not from the ordinary business proceeds of the taxpayer.
As a result, the first strand of Myer is not satisfied.
The Westfield case has been quoted in contrast to the view of Myer. Contrary to the
judgement held in “FCT v Westfield (1991)” profits and gains derived from the ordinary
business course constituted income but did not followed the decision made in “Myer
Emporium Ltd v FCT (1987)” (Burton, 2017). The profits that was made by the taxpayer
was from the commercial activity and was treated as income.
The difference overemphasizes the principle held in “Myer Emporium Ltd v FC of T
(1987)” (Miller & Oats, 2016). In “Westfield v FC of T (1991)” despite the profits made

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from the normal business course but it hardly follows the judgement made in “Myer
Emporium Ltd v FC of T (1987)” and the profit derived by the taxpayer was in the course of
business and constitute income in nature.
Answer to question 4:
Particulars Amount ($) Amount ($)
Capital Proceeds: Proceeds from sale of rental Property
CGT Event A1: Considerations - (Section 104-10(1)) 340000
Cost Base (section 110-25)
Element 1: Purchase (Cost Base) 180000
Capital Gains 160000
Capital Proceeds: Proceeds from Shares on 1/4/2014
CGT Event A1: Considerations - (Section 104-10(1)) 2000
Element 1: Purchase (Cost Base) 10000
Capital Gains / Losses 8000
Capital Proceeds: Proceeds from sale of Diamond Ring
CGT Event A1: Considerations - (Section 104-10(1)) 4000
Element 1: Purchase (Cost Base) 750
Capital Gains / Losses 3250
Capital Proceeds: Proceeds from sale of 2500 Shares on 1/6/14)
CGT Event A1: Considerations - (Section 104-10(1)) 18750
Element 1: Purchase (Cost Base) 18000
Capital Gains / Losses 750
Net Capital Gains / (Loss) 156000
Calculations of Capital Gains
For the year ended 30 June 2018
Under “section 104-10(1)” the disposal of rental property gave rise to “CGT event
A1”. As evident the sale of property yielded capital gains for Dave. On the other hand,
“section 108-10(2)” defines collectible as an artwork, rare folio or postage stamp that is kept
by the taxpayer for their own use and enjoyment.
Accordingly “section 118-10(1) of the ITAA 1997” defines capital gains or loss from
collectible must be ignored if the purchase price of asset is below $500. The cost price of

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stamp was below $500 therefore capital gains made from the sale of stamp by Dale would be
ignored. Dale sold the diamond ring that had the cost base of $500 for 750. The capital gains
from the collectible is included for determining the net amount of capital gains for the year.
As per “section 108-20(2)” personal use asset includes mobile phone, boat, yacht or
television that are usually kept for taxpayer’s own enjoyment (Fleurbaey & Maniquet, 2018).
Capital loss made under “section 108-20(1)” from the sale of personal use asset should be
ignored. The disposal of boat yielded capital loss and the same is excluded from capital gains.
As per the ATO capital gains derived from the shares or unit are treated in the similar
manner just like the other asset for the purpose of taxation (Bankman et al., 2017). Dale sole
shares on 1/4/14 which yielded capital loss. In the later part Dale sold shares that were
acquired on 3/4/1984. The capital gains made were from the pre-CGT asset therefore it is
excluded from capital gains. Additionally, Dale sold shares that was purchased on 25/5/1996
for 18750. The disposal resulted in capital and it is included capital gains.
Answer to question 5:
Answer to A:
According to “section 8-1 of the ITAA 1997” outgoings which is pre-commencement
to the revenue deriving activities and not in the ordinary business is non-deductible expenses.
The judgement in “Softwood Pulp & Paper v FCT” held that the feasibility expenses which
was occurred by the taxpayer to set up the paper producing mill was preliminary in nature
(Murphy & Higgins, 2016). Consequently, a business incurring interest on loan at the
preparatory phase would not be allowed for deduction because there is no relation with the
income generating activities. For a business to progress from the preparatory stage it is
necessary that the business activities have begun.

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Answer to B:
The law court in “Ronpibon Tin NL v FCT (1949)” explained the “Incident and
Relevant Test”. Under this test, accordingly an expenditure would be allowed for deduction
as outgoing given the expenses are incurred in producing the assessable income and the same
must be relevant and incidental to that extent (Buenker, 2018). For an expense to qualify
within the initial part of subsection it is essential and satisfactory that the losses or outgoings
are incurred in producing taxable income. The interest on loan forms the essential feature of
generating assessable income. The court held that the interest on loan would be allowed as
deductible expenses.
Answer to C:
As evident in “FCT v Brown” the taxpayer borrowed money from bank to purchase a
deli business to operate under partnership with his wife. The business was eventually sold by
the taxpayer but he continued to pay interest on loan as the sales proceeds were inadequate to
pay off the debt. The commissioner allowed the taxpayer to claim deduction because the loan
was taken at the time of carrying on the business under partnership with the intent of
producing income.
Answer to question 6:
According to “section 8-1” a person is entitled for an allowable deduction if the
expenses incurred were in the ordinary business course for the derivation of assessable
income (Miller & Oats, 2016). A taxpayer taking loan to purchase the rental property, the
interest incurred is allowed for deduction.
Approximately 40% of the Australian mortgages are based on interest. Interest would
probably become Australia’s subprime. The interest on loan enables the investors borrow
more and invest in the rental property. As a result the investors not only increase gains from

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the rental property but also face higher debt. The sum of interest on loan is treated as the sign
of hypothetical bubble. Therefore, it implies that the property owners does not have much
equity when the property prices falls.

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Bankman, J., Shaviro, D. N., Stark, K. J., & Kleinbard, E. D. (2017). Federal Income
Taxation. Wolters Kluwer Law & Business.
Buenker, J. D. (2018). The Income Tax and the Progressive Era. Routledge.
Burton, M. (2017). A Review of Judicial References to the Dictum of Jordan CJ, Expressed
in Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the
Purposes of the Australian Income Tax. J. Austl. Tax'n, 19, 50.
Fleurbaey, M., & Maniquet, F. (2018). Optimal income taxation theory and principles of
fairness. Journal of Economic Literature, 56(3), 1029-79.
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identified]: Cch Incorporated.
Kenny, P. (2013). Australian tax. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. (2015). Australian taxation law cases 2015. Pyrmont, NSW: Thomson Reuters.
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taxation law. North Ryde [N.S.W.]: CCH Australia.
Murphy, K. E., & Higgins, M. (2016). Concepts in Federal Taxation 2017. Cengage
Learning.
Robin, H. (2017). Australian taxation law 2017. Oxford University Press.

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Sadiq, K., & Coleman, C. (2013). Principles of taxation law 2013. Sydney, N.S.W.: Lawbook
Co./Thomson Reuters.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., & Ting, A. (2014)
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