Taxation Law: Residency Test, Rental Income, Sale of Land

This document discusses the residency test for Australian taxation purposes, tax liability for rental income from Airbnb, and tax implications of subdividing and selling land. It includes relevant rules and applications, and is applicable to students studying taxation law.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to question 1:.................................................................................................................2
Issues:.....................................................................................................................................2
Rule:.......................................................................................................................................2
Application:............................................................................................................................4
Conclusion:............................................................................................................................5
Answer to question 2:.................................................................................................................5
Issues:.....................................................................................................................................5
Rule:.......................................................................................................................................5
Application:............................................................................................................................6
Conclusion:............................................................................................................................7
Answer to question 3:.................................................................................................................7
Issues:.....................................................................................................................................7
Rule:.......................................................................................................................................7
Application:............................................................................................................................8
Conclusion:............................................................................................................................9
Answer to question 4:.................................................................................................................9
References:...............................................................................................................................11

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Answer to question 1:
Issues:
Whether the taxpayer will be held as the Australian resident for the taxation purpose relating
to the year 2017/18 and 2018/19 under the legislative sense of “section 6 (1), ITAA 1936”?
Rule:
Denoting explanation in “s995-1, ITAA 1997” Australian resident includes an
individual besides company who is living in Australia and includes those individuals that are
having their domicile in Australia only when the commissioner is content that the taxpayer
has the fixed dwelling place outside Australia (Brauner & Stewart, 2016). A person will be
held Australian resident if the person has been living in Australia either in breaks or regularly
for no less than six months of year unless the taxpayer proves the taxation commissioner that
he or she has their fixed place of dwelling outside Australia and has no intention of living in
Australia.
Referring to “section 995-1, ITAA 1997” to determine the residency status of an
individual there are four test (Grange et al., 2014). They are;
1. Resides Test
2. Domicile Test
3. 183-days Test
4. Commonwealth superannuation Test
Resides Test:
The term resides denotes that to live in Australia for the substantial time period. This
largely involves determining the extent of fact and degree. Accordingly, as per “TR 98/17”
the behaviour of the taxpayer generally involves the extent of existence in Australia, business

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or work purpose, family or social arrangements of living along with the overall time of
presence in Australia. The court in “Joachim v FCT (2002)” held that physical presence and
intention of living in Australia might correspond for most of time but there are some persons
that are commonly considered as residing in Australia (James, 2015). The central focus under
this test is that whether the individual has any continuous relation with the place together
with the aim of coming back to Australia and their attitude towards the place that forms their
continuous home.
Domicile Test:
Accordingly, under “section 6 (1)(a)(ii)” an individual is held to be Australian
resident if their domicile is in Australia except the taxpayer proves that he or she has their
permanent place of dwelling out of Australia (Kenny, 2013). Domicile is ascertained under
the “Domicile Act 1982” and includes person based on their origin of birth. Referring to “IT
2650” the commissioner views that the intended and the actual length of stay of an individual
in the foreign country and includes the intention of abandonment of residence the taxpayer
had in Australia. Accordingly, in “FCT v Applegate (1979)” the law court held that
permanent does not means everlasting or forever and it is evaluated objectively every year.
183-Days Test:
Under this test an individual is held to be the Australian resident if he or she has been
in Australia for a period of six months in the particular income year either on continuous
basis or intermittently, except when the taxpayer proves the commissioner that he has no
intention of taking up Australian residency (Krever, 2013).
Commonwealth Superannuation Test:
This test is applied on individuals that are the member of commonwealth super fund
and they are treated to be Australian resident for taxation purpose.

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Application:
The case study provides that Adam was employed in Dubai from 1st November 2017
till 1st April 2018 and lived in Apartment which was leased by airline company. While in
May 2018 Adam agreed to locate for employment purpose for an indefinite time period. To
determine the residency test of Adam the following test are applied;
Resides Test: Despite that Adam has his residence in Australia and his family has been
living there, this factor should not be considered sufficient enough to determine his residency
status. For the year 2017/18, Adam was physically not present in Australia for one half of the
income year. However, the apartment in which is stayed was temporary in nature. Hence, for
2017/18 he will be held Australian resident. While in 2018/19 he would not be held as
Australian resident since he is employed in Dubai for the indefinite time period. Referring to
“Joachim v FCT (2002)” Adam under this test will not be held as Australian resident as for
most of the 2018/19 he was not present physically in Australia (Sadiq & Coleman, 2013). He
only returned to visit his family for a short stay in Australia.
Domicile Test: From 1st November to 1st April 2017/18 Adam lived in the apartment that was
given by his company. Consequently, this means that his stay was temporary in nature and
has not set up any permanent place dwelling out of Australia. For 2017/18 Adam will not be
held Australian resident within the meaning of “section 6 (1), ITAA 1936”. Whereas in
2018/19 on moving to Dubai, Adam also did not explain conclusively that his choice of
domicile is Australia. Referring to “FCT v Applegate (1979)” his permanent place of
dwelling is in Dubai and for 2018/19 he only visited for six weeks which further adds weight
that he is not resident of Australia under “section 6 (1), ITAA 1936”.

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183-Days Test:
Adam during the year 2017/18 and 2018/19 was not present in Australia physically.
Hence, he will not be held as Australian resident under this test.
Superannuation Test:
The Superannuation Test is irrelevant in the situation of Adam because he is not the member
of super fund.
Conclusion:
On a conclusive note, for 2017/18 Adam has satisfied the residency test and domicile
test. Therefore, under “section 6 (1), ITAA 1997” he will be treated as Australian resident.
However, for 2018/19 Adam has successfully passed the residency test and hence he is not an
Australian resident under “section 6 (1), ITAA 1997”.
Answer to question 2:
Issues:
Whether the taxpayer will be liable for tax for the rental income derived from the
Airbnb? Whether the taxpayer is under obligation of registering for GST for renting the house
under Airbnb?
Rule:
Rent must be considered as the price which is paid as the right of using other person’s
property. This includes land, building, equipment etc. As per “section 6-5, ITAA 1997” rent
is treated as ordinary income. Rent must be considered as payment which is paid by one
person in exchange of using another person’s property under the given time period (Sadiq et
al., 2014). Under the flow concept the receipt of rent is held as ordinary income that is
derived from the investment property.

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According to ATO if the taxpayer has rented their property or made an investment in
rental property, then they would be needed to maintain the records right from the start to
compute the overall amount of expenses the taxpayers is required to claim as deduction
(Woellner, 2013). The ATO requires the taxpayer to declare any kind of rental income
derived in their tax return from the rental property.
Guidance related to sharing economy and tax is provided to taxpayer from ATO.
When the taxpayer rents out in whole or partly their residential property or unit through the
digital platform namely to Airbnb, Home Away or Flipkey then in such situation the taxpayer
should maintain the records of income earned and declare it in their taxable income.
Furthermore, the ATO advises the taxpayer to maintain the records of expenses as well
because they will be able to claim the same (Ato.gov.au, 2019).
The taxpayers, as per the ATO does not need to pay or register for GST for the rent
derived from the digital platform. Alternatively, not GST is payable under the residential
property and hence no GST credits can be claimed for the rental expenses.
Application:
The case study provides that Orpheus has rented the ground floor of his townhouse
that is located in Sydney. The property was partially rented to Airbnb for the overall period of
150 days during the year. The taxpayer must apportion the claim in respect of his ownership
interest because the property was only partially rented out. Under “section 6-5, ITAA 1997”
the rental income that is earned by Orpheus would be treated as ordinary income because it
comprised of regular flow of income (Murray et al., 2018). As a result, Orpheus must
maintain the record of income and expenses well that was occurred while renting out the
property. The rental income derived by Orpheus will attract tax liability since it constitutes an
ordinary income under the “section 6-5, ITAA 1997”.

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With reference to ATO, Orpheus is not required to apply or register for GST because
no GST is required to be paid on the rent derived from residential property that is rented to
digital platform. Therefore, no GST liability rises for Orpheus for the rent received from
doing Airbnb since no business activities is being conducted by taxpayer here.
Conclusion:
Conclusively, rental income derived by Orpheus will be treated as ordinary income
under “section 6-5, ITAA 1997” while he is not required to be registered for GST for renting
out his townhouse under Airbnb.
Answer to question 3:
Issues:
Whether or not subdividing and sale of land in small blocks which was actually
bought for farming purpose will be treated as taxable income under the “section 25 (1)” or
the “section 26 (a)”?
Rule:
Land is treated as CGT asset and sale of land will result in CGT event A1. As defined
in “section 108-10, ITAA 1997” CGT event A1 happens when a CGT asset is disposed by
the taxpayer. As per “section 104-10, ITAA 1997” sub-dividing the land does not result in
sale (Morgan & Castelyn, 2018). The general rule says that, if the disposal of land results in
business or forms the part of business then the proceeds that is earned held as ordinary
income under “section 6-5 of the ITAA 1997”. If the sale leads to simple realisation of land,
then the proceeds derived would be held as capital amount.
Referring to “Taxation Determination of TR 97/3” whether the profits made from
isolated transaction is treated as income and assessable under “subsection 25 (1) of the ITAA

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1936”. As held in “Moana Sand Pty Ltd v FC of T (1988)” both “section 25 (1)” and
“section 26 (a)” is applied to include into the taxable income of taxpayer and the amount
which is received by taxpayer during the year formed the outcome of single sale within the
isolated transaction (Robin & Barkoczy, 2019). Consequently, the profit was held as taxable
earnings within the ordinary concepts. Correspondingly, the court in “Crow v FC of T
(1988)” held that taxpayer was chargeable for profits because the taxpayer was carrying on
the land development business.
Application:
The land was sold by Joe for $700,000 which he kept it as the nest-egg for the
retirement. While on one occasion he was approached by a real estate developer that
proposed to sub-divide and build eight townhouses on land. The proposal was accepted by
Joe and eight townhouses was constructed. Joe finally with the help of real-estate agent sold
each townhouse for $650,000. The land was initially bought with the sole purpose of using it
as retirement nest-egg. Referring to the court’s decision in “Moana Sand Pty Ltd v FC of T
(1988)” the profit made from selling the land should be viewed as ordinary income.
Selling the sub-divided land and making profits thereon from the several lots would
attract tax liability. As the general rule of “section 25 (1) of the ITAA 1936” the profits made
from the sale of sub-divided land constitutes an ordinary income obtained from carrying the
business of land development or taxable under “section 26 (a)” as income from the profit
making arrangement (Morgan & Castelyn, 2018). The land was sold by Joe in an enterprising
manner and also took extensive amount of work on land to get the best price.
The extensive development in the form of subdivision amounted to more than the
simple realisation of the asset because it represented the work done in the ordinary business
course. Joe will be treated taxable under “section 25 (1) of the ITAA 1936” relating to

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profits derived from the sale of land because he has gone further than simple realisation of the
capital asset and his activities constituted conducting the business of land development.
Conclusion:
Under the “section 25 (1), ITAA 1936” Joe will be treated taxable for the profits
made from the sale of several lots because it amounted to ordinary income from the profit
making undertaking.
Answer to question 4:
According to “section 104-10, ITAA 1997”, a CGT event A1 takes place when CGT
asset is sold. The law court in “Sara Lee Household & Body Care (Aust) Pty Ltd v FCT
(2000)” held that when the asset is sold based on contractual terms, the contract actual takes
place when the CGT event occurs (Woellner, 2013). Instead, when an asset is not disposed
under the contract then the CGT event takes place when there are change in the ownership.
As evident in the case of Harrison, he formed a contract of selling the investment
property on 24 January 1999 but the property’s title was actually sold for $1.3 million in
2018. Referring to the case of “Sara Lee Household & Body Care (Aust) Pty Ltd v FCT
(2000)” the sale of investment property by Harrison results in CGT event A1 under “section
104-10, ITAA 1997”.
Accordingly, with respect to the capital gains tax if a taxpayer disposes any capital
asset especially the real estate or the shares in company or unit in trust there can be any
capital gains or capital loss (Krever, 2013). Therefore, the taxpayers are required to report in
their tax return the amount of capital gains and capital loss and should pay taxes on the
capital gains made thereon. According to the ATO shares held in the company or units in
trust is treated in the identical way as any other asset for capital gains tax purpose. For

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investors capital gains tax is applied on the shares when CGT event happens or when the
taxpayer sells the shares held by them.
In the current situation Harrison purchased shares in during October 1985 for a
purchase price of $4. The shares were eventually sold for $12 in 2018. With reference to
“section 104-10” the CGT event A1 has happened since the change in ownership took during
20th June 2018. However, the transfer happened on 10th July 2018. As a result, the capital
gains will be included in the assessable income of Harrison in 2019 only because the actual
transfer took place only after 30th June 2018.
Calculation of Capital Gains Tax
In the Books of Harrison Carter
For the Year ended 2018
Particulars Amt ($) Amt ($)
Capital gains on Sale of Investment Property
Sales Proceeds $ 13,00,000.00
Less: Purchase Price $ 8,00,000.00
Gross Capital Gains (Proceeds Less Purchase Price) $ 5,00,000.00
50% CGT Discount $ 2,50,000.00
Net Capital gains $ 2,50,000.00
Calculation of Capital Gains Tax
In the Books of Harrison Carter
For the Year ended 2019
Particulars Amt ($) Amt ($)
Capital Gains on Sale of Shares
Sales Proceeds $ 1,20,000.00
Less: Purchase Price $ 40,000.00
Gross Capital Gains (Proceeds Less Purchase Price) $ 80,000.00
Less: Capital Loss $ 65,000.00
Net Capital gains $ 15,000.00

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References:
Ato.gov.au. (2019). The sharing economy and tax. Retrieved 26 July 2019, from
https://www.ato.gov.au/General/The-sharing-economy-and-tax/
Brauner, Y., & Stewart, M. (2016). Tax, law and development.
Grange, J., Jover-Ledesma, G., & Maydew, G. (2014) principles of business taxation.
James, S. (2015) The economics of taxation.
Kenny, P. (2013). Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. (2013). Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Morgan, A., & Castelyn, D. (2018). Taxation Education in Secondary Schools. J.
Australasian Tax Tchrs. Ass'n, 13, 307.
Morgan, A., Mortimer, C., & Pinto, D. (2013). A practical introduction to Australian
taxation law. North Ryde [N.S.W.]: CCH Australia.
Murray, I., Taylor, J., Walpole, M., Burton, M., & Ciro, T. (2018). Understanding Taxation
Law 2019.
Robin & Barkoczy Woellner (Stephen & Murphy, Shirley Et Al.). (2019). Australian
Taxation Law Select 2019: Legislation And Commentary. Oxford University Press.
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). Principles of taxation law 2014.

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Woellner, R. (2013). Australian taxation law select 2013. North Ryde, N.S.W.: CCH
Australia.