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

This document discusses the taxation law related to residency, rental income, and sale of land. It covers the rules and tests for determining residency status, tax obligations for rental income earned through digital platforms, and assessability of profits earned from selling sub-divided land. The document provides a comprehensive analysis of the relevant provisions and case laws.

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:...............................................................................................................................12

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Answer to question 1:
Issues:
Will the taxpayer be treated as the resident of Australia under the definition of
“section 6 (1), ITAA 1936” for the purpose of tax?
Rule:
As given under “s995-1, ITAA 1997” Australian occupant denotes those people that
are living in Australia and includes those individuals who has their permanent residence or
house in Australia, barring when the tax officer is satisfied that the taxpayer has the fixed
home in overseas nation (Braithwaite & Reinhart, 2019). A person would be held as
Australian resident either on the continuous basis or sporadically if they have been present
physical in Australia for a minimum of six months barring when the commissioner is content
that an individual has fixed residence out of Australia and has no purpose of living in
Australia.
There are four test given under “s995-1, ITAA 1997” for ascertaining his or her status
of residence in Australia. they are as follows;
a. Resides Test
b. Permanent place of Abode Test
c. 183-Days Test
d. Superannuation Test
Resides Test:
The term resides implies to live for a considerable time period in Australia. It mainly
involves the extent of fact and degree (Barkoczy, 2016). This mainly involves the behaviour
while physically present in Australia. This mainly involves;

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a. The intention of physically present in Australia
b. Family, business or work ties
c. Maintenance and location of Assets
d. Social arrangements for living
Weightage must be provided to each above outlined factor as it will vary with case
and no single factor will be treated exclusive. The court in “FCT v Joachim (2002)” held
that physically present and intentions may overlap for most of the time nevertheless, there are
some persons that may be considered as residing in Australia (Burton & Karlinsky, 2016).
The primary test is, whether the taxpayer has any kind of continuousness with the place
together with the purpose of coming back to that same place and the assertiveness that the
places is their home.
Domicile Test:
Under this test an individual if domiciled in Australia then they will continue to
remain Australian resident despite they live in foreign nation, unless the ATO is content that
an individual has made their permanent home in another nation. The “taxation ruling of IT
2650” deals with the permanent place of abode out of Australia. Relevant consideration such
as the intended length of individuals that stay in their overseas along with the duration and
continuity of a person’s stay in foreign country (Saad, 2014). The abandonment of any place
of residence in Australia and permanency of association which an individual has with the
specific place in Australia. As held in “Applegate v FCT (1979)” the law court held that the
word permanent implies everlasting and its objectivity is determined each year. The taxpayer
was considered to have permanent place of abode out of Australia.
183-Days Test:

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A person is held to Australian resident on constant or intermittent basis for a
minimum of 183 days or more in the relevant income year.
Superannuation Test:
This test is applied on individuals that are the member of commonwealth superannuation
fund.
Application:
The case study provides that Adam worked in Dubai from 1st November 2017 till 1st
April 2018 and resided in the leased apartment given by the company. Nevertheless, in May
2018 Adam relocated to Dubai for an indefinite time period. Below outlined test is
implemented to determine Adam residency position;
Resides Test: In spite of the fact that Adam has the residence in Australia where his family
resided, this factor cannot be considered significant enough to determine his residency
position. Adam for the first half of 2017/18 was not present in Australia and resided in a
temporary leased apartment in Dubai given by his company. While for 2018/19 he signed the
contract of relocating to Dubai for the indefinite time period. As held in “Joachim v FCT
(2002)” he would not be considered as Australian occupant since Adam was not existent
physically in Australia and only came back for a short visit to spend time with his family.
Domicile Test: Starting from 1st November to 1st April 2017/18, Adam during his
employment visit in Dubai lived in temporary leased apartment that was given by his
employer. This means that his stay was temporary in nature and Adam did not set up any
permanent residence out of Australia. Within the meaning of “section 6 (1), ITAA 1936”,
Adam for 2017/18 will be treated as Australian resident (Thuronyi & Brooks, 2016). Whereas
in 2018/19 after relocating to Dubai for indefinite time period because he had not
conclusively stated his choice of residence in Australia as he bought an apartment in Dubai

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which reflected a durability of association with that place. Referring to “Applegate v FCT
(1979)” Adam will be treated as non-resident of Australia since he only visited for six weeks
all through the year (Chardon et al., 2016). This factor adds weight that Adam within the
provision of “section 6 (1), ITAA 1936” will not be held Australian resident for 2018/19.
183-Days Test:
Starting from 2017/18 and 2018/19 Adam was physically not existent in Australia for
183 days in the concerned income year. Hence, he is not an Australian resident under this
test.
Superannuation Test:
The superannuation test is irrelevant in case of Adam as he does not has membership
with superannuation fund.
Conclusion:
On a conclusive note, Adam for 2017/18 will be treated as Australian resident because
he did not set up any permanent place of abode out of Australia however for 2018/19 Adam
within the provision of “section 6 (1), ITAA 1997” will be held as not an Australian resident
as he successfully passed the residence test.
Answer to question 2:
Issues:
Will the taxpayer be held accountable for tax on earning rental income from renting
out his townhouse on Airbnb? The second issue is whether the taxpayer is under obligation of
registering for GST on renting out the townhouse for Airbnb?

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Rule:
Rent must be considered as price which is paid for using another person’s property
particularly land, building, equipment etc. As a general rule, rent is viewed as ordinary
earnings. It is the payment that is provided by one person in exchange of using the another
person’s property for the specified time period (Evans et al., 2015). Receipt of rent must be
treated as ordinary income under the flow concept because rent flows from investment made
in rental property.
As stated by ATO, where a taxpayer rents out the property or makes an investment in
rental property, they would be required to keep track of the records right from the beginning
and compute the sum of expenses one needs to claim as permissible deductions (Miller &
Oats, 2016). The taxpayer is mandatorily required to declare their income while filing tax
return for the rental property.
The ATO guides the taxpayer regarding the sharing economy and tax. When the
taxpayer rents either in full or a portion of their residential house through digital platform
namely the Airbnb, Home Away or Flipkey then the taxpayer is under the obligation of
keeping track of their records for the income that is earned and declare the same in their
taxable income (Bankman et al., 2019). The taxpayer is also under obligation of keeping their
records of outgoings which they can claim as deductions (Freudenberg et al., 2017). The
taxpayers are not necessarily required to pay GST for the sum of residential rent earned.
Alternatively, GST is not applied on the residential property. The residential property owners
do not need to register for GST relating to rent which is charged and cannot claim GST
credits for rental outgoings.

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Application:
Accordingly, in the present situation of Orpheus has rented his ground floor of his
townhouse in Sydney. Orpheus partially rented out the property to Airbnb and the total days
the property was rented out stood 150 days. The taxpayer must apportion the claim in relation
to the ownership interest as the property was only partially only rented out. The receipt of
rent here by Orpheus should be viewed as ordinary income under the “section 6-5, ITAA
1997” since it comprises of circular flow of income (Sadiq, 2019). Additionally, Orpheus will
only be allowed to claim the outgoings for the period of 150 days only because the property
was only let for rent during those time period. To claim the expenses for income tax
deduction, Orpheus must keep record of those expenses. The rental income that is earned by
Orpheus will be included into his tax return for renting out a portion of his house since the
rent that is received is an ordinary income under the meaning of “section 6-5, ITAA 1997”.
Additionally, Orpheus do not need to register for GST because no GST is paid for
renting out the residential property which is rented out through digital platform. Additionally,
no GST is chargeable on the rent earned by Orpheus for doing Airbnb. This is because the
taxpayer is not performing any kind of business activities.
Conclusion:
Conclusively, rent received from letting out a portion of house is regarded as the
ordinary income and will be taxable as ordinary income under “section 6-5, ITAA 1997”.
Furthermore, Orpheus is not required to register for GST because no GST is payable for
renting out the property through digital platform.

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Answer to question 3:
Issues:
Will the taxpayer be held assessable under “section 25 (1)” or the “section 26 (a)” for
the income earned from selling the sub-divided land in small blocks which was originally
purchased for farming purpose.
Rule:
The land must be viewed as CGT asset and its sale would lead to CGT event A1. As
given in “section 108-10, ITAA 1997” a CGT event A1 happens when the taxpayer sells the
CGT asset. Sub-dividing the land do not lead to sale of land within “section 104-10, ITAA
1997” (Butler, 2019). Accordingly, if the disposal of land by taxpayer results in business or
the part of business then the revenue that is earned from selling the land will be taxable as
ordinary income under the provision of “section 6-5 of the ITAA 1997”. Whereas if the sale
constitutes a mere realisation of capital asset then the sales proceeds derived would be held as
capital in nature.
As defined in “Taxation Determination of TR 97/3” if the profits which is earned
from isolated transaction then it will be treated as income and therefore it will be considered
assessable under “subsection 25 (1) of the ITAA 1936” (Murray et al., 2018). Referring to
the case of “Moana Sand Pty Ltd v FC of T (1988)” both within “section 25 (1)” and the
“section 26 (a)” was applicable to include the sum into the assessable income of the taxpayer
and the sum which was received by the taxpayer during the year as the outcome of single sale
and under the isolated transaction (Woellner et al., 2016). Hence, the profit which was earned
was held as ordinary income. While in another event of “Crow v FC of T (1988)” the
commissioner held that the taxpayer was assessable relating to profits which was derived
from carrying on the business of land development.

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Application:
Joe disposed the land which he had kept it as retirement nest egg for a sum of
$700,000. But when a real-estate agent approached Joe with the offer of constructing eight
townhouse on land, Joe readily accepted the offer and decided to construct eight townhouses
on the subdivided land. Joe also engaged the service of real estate agent and sold each
townhouse for a sum of $650,000. Joe initially bought the land with the intention of keeping
the land as the retirement nest egg. Referring to the decision made in “Moana Sand Pty Ltd v
FC of T (1988)” the profits which was earned from the disposal of land within the ordinary
concepts.
Joe here will be considered assessable for the profits which is earned from selling the
several sub-divided lots. Accordingly, the profits which is earned is generally taxable within
the meaning of “section 25 (1) of the ITAA 1936” as income derived from conducting the
business of land development or under “section 26 (a)” as the profit arising from conducting
the profit making undertaking (Qureshi & Kumar, 2019). The taxpayer here Joe disposed the
land in the enterprising way by undertaking extensive amount work on the land in order to
obtain the best price of the land.
Joe here will be considered for tax relating to profits which is earned from the sale of
land under “section 25 (1)” since he has gone a step ahead of realizing the capital asset and
subdividing as well as sale of land constitutes carrying on the business of land development
(Morgan et al., 2018). In the present case, the extensive development and subdivision of land
by Joe is greater than simple realisation of the asset. It constituted work done in the course of
business activities.

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Conclusion:
On a concluding note, Joe will be treated taxable for the profits obtained from selling
the several lots under “section 25 (1), ITAA 1936” since it amounted to carrying on the
business of land development or profit deriving scheme.
Answer to question 4:
As explained in “section 104-10, ITAA 1997”, a CGT event A1 takes place when a
taxpayer sells the CGT asset. The decision made in “Sara Lee Household & Body Care
(Aust) Pty Ltd v FCT (2000)” held that when an is disposed under a contract, the time of
contract takes place when the CGT event takes place (Morgan & Castelyn, 2018). On the
other hand, when an asset is not disposed under the contract, then the CGT event takes place
when the change in the ownership takes place.
In light of the current case, a contract was entered into by Harrison to sell the
investment property on 14 June 2018 for a price of $1.3 million. Referring to the case of
“Sara Lee Household & Body Care (Aust) Pty Ltd v FCT (2000)” the disposal of
investment property by Harrison resulted in CGT event A1 under the “section 104-10, ITAA
1997” (Pert et al., 2018).
As stated by the ATO if a taxpayer disposes the capital asset especially the real estate
or the shares, they usually make capital gains or loss. A taxpayer in this case is under
obligation of reporting the capital gains and losses in their tax return and pay the taxes on the
capital gains (Robin & Barkoczy, 2019). According to the ATO, acquisition of shares in the
company or in units are held as capital asset just like any other asset for the purpose of CGT.
Capital gains tax is applied on the shares when the CGT event happens or when the asset is
sold by them.

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Harrison in October 1985 purchased shares for $4 and disposed the same in 2018 for
$12. Under the “section 104-10” a CGT event A1 took place for Harrison when the change in
ownership occurred on 20th June 2018 (Brabazon, 2019). The actual transfer of shares
happened on 10th July 2018. As a result, the capital gains would be included into the
assessable income of Harrison for the income year of 2019 since the transfer took place
following 30th June 2018.

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