LAW 6001 Taxation Law: Meaning of Permanent Establishment

2.

Discuss with reference to relevant case law: 

1. Whether Andrew a resident of Australia for tax purposes

2. The source of the $145 000 paid for his baseball skills

3. Whether he is liable for taxation in Australia on the $145000 for his baseball skills

4. Whether Andrew is liable for tax on the rental income received from America during the balance of the year 

Answers:

1. A: 

As defined under “Subsection 6 (1) of the ITAA 1936” a statutory meaning of the term permanent establishment has been made. The term permanent establishment in relation to an individual together with the commonwealth or state constitutes a place through which a person carries out the business activities (Barkoczy, 2014). The definition of permanent establishment is limited to overview of abovementioned but also comprises of location from where business is carried on with the assistance of agent.

B: 

According to the “UK/Australian Double Taxation Agreement 1946” an explanation has been provided that profits of the company in the contracting nation would attract tax liability in that state except for it is noticed that the firm is carrying out its business functions in the contracting nation with the help of permanent establishment in another state. Referring to the provision explained under paragraph 3 of “Double Taxation Agreement 1946” where a firm of a contracting country conducts the business in another contracting country with the help of permanent establishment in the other country would attract a tax liability based on the company tax rate of 30% (Coleman & Sadiq, 2013). Similarly, the UK/Australia double taxation agreement explains that a company incorporated in UK performing the business in Australia with the help of permanent establishment would attract taxation at the current tax of 30% for the proceeds which is attributable to that division.

C: 

As defined under the “Article 5 (5) of the OECD” independent agent acting on behalf of the enterprise to regularly conclude agreements or negotiate the essentials of materials convention in the company’s name would considered sufficient to result in permanent establishment (Grange et al., 2014). However, the conclusive committeemen should be such that the authority must be exercised habitually rather than once or twice. Furthermore, majority of the negotiations such as drafting or signing of the contracts must occur in the country of host.

2.

1:

“Section 995-1 of the ITAA 1997” explains that residents or the occupant of Australia refers to the individual apart from company that lives in Australia and comprises of person that has domicile in Australia but for the taxation officer is content that an person’s perpetual place of dwelling is out of Australia (James, 2013). The current case study provides that Andrew McSwington by birth was an Australian and in the off season he went to Mexico for two months and America for a period of 15 months. He later came to back to Adelaide to play for a minor league team for a time of fifteen months.  

The “Taxation rulings of TR 98/1” explains that an individual residency status is vital in determining whether an individual would held accountable for taxation purpose.

The Domicile Test with respect to “Domicile Act 1982” explains that a person is the Australian occupant assumed the person residence is in Australia, except the taxation officer is content that individual’s perpetual place of residence is out of Australia (Jover-Ledesma et al., 2015). In “FC of T v Applegate (1979)” the law court said that perpetual does not mean constantly instead it is adjudged factual each year. The intended and the actual length of overseas stay is regarded substantial element.

Similarly, the above stated explanation provides that the continuity of Andrew’s stay in overseas nation was lasted for 2 and 15 months respectively. With reference to “Domicile Act 1982” he acquired the domicile in nation of his origin. The stay of Andrew in Mexico and America was of transitory nature (Kenny, 2013). With respect to “Domicile Act 1982” Andrew and within the meaning of “subsection 995-1” Andrew is an Australian resident for Australian taxation purpose.

Under the 183 days a person would be held as the Australian occupant if the individual has actually been living in Australia for greater than six months either continuously or intermittently unless the person takes up the resident outside of Australia (Krever, 2013). As in case of Andrew it is noticed that he is present in Australia intermittently for greater than six months and under the provision of 183 days test he would be treated as the Australian occupant.

The superannuation test is not applicable on Andrew as he is not an eligible employee of commonwealth public servants.

With reference to above stated test it can be stated that Andrew satisfied the Domicile Test and 183 days’ test. Therefore, for taxation purpose he is an Australian resident.

2: 

According to the “Taxation Ruling of TR 99/17” benefits derived by the person from the sporting involvement would be treated as the assessable income under the ordinary concept of “section 6-5 of the ITAA 1997”. Referring to “Reuter v F.C. of T (1993)” payment received from signing of fees is assessable as income given such income is received from the commercial exploitation of the sportsperson skills for public fame or image (Sadiq, 2014). As Andrew singed for a minor league team the source of $145,000 Andrew’s commercial use of sporting skills in pursuit of sporting excellence. The sign of fees of $145,000 constitute revenue in nature as it is obtained from carrying of business of sports and the same will held calculable as ordinary earnings under “section 6-5 of the ITAA 1997”.

3: 

Liability to tax originates for a person on yearly basis based on the conditions that are applied in the relevant income year. The receipt of $145,000 by Andrew would be held assessable under the provision of “subsection 6-5 of the ITAA 1997” because it involves commercial exploitation of the skills (Woellner, 2013). The money amounts to revenue obtained from carrying on of sporting business.

4: 

Individuals that are Australian resident are taxed from their worldwide source of income. A house was bought by Andrew in America and was rented out while is stay in Australia. The taxation commissioner in “Adelaide Fruit and Produce Exchange Co Ltd v FC of T (1932)” held that the periodic receipt from the rental properties are held as assessable income (Woellner et al., 2013). The rental income that is received by Andrew from his rental property attracts tax liability under the “section 6-5 of the ITAA 1997” as income from ordinary concept.

3: 

The taxpayer in the Myer Emporium was regarded as the parent company of the group of companies together with the 100% own Myer Finance Ltd. The business was carried on by the group mainly retail trading and property development. In the process of group reorganisation a sum of $80 million to the secondary company for the tenure more than 7 years at rate of 12% interest every year (Pinto, 2013). As the part of consideration the company taxpayer paid $45.37 million as the lump sum. The amount was computed based on the outstanding interest which was payable at the discounted rate of 16% yearly.

The taxation commissioner treated the lump sum $45.378 million as the taxable earnings for the year ended 30 June. On making plea, the Federal Australian Court and Supreme Court of Victoria held that sum was non-taxable capital receipt (Robin, 2017). In the later appeal the commissioner of Full High Court held that amount in issue was income as per ordinary concept under the provision of “subsection 25 (1)” and “paragraph 26 (a)” as the profit originating from the carrying on of the profit making structure.  

First Strand:

The first strand of “Myer Emporium Ltd vs F C of T (1987)” is associated with the receipts and profits obtained from the isolated transactions (Blakelock & King, 2017). The first strand explains that the income from the isolated business transaction would be treated as revenue given that it was entered into with the purpose of making profit and the transaction carried commercial in nature or possessed the character of business deal.

According to the court submission the first strand foundations represents the business proceeds principle under the concept of income. For a certain number of reasons, the court of law was reluctant to hold or readily accept that the profit or receipt from the isolated transaction was income or assessable (Fry, 2017). More accurately, the full High Court stated that in Myer three stands of opinions were combined to discourage the court of law in accepting the simple proposition that the presence of intention or the objective of making profit is sufficient itself to consider the receipt as income.

The first of strand of “Myer Emporium Ltd v F.C of T (1987)” submitted extensive proposition that profit or the receipt that is made in the ordinary business course is income (Maley, 2018). The Full High Court in its decision clarified that profit made from the such transaction was regarded as income under the first strand of case. The court of law referred to second limb of “section 26 (a)” and held that the profit was taxable income.

In contrary to the decision, in “Westfield Ltd v FCT of T 91 ATC”, even though the profit or gains that is made in the ordinary business course constitutes income but does not allows follows the decision held in “FC of T v Myer Emporium Ltd (1987)” that every single profit derived by the taxpayer in the commercial activity would be income in nature (Jones, 2017). To express such proposal would remove the difference between the income and the capital profit. It is essential the objective of profit making should happen in respect to specific procedure.

The decision of Full High Court held that payment would be considered as income under the ordinary concept and would be taxable under “section 25 (1) of the ITAA 1997”. Furthermore, there should be no sole or principal purpose is needed to enter in the profit generating scheme. While in “Westfield Ltd v FC of T 1991” the selling of land was out of the taxpayer’s ordinary business activity or essential event thereof. This is because the taxpayer’s business activity was the construction of shopping centres. The income obtained from the resale of land was capital and cannot be held as income.

The divergence overstates the principle of Myer’s case. In “Westfield Ltd” each receipts from business is not treated as income in nature despite it seem opposing to the Act. The principle stated in Myer’s case is only applied on situations where the taxpayer intends to make profit and indulge in selling the business transactions.     

4. A: 

According to “section 8-1 of the ITAA 1997” any form of losses or outgoings that are preliminary in starting the revenue generating or business activity and are not incurred “in the course of” then such expense is not allowed for deduction. In “Softwood Pulp & Paper v FCT” the company incurred expenditure to carry out the feasibility research of determining whether the establishment of the new paper producing mill would be viable or not (Sadiq, 2014). The commissioner of taxation in its verdict explained that the feasibility expenses that was incurred was not in the course of income producing activity. Therefore, the taxpayer was denied deduction for preliminary expense.

B: 

An expenditure is only considered for deductions as the outgoing that is occurred in producing the taxable income and the same should be incidental and relevant to that end. In other words, for an expenditure to quality within the subsection, it must be both sufficient and necessary where the instance of loss or outgoings must be found in generating taxable earnings (Krever, 2013). The court of law in “Ronpibon Tin NL v FCT (1949)” held that the expenses would only qualify as deduction if the expenses are incurred in producing the taxable income.

As understood from the above stated judgement expenses on interest on loan carries sufficient evidences and necessary character of generating assessable earnings. The commissioner of taxation held that the proportion of interest on loan that was occurred by the taxpayer was in the course of deriving the taxable income (Sadiq, 2014). Therefore, under the general provision of “section 8-1 of the ITAA 1997” a deduction is allowable.

C: 

Expenses that are post cessation in nature might be allowed as deductions if the event of loss or outgoing is noticed in the operation of business which was previously carried on by the taxpayer in deriving the taxable income. In “FCT v Brown (1999)” the taxpayer and his wife borrowed a sum of money from the bank so that they can fund the purchase of business which they carried on in partnerships (James, 2013). The taxpayer subsequently sold the business however continued the payment of interest on loan since the proceeds obtained from sale was not sufficient to discharge the unpaid sum of debt. The commissioner of taxation held that deduction was allowable since the event of payment of interest was noticed in respect of loan entered by the partnership to carry on the business for generating assessable income.

References:   

Barkoczy, S. (2014). Foundations of taxation law.

Blakelock, S., & King, P. (2017). Taxation law: The advance of ATO data matching. Proctor, The, 37(6), 18.

Coleman, C., & Sadiq, K (2013). Principles of taxation law.

Fry, M. (2017). Australian taxation of offshore hubs: an examination of the law on the ability of Australia to tax economic activity in offshore hubs and the position of the Australian Taxation Office. The APPEA Journal, 57(1), 49-63.

Grange, J., Jover-Ledesma, G., & Maydew, G. 2014 principles of business taxation.

James, S ( 2013). The economics of taxation.

Jones, D. (2017). Mid market focus: Income or capital?: Taxpayer draws a blank. Taxation in Australia, 51(7), 357.

Jover-Ledesma, G. (2014). Principles of business taxation 2015. [Place of publication not identified]: Cch Incorporated.

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.

Maley, M. N. (2018). Australian Taxation Office Guidance on the Diverted Profits Tax.

Pinto, D., (2013). State taxes. In Australian Taxation Law (pp. 1763-1762). CCH Australia Limited.

Robin, H., (2017). Australian taxation law 2017. Oxford University Press.

Sadiq, K. (2014). Principles of taxation law.

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

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2014), Australian taxation law select.