Taxation Law For Double Taxation Agreement

Meaning of Permanent Establishment

According to the ATO the meaning of the permanent establishment has been defined under “subsection 6 (1) of the ITAA 1936”. This includes business operations that is carried out by the Australian resident entity at with the help of fixed business place in alternative nation (Brauner and Stewart 2013). In other words, permanent establishment refers to the business functions that is performed by a resident of foreign entity at or with the help of fixed business place in Australia. 

As defined under “Australian/UK DTA (Double Taxation Agreement) 1946” the profits of a business of a contracting state would be held liable only in that nation unless the enterprise is conducting its business in the alternative contracting nation with the help of permanent establishment located in the other nation (Jover-Ledesma 2014). If a nation is conducting the business in a way that the profits of the company might be taxed in the other nation but only to an amount is attributable to that permanent establishment.

In ascertaining the profits of the permanent establishment, the enterprise must be permitted to claim deductions expenditure of the enterprise being the expenses that are incurred for the purpose of permanent establishment (Grange, Jover-Ledesma and Maydew 2014). The “Australia/UK DTA 1946” provides an explanation that companies which is incorporated in UK and carrying on the business in Australia then the profits might be taxed in other nation but simply to the amount which is attributable to that permanent establishment. 

According to the “Article 5 (5) of the OECD” the activities of making contracts does not result in permanent establishment if the contracts are carried out by the independent agent acting on behalf of the ordinary business course. 

The terms of resident and resident of Australia has been defined under the “subsection 6 (1) of the ITAA 1936”. As per the “subsection 6 (1)” a person apart from the company that resident in Australia includes the person that has the domicile in Australia unless the commissioner is content that the person has his or her permanent place of abode outside of Australia (Kenny 2013). Within the meaning of “subsection 6 (1)” a person is treated as Australian resident who has been in Australia, constantly or in breaks for more than one-half of the income year, unless the commissioner is content that the person’s place of abode was out of Australia and he or she does not intend to take up the residency in Australia.

Domicile is treated as lawful conception to be ascertained under the “Domicile Act 1982”. The common law rule is that a person obtains the domicile by birth the domicile of their origin, being the nation of his birth and his or her father’s permanent home. In “Applegate v FCT (1979)” the high court held that permanent does not represents everlasting or forever and the same is evaluated objectively every year (Krever 2014). The taxpayer here had the permanent place of abode out of Australia.

The current situation of Andrew highlights that he was born in Adelaide and travelled to Mexico and America to play leagues for 2 and 15 months. Andrew later returned to Australia to play for Adelaide. Referring to the interpretation of “Domicile Act 1982” Andrew acquired the Domicile of his origin since he was born in Australia, Adelaide. Andrew’s stay in Mexico and America was temporary or transitory type.

Australian/UK DTA

Within the meaning of “subsection 6 (1) of the ITAA 1936” Andrew is an Australian resident and also fulfils the requirement of “Domicile Act 1982”. 

If the taxpayer is the foreign resident, the taxpayers are generally taxed based on the ordinary and statutory income that is sourced in Australia. As held in “FC of T v French (1957)” source refers to the place where the services are performed (Morgan, Mortimer and Pinto 2013). As evident the sum of $145,000 paid to Andrew for his baseball skills were sourced in Australia. Andrew would be held liable for taxation since sign-on fees received were sourced in Australia.        

The “taxation ruling of TR 98/17” discusses regarding the benefits that is received by the individuals from the sporting indulgence. As per the ruling payments received may constitute benefit which is assessable income given the payment received is associated or in respect of employment or services provided (Sadiq and Coleman 2013). The judgement made in “FC of T v Reuter (1993)” payments that are assessable income comprises of salaries, wages, sign-on fees or retention payment for continuance of services. The payments are taxable income since it includes exploitation of the personal skills in the commercial manner with the objective of gaining reward. The sign-on fees of $145,000 received by Andrew from his sporting engagement constitute assessable ordinary income under “section 6-5 of the ITAA 1997”. The amount received was for commercial exploitation of skills developed and used for sporting excellence. 

An Australian resident is held liable for taxation for their income obtained from all around the world. Andrew rented out the house in America during his stay in Australia and derived rental income during the balance of the year. The court in “FCT v Adelaide Fruit and Produce Exchange Co Ltd” held that periodic receipt obtained from rental properties attracts tax liability (Sadiq et al. 2014). Therefore, the rental income obtained from the rental property in America constitute ordinary income under meaning of “section 6-5, ITAA 1997” which is liable for taxation. 

The first strand of Myer articulated the principle that extraordinary or the isolated transaction that meets three specific criteria would be held as ordinary income (Woellner, 2013). The requirement includes;

1. There must be a business functions or commercial transaction
2. A profit deriving objective was made while entering the transaction
3. The profit was derived by a consistent means with actual intention

A: Profit as a result of business operations:

Extraordinary transaction happens when the business takes an activity which results in proceeds that are not the proceeds obtained in the ordinary business course. As the transaction is undertaken by the business, the first requirement was met. With the isolated transactions. The first requirement would not be automatically met. An isolated transaction would be only met when the first requirement involves commercial transaction (Pinto 2013). The condition is likely to be met when the transaction that was entered was commercial in type. However, the condition is less probabilistic to meet the requirements if the transaction is of the type that a wage earner that may enter into.

B: Intention of making profit when entering the transaction:

As held in “FCT v Cooling (1990)” the profit making objective does not need to be the dominant intention of the taxpayer (Braithwaite 2017). Given the transaction entered into by the taxpayer does not has the profit deriving intention when purchasing the asset, but held the profit deriving objective when selling the asset. Therefore, the second requirement of the first strand would not be met.

C: Profit made in consistent with the actual intention:

To meet the first strand of Myer, the manner in which the profit is actually made should be in agreement with the actual intention of profit making by the taxpayer while entering the transaction.

As held in “Westfield v Ltd (1991)” the taxpayer bought a piece of land with the intention of jointly developing the shopping centre on the land (Robin 2017). The taxpayer knew the possibility of selling but did not had the actual intention of selling it. The court held that proceeds did not constitute ordinary income since the transaction lacked entrepreneurial intention and not from the normal proceeds of the taxpayer’s business. Therefore, the first strand of Myer was not satisfied.

The case of Westfield has been cited as contrary to the view of Myer. In contrast to judgement in “FCT v Westfield (1991)” the profits and gains made in the normal course of business represented income but does not follows the judgement of “Myer Emporium Ltd v FCT (1987)” that the profit obtained by the taxpayer from the entrepreneurial activity would be held as income.

The disagreement overemphasizes the principle of Myer’s Case (Roe 2017). In “FCT v Westfield (1991)” even though the profits or gains derived from the ordinary course of business and does not follows the decision in “FCT v Myer 1987” that profit made by the taxpayer in the course of business will be of income in type. 

Calculations of Capital Gains
For the year ended 30 June 2018
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

The sale of rental property constituted “CGT event A1” under “section 104-10(1)”. In the current situation Dale has obtained capital gains from the disposal of property.

As per “section 108-10(2)” collectibles include any artwork, rare folio and postage stamp which is entirely kept for their personal enjoyment or usage. Capital gains or loss should be ignored under “section 118-10(1) of the ITAA 1997”. The purchase of price stamp is below the mark of $500 and hence the capital gains derived from the sale of stamp is disregarded here.

Personal use asset is defined under “section 108-20(2)” that is mainly used or kept for personal enjoyment (Burton 2017). This includes the example of television, mobile phone, boat or bicycle. However, the capital loss must be disregarded under “section 108-20(1)”. The sale of boat resulted in loss therefore it should be excluded from capital gains.

Capital gains made from the shares or unit are treated in the similar way just like the other asset for taxation purpose. The sale of shares on 1/4/14 resulted in capital loss. Dale further sold the diamond ring that was acquired for $750. As the diamond ring is treated as collectible with the cost base of $500 the capital gains made is included for