PROBLEM
Mr. Smith is a computer consultant who for many years worked for a company in Melbourne deriving an annual salary of over $100,000. In 1984 he purchased a large parcel of land approximately 50 kilometers from the city. The purpose of the purchase was to provide his young family with the advantages of growing up in a rural environment, far from the pollution of the city. The location also had the advantage of being close enough for him to commute to his job in the city each day.
In 2001, he noticed a growing demand for olive oil and decided to plant olive trees on half the property. The soil was suitable and the trees took about 5 years to mature. Fortunately, the demand for olive oil continued to grow and over the last few years he has been turning over approximately $10,000 from the sale of his oil to restaurants in Melbourne and Sydney. Nonetheless, the expenses in processing the oil are high and in some years he has incurred a loss from the activity.
In January 2013, he was approached by a University in Hong Kong and offered a senior academic position that paid double the salary he was receiving in Melbourne. In March 2013 he flew to Hong Kong and was interviewed for the position. In early May 2013, the University notified him that he had been successful and requested him to take up his new position in July 2013. The University couriered the contract of employment to him and he signed it in Melbourne on 20 May 2013. The contract was for 4 years, although the University agreed to a clause which would enable Smith to terminate the contract after two and half years if his family was not happy living in a foreign country.
In May 2013, Smith resigned from his job in Melbourne and on 1 July 2013 left with his wife and children to take up the position in Hong Kong. The University provided an apartment close to the University and his children were enrolled in schools nearby. His salary was paid into a bank account he opened in Hong Kong. He also derived interest from the account. Prior to leaving Australia he leased his house, at a commercial rate, to his brother who paid the rent directly into Smith’s bank account in Melbourne. Smith had organised with the bank to transfer the funds in the Melbourne account to his Hong Kong account on a monthly basis. The Melbourne account also derived interest.
His brother had also become interested in the olive oil business and had agreed to manage the production and distribution of the olive oil during Smith’s absence overseas.
Prior to leaving he sold the family car and gave an antique to his sister. At the time he gave the antique to his sister it had a market value of $5000, although he had purchased it for $3000 in 2010. He also sold his boat for $16,000. He had purchased the boat in 2009 for $12,000, so he could engage in some recreational fishing.
Unfortunately, Smith’s wife was not able to obtain work in Hong Kong and grew increasingly unhappy living in a foreign country. Consequently, Smith decided to terminate the contract with the University and returned to Melbourne on 30 June 2016.
Prior to leaving Hong Kong, he had been approached by a university in Melbourne to take up the position of professor with a salary of over $250,000. After returning to Melbourne he began work at the university on 1 August 2016.
His children were now older and anxious to live closer to the city. He therefore decided to finance the purchase of a home close to the city by selling the remaining half of the property that had not been used to grow olive trees. Acting on the advice of a real estate agent he subdivided the land into residential blocks. He was also actively involved in the marketing of the land to the extent that he set aside one of the rooms in the house as a sales office. By 30 June 2017 he had derived $1,000,000 from the sale of all the land.
REQUIRED:
Advise Smith and his wife of the Australian tax consequences of the above fact situation, referring to appropriate legislation, case law and tax rulings. Students should note that Australia has a Double Tax Treaty with China, but this treaty does not apply to Hong Kong.
(20 marks)
