Copyright © 2015 LexisNexis. This article is made available per the publisher's Content Sharing policy.Residence is important in determining the Australian income tax liability for individuals that are residents (all income sources) and foreign residents (Australian income sources) of ordinary and statutory income.1 In recent times the Australian Taxation Office (ATO) appears to be taking a tough stance on the residence of Australian citizens who travel overseas to work for a period of time, especially where that work is undertaken in countries with low income tax rates. This is evident in a number of cases that have recently been decided by the Administrative Appeals Tribunal (AAT) on the issue of residence. These cases highlight significant scrutiny by the ATO and the need for such workers to obtain good tax advice, and provide sufficient documentary evidence for the ATO or the AAT as this may be needed to establish the relevant facts

Blissenden, Michael

Kenny, Paul

Villios, Sylvia

Residence is important in determining the Australian income tax liability for individuals that are residents (all income sources) and foreign residents (Australian income sources) of ordinary and statutory income.1 In recent times the Australian Taxation Office (ATO) appears to be taking a tough stance on the residence of Australian citizens who travel overseas to work for a period of time, especially where that work is undertaken in countries with low income tax rates. This is evident in a number of cases that have recently been decided by the Administrative Appeals Tribunal (AAT) on the issue of residence. These cases highlight significant scrutiny by the ATO and the need for such workers to obtain good tax advice, and provide sufficient documentary evidence for the ATO or the AAT as this may be needed to establish the relevant facts

Blissenden, Michael (R7289)

Western Sydney ResearchDirect

Residency and Australians working overseas : can be an expensive lesson in tax Law

Flinders Academic Commons

Archived at the Flinders Academic Commons: http://dspace.flinders.edu.au/dspace/ ‘This is the peer reviewed version of the following article: Residency and Australians working overseas: can be an expensive lesson in tax law (2015) 2(9-10) TAX 188which has been published in final form at https://advance.lexis.com/api/permalink/21e71843-fe87-4b29-800c-9e8183cca181/?context=1201008&federationidp=SFHJ6R50981Copyright © 2015 LexisNexis. This article is made available per the publisher's Content Sharing policy.  Residency and Australians working overseas:can be an expensive lesson in tax lawDr Paul Kenny FLINDERS UNIVERSITY, Michael Blissenden UNIVERSITY OF WESTERNSYDNEY and Sylvia Villios UNIVERSITY OF ADELAIDEResidence is important in determining the Australianincome tax liability for individuals that are residents (allincome sources) and foreign residents (Australian incomesources) of ordinary and statutory income.1 In recenttimes the Australian Taxation Office (ATO) appears to betaking a tough stance on the residence of Australiancitizens who travel overseas to work for a period of time,especially where that work is undertaken in countrieswith low income tax rates. This is evident in a number ofcases that have recently been decided by the Adminis-trative Appeals Tribunal (AAT) on the issue of resi-dence. These cases highlight significant scrutiny by theATO and the need for such workers to obtain good taxadvice, and provide sufficient documentary evidence forthe ATO or the AAT as this may be needed to establishthe relevant facts.Residence definedThe term “resident” of an individual is defined ins 6(1) of the Income Tax Assessment Act 1936 (Cth) (theAct):(a) a person, other than a company, who resides inAustralia and includes a person:(i) whose domicile is in Australia, unless theCommissioner is satisfied that the person’spermanent place of abode is outside Australia;(ii) who has actually been in Australia, continu-ously or intermittently, during more than one-half of the year of income, unless the Commissioneris satisfied that the person’s usual place ofabode is outside Australia and that the persondoes not intend to take up residence in Aus-tralia; or(iii) who is:(A) …(B) an eligible employee for the purposesof the Superannuation Act 1976; or(C) the spouse, or a child under 16 …This provides four tests to establish whether anindividual is a resident:• the resides test according to ordinary concepts;• the domicile and permanent place of abode test;• the 183 day test; and• the Commonwealth superannuation fund test.An individual will be a resident if any of the four testsare satisfied. The fourth test only applies to relativelyfew people working overseas who are members of aCommonwealth superannuation fund. The 183 day testgenerally applies to people coming to Australia, so haslittle application. Thus, for Australians leaving to workoverseas, the questions at issue focus on the first twotests: the “resides test” and the “domicile and permanentplace of abode test” (as evident in the recent casesbelow).The courts have formulated relevant factors for thesetwo tests that will be taken into account in determiningresidence. A taxpayer needs to consider all of thesefactors to determine, on the balance of the facts, whetherthe test of residency has been satisfied. Generally nosingle fact will determine the outcome, although somefactors are more important than others, and differentfactors could lead to opposing outcomes. The definitionof residence leads to many grey areas, thus it is littlewonder that the ATO and the accounting and taxprofessions are often at loggerheads as to where theresidence line should be drawn.The first test provides that a resident “resides” inAustralia; “Resides” is not defined in the Act and thecourts have tended to follow the ordinary meaning of“resides” in formulating a list of relevant factors todetermine whether a person resides in Australia, asfollows:2• physical presence;• family, employment or business ties;• maintenance of a place of abode and other assets;• frequency, regularity and duration of visits; and• habits and mode of life.These factors are similar to those set out by theCommissioner in Taxation Ruling IT 26073 (residencystatus of visitors and migrants) and Taxation Ruling IT26504 (residency status of individuals who temporarilylive outside Australia). The weight to be given to eachfactor will vary with the individual circumstances andno single factor is necessarily decisive.australian tax law bulletin December 2015188A person may be held to reside in more than oneplace.5 For taxpayers relocating overseas to work for asignificant period with their family, the lack of physicalpresence, family and work ties, and an Australian abodewill ensure that this test will not be satisfied. Thus, thequestion at issue for such taxpayers usually falls underthe second test which has a greater ambit.The second test generally applies to situations wherea resident leaves Australia to work overseas for a lengthyperiod of time. There are two parts to this test that mustbe satisfied to find that the taxpayer is a resident:• a person’s domicile must be Australian; and• the Commissioner is satisfied that his/her perma-nent place of abode is not overseas.Domicile refers to the legal relationship between aperson and a state by which the person invokes thestate’s legal system as his or her personal law. Given thatdomicile does not usually change for taxpayers workingoverseas for relatively short periods of time, most of thecases turn on the question of where the taxpayermaintains their permanent place of abode.ATO Taxation Ruling IT 2650 provides relevantfactors as to whether a permanent place of abode isoverseas as follows:6• intention as to length of stay;• actual length of stay;• abandonment of place of abode in Australia;• acquisition of place of abode outside Australia;• intention to make place of abode “home”;• nature and quality of use made of place of abode;• duration and continuity of presence in place;• durability of association (ties) with place — doyou own it, lease it or are you just staying there —and ties — family, children at school, employ-ment, bank accounts and so on.The leading case is FC of T v Applegate,7 where thetaxpayer had a permanent place of abode overseas eventhough he was only away 2 years. Permanent does notmean everlasting, but something more than temporary ortransitory.8 IT 2650 states:14. The Federal Court rejected the Commissioner’s argu-ment that a permanent place of abode outside Australiarequired an intention to live outside Australia indefinitelywithout any intention of returning to live in Australia in theforeseeable future, other than at some remote, albeit spe-cific, point of time. The Court said that the term “perma-nent” must be interpreted in the context in which it appears.The Court said that in its context in the “resident” definitiona permanent place of abode does not have to be “everlast-ing” or “forever”. It means something less than a perma-nent place of abode in which a person intends to live for therest of his or her life. It should be contrasted with atemporary or transitory place of abode outside Australia. Itconnotes a more enduring relationship with the particularplace of abode than that of a person who is ordinarilyresident there or who has there his or her usual place ofabode. An intention to return to Australia in the foreseeablefuture to live does not prevent the taxpayer in the meantimesetting up a “permanent place of abode” elsewhere. TheFederal Court also found that the taxpayer’s intentionregarding the duration of his stay overseas was only onerelevant factor to be taken into account. Of more impor-tance is the nature and quality of use which the taxpayermakes of a particular place of abode overseas.IT 2650 also contains a number of examples of theATO’s view of the application of the residency test. TheATO also has a residency tool, “Determination ofresidency status — leaving Australia”,9 to offer guidancefor taxpayers on residency who leave Australia to workoverseas. However the disclaimer states that:[The] result is based solely on your answers, the outcome isnot binding on the ATO. Whether or not you are anAustralian resident for tax purposes will be determined onthe actual facts of your situation.Given this disclaimer and that the determination ofresidence is a question of fact and degree, the residencytool would appear to be problematic and a poor substi-tute for professional advice.Shord v FCTIn Shord v FCT10 the taxpayer worked as a diver anddiving supervisor for overseas companies at many placesaround the world during the 2006–11 income years. Thetaxpayer considered that he had left Australia in 1999 topursue a nomadic working life and that he based himselfin his country of birth, the United Kingdom. However,the taxpayer maintained strong physical, emotional andfinancial ties to Australia. Also, he jointly owned a homein Australia which he lived in with his wife in a marriageof over 23 years. He had an Australian passport since2004. Mr Shord described his background as follows:11My lifestyle is a nomadic lifestyle. I call the world myhome. The barge that I work on is my home. The moreestablished places are bases. These are used to store thingsthat you may not be able to put on your back. My home inthe UK is an established base to live and ravel from, alsomy contact place for work as well as a meeting place forfriends and family living in the United Kingdom. My lifestyle also relies on trust between my wife, who is reluctantto leave Australia to take up living in some foreign country.I am privileged in my position to be able to get my wife tojoin me in some countries where I may be, if the circum-stances allow it. Even if it is only a few days while theymove a barge or vessel to a new location.…As advised by the Tax Office in 1999, I removed myselffrom all Electoral rolls in Australia. These included theFederal, State and Local. I am enrolled in the UnitedKingdom.australian tax law bulletin December 2015 189Under the advice of the Tax Office I withdrew all mySuperannuation in about 1999 and closed the variousaccounts. Since then I have only received Superannuationcontributions while working for a short time in Australiafrom July 2011.As a requirement put to me by the Tax Office in 1999, I soldany assets that I had except for my share of the house I stayat while I am visiting Perth. I don’t own a car or any othermotorised vehicle in Australia. I have no personal assetshere in Australia, those I did have in 1999 have beendisposed with.The only investment that I have within Australia is a partshare in a house that my wife and I purchased as her homehere in Western Australia. I did own a part share in anotherhouse that was rented, but that has since been sold to allowme to pay out various debts that had been accumulatinghere in Australia and abroad.I have no Australian shares or any other listed or unlistedinvestments in Australia.I do not belong to any club, sporting or otherwise inAustralia. I was a past member of the RSL in New SouthWales but ceased many years ago.Due to my occupation, I have medical insurance to coverme world wide. In the United kingdom I have a nationalinsurance number which covers me throughout the Euro-pean Community.My wife lives most of the time in Australia. Cyn is a fullyqualified nurse and midwife. She has always worked tokeep herself, she is a very independent woman, and hasrecently retired, being 64 years old.I have no other family in Australia.Notwithstanding the advice and that the taxpayerabandoned certain Australian ties, the ATO consideredthat the taxpayer was a resident of Australia for the2006–11 income years given the strong physical, emo-tional and financial ties to Australia. The Commissionerissued amended assessments to the taxpayer increasingthe amount of income tax payable by a total of $149,967.75plus penalty tax of over $150,000.The AAT found that in the 2006–11 income years, thetaxpayer resided in Australia under the “resides” testsand also satisfied the domicile test given his domicile ofchoice was in Australia. The taxpayer had not estab-lished a permanent place of abode outside Australia andthus satisfied the permanent place of abode test. TheAAT observed that the taxpayer’s physical, emotionaland financial ties to Australia during 2006–11 were verystrong. He jointly owned a home in Australia with hiswife of over 23 years. Further, the evidence before theTribunal supported the finding thatAustralia was Mr Shord’s“domicile of choice” during the period. The taxpayer didnot establish that the United Kingdom, or any otherplace outside Australia, was his “permanent place ofabode”. Most of the relevant factors as set out in IT 2650strongly indicated that the taxpayer resided in Australia.Engineering Manager v FCTIn Engineering Manager v FCT12 the taxpayer workedas an engineer in Oman for a multinational company inthe oil and gas industry from 4 January 2010 to29 April 2011. He then returned to live with his familyin Perth. Prior to that, he worked overseas on variousengineering jobs since 2004.Despite the lengthy absence of about 6 years, work-ing and living in an overseas abode, the Commissionerargued that the taxpayer was a resident of Australia forthe year ended 30 June 2011 as a result of his connectionbetween the taxpayer and his family living in Australia.He often returned to Australia when on leave from hisoverseas employment. The Commissioner argued thetaxpayer was a resident given his continuity of associa-tion with Australia. A Notice of Amended Assessmentfor the 2011 year was issued to include $274,509 derivedfrom employment in Oman.The Tribunal held that the taxpayer was a non-resident in 2011. Whether a person resides in Australia isa question of degree and therefore one of fact. Thetaxpayer was not a resident of Australia under theordinary resides test, during the whole of the year inquestion. Further, the taxpayer’s permanent place ofabode for most of the year ended 30 June 2011 wasoutside of Australia, thus the alternative test was notsatisfied.Murray v FCTThe taxpayer in Murray v FCT13 lived and worked inThailand and Indonesia from June 2006 to February2010. The taxpayer lived overseas in rental accommo-dation with his wife and also obtained the right to residein Indonesia as a retired person. Between 2008 and2010, the taxpayer had made a number of trips back toAustralia.When visiting Australia in February 2010, the tax-payer was arrested and charged with drug possession.The taxpayer was convicted and sentenced to 18 monthsimprisonment. After being released from jail in Decem-ber 2011, he was served a Departure Prohibition Orderand was thus prevented from returning to Bali. Again,despite the taxpayer working overseas and living in anoverseas abode with his spouse for a lengthy period (5years) the Commissioner taxed the taxpayer as a residentfrom 2009–11 and issued default assessments withtaxable income of: $191,699 for the 2009 year, $765,342for the 2010 year, and $37,439 for the 2011 year, all withpenalty tax.The AAT was satisfied that the taxpayer was not aresident of Australia according to the ordinary meaningof resides during the years ended 30 June 2009–11. Thetaxpayer had not been residing in Australia since June2006. The taxpayer had set up a home in Bali from early2008. While the taxpayer’s visits to Australia wereinitially lengthy, they did not destroy the continuity ofassociation he had with Bali.australian tax law bulletin December 2015190ConclusionA review of the three cases shows the extent to whichthe determination of residence is a question of fact anddegree. Further, these cases suggest that the Commis-sioner’s auditors are pushing the boundaries of IT 2650when determining the residency of Australians workingoverseas. In particular the case of Murray v FCT cannotbe easily reconciled to IT 2650 given the lack ofconnection to Australia. Thus, Australians leaving towork overseas and their tax advisers must take great carein the application of the “resides test” and the “domicileand permanent place of abode test”. The ATO’s resi-dency tool appears problematic and should not be usedto replace professional advice. Tax planning advice andrelevant documentary evidence are crucial for Austra-lians choosing to work overseas especially in jurisdic-tions with low income tax rates.This paper has been subject to an independentreview.Dr Paul KennyAssociate Professor Taxation LawFlinders Business SchoolFlinders Universitypaul.kenny@flinders.com.auwww.flinders.com.auMichael BlissendenDeputy DeanUniversity of Western SydneyM.Blissenden@uws.com.auwww.uws.edu.auSylvia VilliosLecturerAdelaide Law SchoolUniversity of Adelaidesylvia.villios@adelaide.edu.auwww.adelaide.edu.auFootnotes1. Income Tax Assessment Act 1997 (Cth), ss 6–5(2), 6–10(4).2. Levene v Inland Revenue Commissioners [1928] AC 217;[1928] All ER Rep 746; (1928) 13 TC 486; IR Commrsv Lyaght [1928] AC 234; [1928] All ER Rep 575; ATOTaxation Ruling 98/17 Income tax: residency status of indi-viduals entering Australia (25 November 1998).3. Taxation Ruling IT 2607 Income tax: residency status ofvisitors and migrants (16 August 1990).4. Taxation Ruling IT 2650 Income tax: residency — permanentplace of abode outside Australia (8 August 1991).5. Lloyd v Sulley (1884) 2 TC 37.6. AAT Case 8892 (1993) 27 ATR 1136; (1994) 94 ATC 175supports this approach taken in IT 2650.7. FC of T v Applegate (1979) 9 ATR 899; 79 ATC 4307.8. Above n 4.9. ATO, Determination of residency status — leaving Australia,Version 2.3.0, 27 May 2005, www.ato.gov.au.10. Shord v FCT [2015] AATA 355.11. Above n 10, at [41].12. Engineering Manager v FCT [2014] AATA 969.13. Murray v FCT [2013] AATA 780.australian tax law bulletin December 2015 191

Residency and Australians working overseas: can be an expensive lesson in tax law

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Residency and Australians working overseas: can be an expensive lesson in tax law

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