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Tribunal case gives clarity on tax residency

By Keeli Cambourne
May 07 2024
4 minute read
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A recent AAT case has offered some valuable insights into how tax residency can be determined if clients move overseas, says an expert technical adviser.

Linda Bruce, senior technical services manager at Colonial First State, said the case involved a Vietnamese-born, Australian citizen, who in 2015 accepted an international assignment to Dubai where he worked for five years.

“During this period, he spent less than 183 days in Australia, in each of the five financial years, and the employer withheld approximately $525,000 in PAYG withholding tax. The taxpayer argued he was a non-tax resident of Australia because he was working in Dubai during this period, and therefore shouldn't be liable to pay tax on the employment income earned while in Dubai,” Bruce said.

“If this argument is true, the taxpayer could get a refund of the PAYG withholding tax. However, the ATO determined that he was an Australian tax resident and was liable to pay tax on the employment income he earned while he was overseas. Therefore, he could not get a refund of the PAYG withholding tax.”

She said it’s worthwhile noting that although the hosting company was in Dubai, his employer remained an Australian entity, incorporated under the Corporations Act 2001.

Under the current tax laws, an individual would be classified as an Australian tax resident if they reside in Australia under the ordinary concept, or meet either the domicile test or the 183-day test.

“The 183-day test is not the issue in this case as the taxpayer obviously spent less than 183 days in Australia each year during the five-year period. The key issue here is whether the taxpayer was a tax resident under the ordinary concepts test or the domicile test,” she said.

“The taxpayer argued that his permanent place of abode was in Dubai. The ATO submitted to the AAT that the taxpayer had an extensive connection with Australia, and therefore he was a resident of Australia under both ordinary concepts and the domicile test.”

The facts continued that the taxpayer’s wife planned to move to Dubai with him, but stayed in Perth, Australia for more than half of any relevant financial year in those five years. In most years she spent more than 300 days in Australia.

Additionally, the taxpayer maintained multiple vehicle registrations and a private health insurance policy in Australia. He also did not try to establish a social connection in Dubai outside his work.

“Further, his employment contract made various provisions for him to mobilise from visits and ultimately returned to where he was posted in Australia at the expense of the employer,” Bruce said.

“It’s important to look at the facts that might indicate whether this individual is maintaining sufficient connection with Australia. In this case, the wife and daughter stayed in Australia while he kept his family home in Australia where the wife and daughter stayed. He kept his life insurance and his car registrations, and he is coming back to Australia. So objectively, is his residency still in Australia?”

She said the AAT agreed with the ATO that the taxpayer was indeed a tax resident based on the connections he had with Australia.

“The ordinary concepts test and a domicile test have always been subjective, and have caused all sorts of disputes and issues,” she said.

“In 2019, the Board of Taxation recommended to reform and modernise individual tax residency rules to provide more clarity. The former government announced in 2021 that it would replace the individual tax residency rules with a new framework based on the recommendation made by the Board.”

Bruce explained that the current government had released a consultation paper on modernising individual tax residency in line with those recommendations, with the consultation process concluding in September 2023, adding that it would be interesting to observe if the government makes additional announcements on this issue in the upcoming federal budget.

“The taxation board proposed a bright line test, which says if a resident spent half of an income a year, or 183 days, in Australia, they are an Australian tax-resident. However, this requirement can be easily manipulated.”

She explained that if someone has spent less than 183 days in a financial year in Australia, it does not necessarily mean they are a non-tax resident.

“It’s not quite that simple. There's a secondary test called the 45-day rule which can come into play. If the taxpayer spends 45 days or more in a particular financial year in Australia, then you look at some other factors.”

She said these factors include whether the person has a permanent right to reside in Australia, whether the person's family stayed in Australia, whether there is accommodation available when the taxpayer returns to Australia and whether there’s an Australian economic connection.

“There are different rules that apply if someone is going overseas to work versus if someone just wants to retire in a foreign country under the proposed residency test,” she said.

“Under the current rules, it can be ambiguous whether or not a person is a tax resident of Australia. This can have various impacts on a financial adviser’s strategies.”

For example, if the tax residency test is simplified, it can be easier to determine the level of a client’s taxable income in Australia. This can help financial advisers determine the level of personal deductible contributions that a client should contribute to super to reduce their Australian taxable income.

Further, Bruce said that when ceasing Australian tax residency, a CGT event happens unless an election is made by the taxpayer for it not to happen.

“If a CGT event happens, the taxpayer is deemed to have sold assets that are not taxable Australian property such as publicly listed shares or managed funds, and future growth will no longer be taxable in Australia,” she said.

“Under the current rules, ceasing tax residency can occur as soon as the client leaves, while under the proposed model it would be much harder to cease Australian tax residency. This means that the proposed residency test can have an impact on the timing of this CGT event.”

Finally, she said, the proposed residency test can have an impact on the SMSF active member test. If the client is a member of an SMSF and is a tax resident under the proposed model, they can continue to make contributions or receive rollovers without causing the SMSF to fail the active member test.

“However, the former government in the May 2021 federal budget announced its intention to change two components of the super fund residency test,” she said.

“The first is to remove the active member test and the second is to increase the temporary absence safe-harbour period from two years to five years. It will be interesting to see whether the current government will revisit this in the upcoming budget.”

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