Resident or Alien?
Tax Telegraph, November 2012
Your client comes to your office with some very ‘exciting’ news.
He has been employed by a corporation in Qatar for 2 years with an option to extend to 5 years. He tells you “Qatar has no income tax on personal income”. He is very excited that since he will be considered a non-resident in Australia and pays no income tax in Qatar, his earnings in Qatar will be tax-free.
On 8 August 2012, the AAT ruled in favour of the Commissioner of Taxation’s (Commissioner) view that Mr Sneddon (the taxpayer) (Sneddon v FCT 2012) was an Australian resident whilst working overseas, under the ‘ordinary concepts test’ and was thereby subject to Australian income tax on all of his worldwide income.
Residency is an important income tax consideration that can quite often be overlooked or misconstrued by individuals. Residency is determined on case by case basis and is one of the main criteria used to determine an individual’s Australian income tax liability.
Generally, Australian residents are taxed on their worldwide income, including capital gains made on the sale of their worldwide assets. In contrast, non-residents are taxed only on their Australian sourced income and capital gains made on assets with a sufficient connection to Australia.
Residency and any associated liability for Australian income tax, is assessed on an annual basis, with events after year end able to be considered when determining a taxpayer’s residency status.
Who or what is a resident?
A “resident or resident of Australia” is defined in Section 6(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) to include not only a person who “resides” in Australia within the ordinary meaning of the word, otherwise referred to as the ‘ordinary concepts test’ but also an individual who falls within the definition of being a resident under one of the three statutory tests. This includes an individual:
- Whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia (otherwise known as the ‘domicile test’)
- Who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income (commonly referred to as the ‘183 day test’); or
- Who is a member of a superannuation scheme established by deed under the Superannuation Act 1990 (also termed the ‘superannuation fund test’)
If an individual does not satisfy at least one of these tests they are categorised as a non-resident.
When assessing residency the taxpayer should begin by applying the ‘ordinary concepts test’ to their case which, if satisfied, removes the requirement to apply the three additional statutory tests.
Ordinary concepts test
The ordinary concepts test is a question of fact and degree; the courts generally base their determinations on the following factors (Iyengar v FCT 2011):
- Physical presence in Australia
- History of residence and movements
- Habits and “mode of life”
- Frequency, regularity and duration of visits to Australia
- Purpose of visits to or absences from Australia
- Family and business ties with Australia compared to the foreign country concerned
- Maintenance of a place of abode
No single factor is conclusive and the weighting of each factor on the decision is dependent on the taxpayer’s individual circumstances.
Domicile is a legal relationship which is acquired by an individual at birth (domicile of origin) and is retained until they acquire a domicile of choice in another country. An individual acquires a domicile of choice by acting with the intention to establish their home indefinitely in another country.
It is the intention, establishment and permanence of a place of abode outside of Australia that is considered when determining an individual’s domicile and permanent place of abode as demonstrated in FCT v Applegate 79.
183 days test
Under this test, the taxpayer is deemed a resident if they were actually in Australia, continuously or intermittently, for a period of more than half of the income year or 183 days, unless the commissioner is satisfied that their usual place of abode is outside of Australia and they have no intention to take up Australian residency.
Superannuation fund test
The taxpayer is deemed to be resident individual under this test if they are a contributing member (or is the spouse or child under the age of 16 of the contributing member) of the superannuation fund for Commonwealth government officers.
The following examples provided by the ATO illustrate the application of the residency tests:
- Emily leaves Australia on a one year contract to teach English in Japan, after which she plans to travel around Asia for a few months before returning to Australia. In Japan she stays with a family friend and rents out her house in Australia. Her family remain in Australia. Given that Emily has always lived in Australia and has not chosen to permanently migrate to Japan (or any other country) and her permanent place of abode remains in Australia, she is an Australian resident under the ‘domicile test’.
- Bronwyn, an Australian resident, receives an offer to work overseas for three years with an option to extend the offer for another three years. Bronwyn and her family make the move; they keep their house in Australia, as they intend to return one day, until then it will be rented out. They rent a house overseas using Bronwyn’s accommodation allowance. Bronwyn is unsure whether to extend her contract for another three years and will decide at a later date. Under the ‘ordinary concepts test’ the length of Bronwyn’s physical absence from Australia and circumstances such as establishing a home overseas and renting out her family home are not consistent with someone residing in Australia. Her permanent place of abode is outside of Australia given the length of time she has committed to spending overseas and establishing a home overseas with her family. The fact that she retains ownership of her home in Australia is not persuasive enough to satisfy the ‘domicile test’ thus making her a non-resident.
Application to Sneddon v FCT 2012
The taxpayer, Mr Sneddon, an Australian citizen who had not travelled overseas prior to April 2008, was offered an opportunity to take up employment overseas in Qatar, which he accepted and performed for almost two and a half years.
While working in Qatar, Mr Sneddon maintained his residence in Perth where he left personal household items and garaged a car. He took three separate trips to Australia for a total duration of seven and a half weeks in the 2009 income year. He also retained telephone and internet accounts, a bank account and a membership in an Australian superannuation fund.
The taxpayer’s earnings were paid to him in AUD$ into his Australian bank account and more than half of his earnings were subsequently used to cover expenses in Australia. Whilst in Qatar he resided in a fully-furnished apartment leased by his employer. His only expenses in Qatar were food, phone, fuel and household items he purchased to make his apartment more comfortable.
The AAT held that the taxpayer was a resident of Australia within the ordinary meaning of “resides” (the ‘ordinary concepts test’). The Tribunal examined the evidence provided and relied on the guiding factors discussed in Iyengar in reaching its decision.
The Commissioner was able to assess the taxpayer on his income earned in Qatar during the 2009 income year.
There was no requirement to consider the application of the domicile test; however the Tribunal found that the taxpayer would also have been an Australian resident because the taxpayer did not adopt a domicile of choice, nor did he establish a permanent place of abode and his domicile of origin was Australia.
A takeaway from Sneddon’s case and previous residency cases is that had the taxpayer sought consultation or advice prior to making the decision to commence employment overseas, the AAT’s decision would not have been as unexpected or burdensome on the taxpayer and a plan to mitigate any income tax implications could have been established.
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