Australia’s tax residency laws are complicated, and interpretation is frequently contested.
The taxpayers most likely wanting to avoid the Australian tax residency net are those who have earnings in foreign countries with a lower tax rate.
Cases show that individuals can easily form the wrong impression of their residency status, and that the Tax Office can easily form presumptions based on readily available evidence of links with Australia.
The Tax Office is active in seeking evidence for taxpayers’ (non-)residency claims. It has taken a fairly expansive view of residency, paying close attention to evidence of a taxpayer’s continued connections to Australia whilst overseas.
Physical presence in a country does not alone determine tax status (regardless of visa or nationality status), and international agreements (where they exist) operate as tie-breakers to determine competing tax claims between countries.
As a general principal, Australian tax residents are taxed on their world-wide income, non-residents only on their Australian-sourced income. There are a number of other tax consequences of being a non-resident which are summarised here.
Additionally, if you have investments, such as shares or real estate, Australia’s capital gains tax rules can be triggered upon changes in tax residency status.
If you get it wrong in the eyes of the Tax Office, assessments can be raised which include penalties and an accumulation of interest, often calculated some considerable time after the event.
Think you are a non-resident of Australia for tax purposes? Think again
This review from Cooper Grace Ward discusses three recent AAT decisions which demonstrate the significance of a taxpayer’s on-going links with Australia while living abroad, and the concept of ‘permanent place of abode’.
Several recent decisions by the Administrative Appeals Tribunal (AAT) have highlighted the common misconception that Australian citizens living and working overseas are not required to pay Australian tax on their income.
This misconception is a serious risk for taxpayers living and working in low tax jurisdictions, where the differences between the local income tax rates and Australian personal income tax rates are greatest.
In Boer v Commissioner of Taxation the taxpayer worked on a 35 days on/off rotation in Oman, and returned to Australia on several occasions during the time of his off-shore appointment. It was held that the taxpayer was a resident of Australia for tax purposes because he had failed to establish a permanent place of abode outside of Australia.
In Sully v Commissioner of Taxation the taxpayer was employed as a marine engineer in Dubai and subsequently New Orleans. The AAT was not convinced that he had established a permanent place of abode in another country and, because his domicile of origin was Australia, was considered to be a resident for tax purposes.
In Sneddon v Commissioner of Taxation the taxpayer was employed in Qatar with provided accommodation but was still a resident of Australia under the ordinary meaning of the word ‘resides’. He maintained a ‘continuity of association’ with Australia despite his physical absence, and in any event had not established ‘a permanent place of abode’ in Qatar.
Domiciled but not resident
A win for the taxpayer – A recent case which indicates a curbing of the more expansive meaning of residence can be found in the case of the Dempsey v FCT  AATA 335. The AAT considered the position of an Australian citizen who worked for 3 years in Saudi Arabia. Despite keeping significant connections to Australia, including a house, bank account and superannuation, the taxpayer was not considered to a have a permanent place of abode in Australia, and was therefore not resident for the relevant period. See here for a full discussion of this case.
ATO focus on returning expatriates
In a separate article, also from Cooper Grace Ward, the case of Pillay v Commissioner of Taxation  AATA 447 provides an example of the ATO forming a view of residency based on a perceived ‘continuity of association’ with Australia.
The AAT accepted the ATO’s submission that Dr Pillay had had a ’continuity of association’ with Australia and was therefore a resident for tax purposes. Dr Pillay maintained a house and had bank accounts in Australia.
Dr Pillay was held to be a resident of Australia in the 2010, 2011 and 2012 income years, despite living and working in East Timor since 2006.
The Tax Office is use their access to data to provide leads for investigation in this area.
Our experience is that the ATO is targeting expatriates from countries with low effective tax rates, often by tracking funds transferred from overseas into Australian bank accounts.
Here’s another example of the Tax Office using Austrac cash transfer data to initiate an enquiry. Being prepared for questioning can help to avoid adverse presumptions, including explaining why you were a non-resident and address issues such as the continued ownership of a house:
If contacted by the ATO, it is important that you organise a detailed response to any ATO correspondence relating to your tax residency position. This includes explaining the reasons why you were a non-resident, based on the four residency tests in the domestic tax law and any ‘tie-breaker’ tests if you were living in a country with a double tax agreement with Australia.
It is also important to address any issues, such as continuing to own a house in Australia or transferring funds to Australia, that may lead the ATO to form a preliminary view that you were always an Australian tax resident.
Non-residence – a checklist
For a helpful list of things which might influence a perception of non-resident status – have a look here: How To Become Non-Resident.
(Caution: these lists are not exhaustive, not definitive and definitely not advice).
Tax Office Residency Tools And Advice
The Tax Office provides a number of online tools for the determination of residency status under a variety of circumstances. The tools should be used with caution, as they are very limited in scope.
The online tool for an adult Australian resident leaving Australia permanently will only signify a “non-resident” determination if the taxpayer can confirm that they are emigrating to another country and are not a Commonwealth or Public Service Superannuation super scheme member (includes spouse).
Here’s a copy of the online report with the “right” questions answered, leading to confirmation of “non-resident” status:
According to the Tax Office website the “common situation” of a taxpayer leaving Australia permanently means “you are generally” treated as a foreign resident for tax purposes from the date of your departure. The catch lies in what is meant by “permanent”.
As referenced in case discussions above, the determination of residency status will frequently revolve around whether the taxpayer is domiciled in Australia, and if not, whether the Commissioner can still be satisfied that the permanent place of abode is outside Australia. This “domicile and permanent place of abode” test is one of the legal definitions of residence in the Tax Act.
Taxation Ruling No. IT 2650 issued by the Tax Office in 1991 offers guidelines for determining when a taxpayer ceases to become a resident.
The Ruling says, however, that the following factors need to be taken into account:
(a) the intended and actual length of the individual’s stay in the overseas country;
(b) any intention either to return to Australia at some definite point in time or to travel to another country;
(c) the establishment a home outside Australia;
(d) the abandonment of any residence or place of abode the individual may have had in Australia;
(e) the duration and continuity of the individual’s presence in the overseas country; and
(f) the durability of association that the individual has with a particular place in Australia.
The weight to be given to each factor will vary with individual circumstances of each case and no single factor is conclusive.
Fast facts on residency for tax purposes
Q1 – 0:15 – Am I a tax resident of Australia?
Q2 – 1:05 – What does it mean to ‘reside in Australia’?
Q3 – 2:19 – What is a ‘permanent place of abode overseas’?
Q4 – 3:35 – What if I still have a property in Australia?
Q5 – 4:40 – What about if I pay tax outside of Australia?
Recommended resource for expats: Essential Property tax information for australian ex-pats (pdf)