In: Accounting
Income Tax Law - Residency Issue - Australia
Zane has advised you that his employer has discussed an opportunity with him where he could work in its Singapore office for two years, commencing on 1 July 2019. Although Zane is interested in this opportunity to live and work overseas, he is concerned about the Australian Taxation Office (ATO) forming the view that he would retain his Australian residency during this time. In addition, Zane is a cricket enthusiast and his employer has agreed to him taking annual leave from 1 October and 30 November 2020 to return to Australia and attend the ‘World T20’ cricket tournament (held from 18 October to 15 November). Zane anticipates that he will spend the time before and after this event visiting relatives and travelling within Australia. Zane is confident that you will be able to provide him with some clear advice on this issue. He has indicated that he would only be interested in working in Singapore if the ATO considered him to be a non-resident during the two years he would be absent from Australia. You are required to write a letter to Zane outlining the law on this residency issue and how the law would apply to him under the scenario in contemplation (the potential move from Australia to Singapore for work for the period 1/7/2019 to 30/6/2021). Your letter to Zane should refer to relevant sources of law (and any relevant ATO advice). Your letter should also refer to the implications of being a resident or a non-resident during the two years. Zane has some doubts about the implications of the visit to Australia in October and November 2020 in terms of residency. He has asked you for advice on this specific issue and stated that he may consider staying in Singapore if the trip to Australia is likely to increase the chances of him being an Australian resident. As well as providing advice, your letter should set out any additional questions for Zane that are relevant to the residency issue. Finally, your letter should refer to the steps you will take to ensure certainty for Zane as to the ATO view on the residency issue.
To
Mr Zane
Subject-Determination of residential status
Sir,
As an income tax consultant I would like to draw your attention about the following applicable tax laws on the basis of facts you have provided.
If you live overseas for a period, you may be a “foreign resident” for Australian tax purposes, even though you are an Australian citizen. Being a “foreign resident” is often advantageous from an Australian tax perspective because, generally speaking, a foreign resident is not required to pay Australian tax on their overseas income (whereas an “Australian resident” is).
Not surprisingly, then, disputes between taxpayers and the Australian Taxation Office (“ATO”) about whether the taxpayer was a foreign resident or an Australian resident during a particular income year (typically, a year when the taxpayer earned significant overseas income) are common.
You will be a foreign resident for an income year if, during the year:
Requirement 1: you were in Australia for less than 183 days (or
you had a “usual place of abode” overseas and did not intend to
take up residence in Australia);
Requirement 2: you did not “reside” in Australia; and
Requirement 3: you had a “permanent place of abode outside
Australia”.
(This is true for many taxpayers; but for some taxpayers, the requirements will be different.)
You need to satisfy all three requirements to be a foreign resident. Determining whether you satisfy Requirement 1 is usually straightforward if you were in Australia for less than 183 days; it is more complex if you were in the country for longer. Determining whether you satisfy Requirements 2 and 3 is often an involved process because there is no “bright line” test for these requirements, ie, the tests are “grey”. How to satisfy Requirement 2 remains controversial – is it enough to show that you were not physically in Australia; or do you also need to show that you severed your associations with Australia? And to satisfy Requirement 3, you need to show that you had a dwelling overseas that was your permanent home. Whether you satisfy Requirements 2 and 3 will likely depend on all your circumstances, including, eg, whether you spent time in Australia – and if so, for how long and for what reasons, the nature of your overseas residence (eg, was it merely a dormitory/barracks or was it something more “home”-like), whether your immediate family lived with you overseas, for how long you intended to live in the foreign country, for how long you actually lived in the foreign country, how strong your connection was with the foreign country, whether you maintained a home in Australia while overseas etc.
But even if you can’t satisfy the three requirements, your foreign income might still be (Australian) tax-free. If the income was earned in a foreign country with which Australia has a ‘tax treaty’ in place, it may be possible to show that, under the treaty, Australia does not have the right to tax you on the income (because only the other country is permitted to tax you).
If the ATO asserts that you’re required to pay tax on your foreign income, the onus is on you, the taxpayer, to show why the ATO is wrong. This means that it is up to you to provide the arguments and evidence to convince the ATO. In our experience, you should aim to provide a clear summary of your circumstances during the relevant income year with supporting evidence, and a considered explanation of how your circumstances compare with the those of taxpayers in relevant Court and Tribunal cases.You can come to Australia in October November 2020 but your stays in Australia in 2020 should have been less than 183 days.
Your's Sincerely
(. )
Tax consultant