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Australian individual tax residency rules: high time for a refresh

Australian individual tax residency rules

Ablean Saoud and Terry Hoban call for revisions to the individual tax residency rules, in light of a recent court case.


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On 9 July 2018, the Board of Taxation (BoT) made public its August 2017 report to the Government, Review of the Income Tax Residency Rules for Individuals. In parallel, the Minister for Revenue, Kelly O’Dwyer requested that the Board of Taxation undertake further consultation with regard to its recommendation to introduce a new set of individual tax residency rules.

The BoT recommends that new rules should be developed which are more in tune with current work and lifestyle practices and can be more easily applied by the great majority of taxpayers.

A recent decision of the Federal Court of Australia, Harding v Commissioner of Taxation [2018] FCA 837, highlights the timeliness of this initiative, and the unpredictability that taxpayers departing Australia face, when interpreting and applying Australia’s “qualitative” individual tax residency rules.

The stakes are particularly high when taxpayers are heading to jurisdictions with low or no income tax which may not have tax treaties with Australia. A finding of continued Australian tax residency in these situations can often mean the difference between a taxpayer paying full Australian tax on foreign wages, or no tax at all.

There is also a flow-on effect to an employer, who may be faced with complying with Australian pay as you go (PAYG) withholding and other employer tax obligations for residents, depending upon the employer’s connections to Australia.

In Harding v Commissioner of Taxation, the taxpayer accepted that he was an Australian-domiciled person. On that basis, he could only cease Australian tax residence if he had ceased to reside here under ordinary concepts, and had also established a permanent place of abode outside Australia.

The taxpayer was an Australian citizen living and working in the Middle East for more than six years. During this period, Mr Harding stayed in a number of fully furnished apartments within the one apartment complex in Bahrain.

The case concerned only one of the years of income during which Mr Harding lived in Bahrain. Derrington J found that for this year, the taxpayer had ceased to reside in Australia under ordinary concepts. In considering whether the taxpayer had also established a permanent place of abode in Bahrain, there was a focus on the use of the apartments in Bahrain and Mr Harding’s intention to bring his family to Bahrain and move out of the furnished apartment complex. Unfortunately the latter never eventuated due to Mr Harding and his wife divorcing. Factors in the analysis of ‘permanence’ included Mr Harding having purchased his own television and linen, but not having to pay for utilities.

Ultimately the decision was that the taxpayer continued to be a tax resident of Australia because he did not have a ‘permanent place of abode’ outside of Australia.

It is to be hoped that any new rules that emerge from the Board of Taxation’s consultation process will require a less “forensic” examination of the taxpayer’s personal circumstances.

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