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17/09/2015 | Stephen Harvey international business, tax, residency, source

Doing Business Overseas?

Residency and Tax Considerations
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With the increasing globalisation of Australian business and migratory workforces, it was timely during our most recent Tax Events series to consider the tax implications of overseas residency.

This is an important topic because the assessable income of Australian residents includes both ordinary and statutory income derived from all sources. The difficulty lies in the absence of a statutory definition of what it means to be "resident", which generates a great deal of uncertainty around the application of the rules.

There are four possible bases upon which an individual may be found to be an Australian resident for tax purposes:

  1. Resides Test - The person resides in Australia because of the application of ordinary concepts;
  2. Domicile Test - The person resides in Australia because they are domiciled in Australia, unless their permanent place of abode is outside of Australia;
  3. 183 Days Test - The person resides in Australia because they are present in Australia for at least 183 days in the relevant year, unless their permanent place of abode is outside of Australia and they don't intend to take up residency here; or
  4. Superannuation Fund Test - The person is a member of an Australian superannuation fund established under the Superannuation Act 1990 (Cth), or an eligible employee.

Applying residency tests

When applying these tests, it is the first test which is the most crucial because the ITAA 1936 says that a person is a resident if they ordinarily reside in Australia. If the answer to the first test is yes, that a particular person does reside in Australia, then the other tests are largely irrelevant. A person will be a resident of Australia for income tax purposes if they reside in Australia, regardless of nationality, citizenship or the location of their permanent home.

Unfortunately, there is no statutory definition for the term "resides", meaning that each case will be determined by its own facts. This makes the facts crucial in every situation. Given that every analysis will involve an assessment of both fact and degree, similar facts can yield different outcomes.

Attempts have been made by the Australian Administrative Appeals Tribunal (AAT) to establish a structured approach to residency, including the formulation of what has become known as the "residency matrix", which places a particular focus on the following key areas to determine residency:

  • Physical presence;
  • Nationality;
  • History of residence and movements;
  • Habits and "mode of life";
  • Frequency, regularity and duration of visits;
  • Purpose of visits to, or absences from, a country;
  • Family and business ties with a country; and
  • Maintenance of a place of abode.

Just to add to the considerable doubt that emerges in some cases, this checklist style of testing has more recently been rejected in favour of a broader, more holistic approach.

It's all in the evidence

Suffice to say that, in every case, evidence is critical. All relevant facts are open for evaluation in determining the residency of a person for tax purposes. There has been a considerable increase in recent years in cases brought by the Commissioner on the basis of residence, and nothing is off limits. The Commissioner has even used incoming and outgoing passenger cards to boost residency arguments.

It is also clear that:

  • Domicile and a continuing connection with Australia is still extremely relevant - assets held or family connections  in Australia are important;
  • In most expatriate cases, the AAT will try to establish what the individual's plans were in respect of employment. This might include whether the person considered the possibility of a longer stay than was previously disclosed, or undertook activities which might ordinarily be considered hallmarks of permanency (e.g. joining clubs); and
  • Incoming and outgoing passenger immigration cards, whilst relevant, are not determinative of residency in themselves, so a characterisation of "permanent resident leaving temporarily" may be used against the expatriate.

If you would like to know more about residency and the tax considerations of doing business overseas, the full paper from our Tax Event series is available here, or please feel free to contact Stephen Harvey directly on 1800 773 477.