Australians are part of an ever-increasing global workforce that travel and work overseas for protracted periods of time, however expats often underestimate the significance of their tax residency status when working and living in a foreign country.
Several recent case decisions from the Administrative Appeals Tribunal have underscored the importance of a taxpayer's understanding of how tax residency status is determined as well as the need to seek professional advice about their tax affairs before heading overseas.
Some of the AAT's conclusions are at odds with the 'rules of thumb' methodology applied by the ATO to determine a taxpayer's residency for tax purposes, highlighting inconsistencies in how residency is determined.
The Australian Tax Commissioner (and tax professionals) utilise the 20 year old Tax Ruling IT 2650 as a guideline for the tax residency status of Australians.
The ATO - and tax practitioners - typically refer to this ruling when considering whether a taxpayer will be resident or non-resident for tax purposes, however the recent AAT rulings signal that the intention to call Australia 'home' - or not - is a very important factor of 'genuine inquiry' into an individual's residency status.
The IT 2650 ruling focuses on two key considerations:
- People who ordinarily reside in Australia but leave temporarily and not living in Australia during the income year; and
- The intention of the Australian taxpayer regarding the duration of their non-residency period.
However, there are additional factors that also are typically considered when determining a taxpayer's residency, for example:
- Their intended and actual length of stay overseas;
- Their intention to return to Australia at some definite point in time or travel to another country;
- Whether they establish a home outside of Australia;
- Whether they leave their Australian home or place of abode (e.g. divesting of property);
- The duration and continuity of their presence in the overseas country;
- The strength of their association with a particular place in Australia.
The central conflict in these recent AAT cases is that the ATO and the AAT differed in where their emphasis and analyses were concerned. The ATO placed less emphasis on the taxpayer's evidence and more on the 'rules of thumb' approach.
The AAT, however, focused less on the guidelines above and placed greater emphasis on the intention of the taxpayer to make Australia his or her home and their evidence of that intention.
The key takeaway is that for Australians going overseas for extended periods of time, they need to be able to prove their intention for residency i.e. within Australia or overseas. The ATT has demonstrated that it will look at not only a wide range of physical evidence but also the taxpayers intention.
We strongly recommend that Australian taxpayers seek a professional perspective on their plans to work overseas, particularly with regards to income, tax, investments and other assets that fall under the purview of the ATO.
This can be a complex area of tax for expats, particularly if there are some uncertainties about the way the ATO or AAT may view their residency.
Please contact us on 02 9957 4033 or contact Matt Zhou for more information.
AAT decisions regarding residency
| Engineering Manager
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.