Taxpayers who reside overseas will need to prove a permanent place of abode in order to not be taxed as an Australian resident.
A recent appeal before the full Federal Court has underscored the importance of taxpayers establishing and proving that they have a permanent place of abode when they move overseas for work purposes. Given how complex residency can be, it’s an important ruling given how more and more taxpayers are relocating for work or for work opportunities.
In Australia, residency ‘tests’ are applied successively and if one of them is met, a taxpayer will be considered as an Australian resident for tax purposes.
The taxpayer had left Australia to work in Saudia Arabia as an aircraft engineer, initially for a year-long contract which was extended over time.
The taxpayer was subject to an audit that led the Tax Commissioner to issue an amended assessment for the 2011 tax year to include income that had been earned in Saudia Arabia.
The Commissioner had determined that the taxpayer was a resident under both the ordinary concepts test and the domicile test. The taxpayer appealed, however, the Federal Court agreed with the Commissioner that he was a resident under the domicile test, although not a resident under the ordinary concepts test.
In this case, the taxpayer was unable to establish a permanent place of abode overseas due to his ex-pat lifestyle and had conceded that he had an Australian domicile.
The primary test for tax residency is called a ‘resides test’ or ‘ordinary concepts’ tests.
If a taxpayer is found to reside in Australia, then they are considered an Australian resident for tax purposes and no other tests need to apply.
However, there are several other tests that will apply if the taxpayer doesn’t satisfy the resides test:
- The domicile test – If their domicile is in Australia, this will likely apply unless the ATO is satisfied that their permanent place of abode is outside Australia;
- The 183-day test – If they are present in Australia for more than 183 days within a tax year, continuously or with breaks, then the taxpayer might be considered to have a ‘constructive’ residence in Australia unless it can be shown that they have a usual place of abode outside Australia (and no intention of taking up residence in Australia)
- The superannuation test – This test is applicable to Government employees working at overseas postings and who are members of specific superannuation schemes.
Taxpayers who are temporary or permanent residents in any tax jurisdiction face a number of tests to determine where they should be paying tax and assuming that moving offshore precludes a taxpayer from tax is a naive assumption. While the taxpayer has appealed the Federal Court Ruling with an outcome pending, it’s an important reminder to people looking to enjoy an expat lifestyle: With effective tax planning, much of the risk can be avoided.
For more information about residency for tax purposes, contact us on 02 9957 4033.
Last updated February 2019. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.