Australia uses four statutory ‘tests’ to determine the residence of an individual. An individual that satisfies the conditions in any one of the four tests is an Australian resident. An individual does not have to be a resident of another country in order to be a non-resident in Australia. Being a resident of another country (as determined by the tax law of that country) does not mean that person cannot be a resident of Australia as well. In fact, that is one of the important roles a Double Tax Agreement could play. A DTA will usually contain a “tie-breaker test” so you only end up with one country of residence for tax purposes. Australia has 44 DTA’s. However, if you go to a non-DTA country you may end up being taxed in both countries as a resident. The four tests are commonly referred to as:
1. The resides test 2. The domicile test 3. The 183 day test 4. The Commonwealth superannuation fund test
oThe resides test A person who resides in Australia is a resident of Australia for tax purposes. “Reside” is not defined in the tax Act so takes its “ordinary meaning” which in the tax context refers to the meaning given to the word in the dictionary. A prime factor here is physical presence. To reside in Australia you will have had a settled dwelling in Australia permanently or for a considerable period of time – at least six months in the ATO view for people entering Australia. Nationality, citizenship or domicile do not determine the matter. The ATO will look at 4 main areas when considering you under the resides test. • Physical presence and intention for being in Australia • Family, business and employment ties a person has with Australia • Assets that they have in Australia
• Living arrangements such as where the person’s children go to school, where the mail is sent to, memberships of groups such as a gym, a sports club or professional associations. The resides test looks at whether or not the person belongs to, or a part of, the Australian community. Summary: A person who moves overseas for a long period and severs all ties with Australia and does not maintain a continuity of association with Australia will most likely not satisfy the conditions of the resides test. •For most foreign assignments, the relevant test will be the domicile test and the key factor will be whether or not the person established a permanent place of abode in a foreign country.
oThe primary test of tax residency is called the ‘resides test’. If a person resides in Australia, she/he is considered an Australian resident for tax purposes and doesn’t need to apply any of the other residency tests. In this case Kit may be likely to satisfy the resides test as his family is living in Australia for the last four years. However, if a person does not satisfy the resides test, he/she will still be considered an Australian resident if they satisfy one of these statutory tests: oThe domicile test: A person who has their domicile (generally, a place that is the permanent home) in Australia is a resident of Australia unless the Commissioner of Taxation is satisfied that their permanent place of abode is outside Australia. Domicile is a strict legal concept. A person usually takes the domicile of their father at the time they are born. In most instances, this test will narrow to a consideration of “permanent place of abode” and in many of those narrow further to a consideration of the term “permanent”. What is a Permanent Place of Abode?
The ATO view is that a permanent place of abode cannot be established in less than two years. Some of the important considerations are: • The intended and actual length of stay overseas • Whether the person intended to stay in the overseas country temporarily and then move to another country or return to Australia • Whether the person has established a fixed residence or household for themselves and their family in the overseas country. This is very pertinent. • Whether a home in Australia is maintained or abandoned • The durability of association with Australia such as the maintenance of bank accounts, whether government and investment bodies have been informed of the move and the consequent change in residency status, the place of education of children and the existence of family ties.
It can be interpreted that Kit satisfies the domicile test as he has his family in Australia and owns a house as well. The fact that he has a joint account with Westpac and his salary is transferred to that account should also be considered to determine his residency status for taxation purposes. oThe 183-day test: If you’re actually present in Australia for more than half the income year, whether continuously or with breaks, you may be said to have a constructive residence in Australia, unless it can be established that your usual place of abode is outside Australia and you have no intention of taking up residence here.
A person who is actually present in Australia for more than half of an income year is a resident of Australia unless the Commissioner of Taxation is satisfied that their usual place of abode is outside Australia and they have no intention to take up residence in Australia. This test is rarely used in practice. It doesn’t require too much analysis except to say that a person relying on a “usual place of abode” argument will have a lower threshold the meet than a “permanent place of abode”. (Summary: If you are in Australia less than 183 days during an income year you will not satisfy the conditions of the 183 day test.) In our case study, Kit does not satisfy the 183 day test. Even if he comes to Australia for the one month leave he gets every third month, still the total duration of his stay would be 3 month which is less than 183 days.
oThe Commonwealth Superannuation test: This test ensures that Australian government employees working at Australian posts overseas are treated as Australian residents. This test is commonly known as the superannuation test, but it only applies to an active contributing member (or the spouse or child of an active contributing member) of the superannuation fund for Commonwealth government officers. Anyone who is an active contributing member is ruled a resident of Australia for tax purposes. (Summary: A contributing member of the superannuation fund for Commonwealth government officers, or the spouse of child of such a contributing member is a resident of Australia for tax purposes).
Since, Kit was recruited for the job and signed his employment contract in Australia, it can be assumed he is working at an Australian post. However, nothing has been specifically mentioned as regards to this in the case. There is some cross over with the resides test. The conditions of the domicile test are an easier threshold for the ATO to meet when attempting to classify a person as a resident. This will often be their aim so they can assess the person on foreign earnings. The domicile test is the one that will catch most Australians on foreign secondments so let’s look at some cases and outcomes to show how they can pan out. However, each case can only be considered and decided on its own facts. Iyengar v FCT 2011
Held: Resident Overseas country: Dubai Intended stay: 2 years with option to stay longer Actual stay: 2 ½ years Job: Engineer Overseas home: Provided by employer Australian home: Family home and goods maintained Reason for return: Project completion Other factors: Overseas salary bank in Australia. Spouse and children remained in Australia. Continued to pay down mortgage in Australia. Returned to Australia for holidays. Pillay v FCT 2013 AATA 447 Held: Resident Overseas country: East Timor however spent about 6-8 weeks per year in Australia Intended stay: Indefinite Actual stay: 5 years Job: Doctor Overseas home: Supplied by employer
Australian home: Maintained and lived in by spouse Other factors: Company car. Kept a wardrobe of clothes in Australia. Adult children and a grandchild in Australia. Kept Australian bank accounts. Joined a social club and gymnasium in East Timor. (Summary: A person who leaves Australia for an indefinite (but subject to a minimum period) or substantial period and establishes a home in another country and divests themselves of assets and entitlements in Australia will most likely not satisfy the conditions of the domicile test.) Thus, looking at all the factors Kit can be considered as an Australian resident for taxation purposes.
Sources of Income Source of income is a question of fact Source of income depends on circumstances of each case Where income is derived from more than one source it may need to be apportioned between those sources General Source Rules Services income – where the services are performed Business income – where the goods are sold or business is transacted Interest income Loan – where the loan agreement is entered into and the money is lent Business contract – where the contract was made Rental income Fixed property – where the property is located Moveable property – where the lease agreement was entered into In my opinion Kit’s salary income would be taxed as it is paid into his Australian bank account. However, since his investments are in Chile, Kit’s investment income will not be taxed in Australia. Also, a DTA is signed between Australia and Chile which means that Kit will not have to pay taxes for his income in both the countries. Also, Kit may be able to claim foreign income tax offset if he pays taxes overseas.