A recent Federal Court decision is a useful reminder that working overseas for an extended period doesn’t necessarily end Australian tax residency. In Quy v Commissioner of Taxation, the taxpayer spent around five years living and working in Dubai. Despite the length of the assignment, the Federal Court dismissed his appeal from a decision that he remained an Australian resident for tax purposes under the domicile test.
One of the most interesting features of the case is that the taxpayer was found not to reside in Australia under the ordinary concepts test, but he was still an Australian tax resident under the domicile test.
Australian tax law contains several separate residency tests, and satisfying or failing one test doesn’t necessarily decide the outcome under another. Under the domicile test, a person whose domicile is in Australia is generally treated as an Australian resident unless the ATO is satisfied that the person’s permanent place of abode is outside Australia. It wasn’t disputed that the taxpayer’s domicile was in Australia. The key issue was therefore whether his permanent place of abode was outside Australia.
The taxpayer was a mechanical engineer who had worked for an Australian company in Australia and on overseas assignments for many years. In 2015, he accepted a full-time position with the company in Dubai.
His connections with Dubai included:
living and working there for several years;
holding UAE residency permits;
living in an apartment leased by his employer; and
developing a social life overseas.
However, he also retained significant connections with Australia. These included:
the family home in Perth;
His point of hire remained Perth, his employment contract was governed by Australian law, his base salary was paid in Australian dollars into an Australian bank account, and super contributions continued to be made under Australian law.
The ART accepted that the taxpayer wasn’t residing in Australia under ordinary concepts during the relevant period. However, it wasn’t satisfied that he had established a permanent place of abode outside Australia for the purposes of the domicile test. In this context, “permanent” doesn’t mean that a person must intend to live overseas forever. Instead, it contrasts with a place of abode that is temporary or transitory.
The Federal Court rejected the argument that living, working and socialising overseas for an extended period was enough, without more, to establish a permanent place of abode outside Australia. It found that the ART had applied the correct legal principles and was entitled to weigh the taxpayer’s overseas circumstances against his continuing connections with Australia. The decision doesn’t establish that any one Australian connection will determine a person’s residency. It instead reinforces that the overall circumstances need to be considered.
Australian residents are generally taxed on their worldwide income, while foreign residents are generally taxed only on Australian-sourced income.
In this case, the ATO accepted that the taxpayer’s overseas salary was foreign-sourced. However, because he remained an Australian resident for tax purposes, that income was still relevant to his Australian tax liability. Having a foreign payroll, an overseas bank account or a right to live in another country won’t, by itself, determine Australian tax residency.
Clients contemplating overseas employment often focus mainly on how long they’ll be away. The case shows that broader matters can be equally important, including:
whether their spouse or children will remain in Australia;
Documents such as employment contracts, assignment letters, leases, residency permits and travel records may become important if the person’s residency position is later questioned.
There’s no automatic time-based rule that makes someone a foreign resident after working overseas for a set period. Residency remains a fact-driven question, and even a posting lasting several years may not be enough. The Government previously announced plans to replace the existing individual residency rules with a new framework, but the existing tests remain in force. Clients should therefore review their residency position under the current law before lodging as foreign residents.
This case is a useful prompt to speak with clients before they leave Australia, rather than after a tax return’s lodged. Residency may also affect other matters, including foreign income reporting, foreign income tax offsets and the Australian tax treatment of assets.
Source:www.ato.gov.au/individuals-and-families/coming-to-australia-or-going-overseas; www.ato.gov.au/calculators-and-tools/tax-return-work-out-your-tax-residency; Federal Court of Australia - Quy v Commissioner of Taxation Judgement