Tax Residency - Alarm Bells Ringing

Change to Australian tax residency ring alarm bells

There have been some recent indications that the ATO is more actively challenging individuals who claim to be non-resident for tax purposes. In particular, many Australians working in zero tax regimes, such as the Middle East, have recently received assessments based on the ATO's assertion that they have remained resident for Australian tax purposes. The financial implications in their situation are of course enormous - and potentially undermine the whole financial basis for undertaking an offshore assignment.

The genesis of the problem would appear to lie in a decision made in 2009 to fundamentally discontinue the tax exemption available under s23AG of the Tax Act for income earned offshore, if certain requirements were met. In fact, the change has meant that many Australians have discontinued working overseas, and many of those who continued to do so have left Australia and based themselves overseas. The tax changes were intended to generate additional revenue - in fact, we have seen no evidence to that effect, whilst it has clearly impacted the number of Australians working overseas, and their competitiveness.

We now have a situation where many more Australians are probably declaring themselves non-resident for tax purposes than has historically been the case. The ATO is quite correct in these circumstances to ensure that in all these instances individuals meet the requirements for non-residency. However, there also appears to be an effort underway to challenge the existing criteria for determining residency, and in fact make it more difficult to substantiate non-residency. You can't help but draw the conclusion that this is being done to maintain and extend the revenue base. Some particular comments are made below:

1. Determining tax residency from an Australian perspective is often a complicated analysis, because it is determined on the facts of any particular case. But from a layman's perspective Tax Rule IT2650 offered a relative beacon of clarity, detailing the factors that would need to be taken into account in any analysis, and indicating that a person with an intention to be outside of Australia for “a period of about 2 years or more” may be considered to have broken residency where they have a permanent place of abode overseas.

Now, in some recent AAT cases there has been explicit statement that the Tribunal is not bound by IT2650 and a suggestion that individual's will find it more difficult to break residency - particularly if they have substantial assets in Australia. In one case, in terms of illustrating an individual's connection with Australia, mention was made that an individual, "maintained retained bank accounts in Australia and his membership in an Australian superannuation fund." The Tribunal did not explain how an individual could go about not maintaining an existing superannuation fund in Australia - as it has been many years since even individuals leaving the country on a permanent basis have had the ability to access their superannuation funds and close their accounts.

2. People need to remember that if they receive an assessment for an early tax year and decide to accept it - perhaps because it related to only a portion of a year - then they make themselves liable for Australian tax from that point on unless their circumstances have changed. Every effort should be taken to object to an unfair assessment, using professional advisers, rather than rely upon a later appeal to the Tribunal. In a number of recent cases which have gone to the Tribunal, it is clear that individuals were handicapped by a lack of professional advice, and evidence to support their position. Remember that the ATO will be professionally represented.

3. There is a wider argument that in this very mobile world, being more restrictive in terms of non-residency will simply make it more attractive for Australians working overseas to permanently depart Australia - or leave for significantly longer periods than has historically been the case. This structurally diminishes the tax base and the nations intellectual and working capital.

From a practical perspective, we would :

A. Encourage all Australian expatriate and business groups based offshore, to make it abundantly clear to any visiting Australian politicians or diplomats that changes in this area constitute a very significant threat to the viability of the Australian expatriate community.

B. Recommend that all potential or existing Australian expatriates seek professional tax advice regarding their residency position. Depending on how matters progress, there may be a need to make significant changes to assignment conditions and the basis on which assets are maintained in Australia.

This is particularly case for assignments into zero tax regimes such as the Middle East. See Exfin to arrange professional advice.