Moving overseas is exciting, but it can also raise important legal and financial questions.
We are seeing an increasing number of people leaving Australia to set up business overseas and take advantage of the potential tax benefits that a low-tax jurisdiction brings. Many people assume that when they leave Australia for an extended period, they are free of their obligations to pay Australian tax.
Unfortunately, it’s not that simple. The ATO will try and tax people on their world-wide income (i.e. income from any source) when they are an Australian resident. Accordingly, it is critical that when you leave Australia, you properly sever your Australian tax ties.
This comes down to a consideration of whether, even though you are physically overseas, you still avoid meeting the criteria of any of the 4 Australian residency tests:
- The ordinary meaning test;
- The domicile test;
- The 183-day test; or
- The Superannuation test.
Ordinary meaning test
Under the ordinary meaning test, an individual is resident if they “reside” in Australia according to the ordinary meaning of that word. This is essentially what the courts have decided a ‘resident’ is over a long history of decisions.
To “reside” is given its common sense meaning, being when a person “permanently” dwells or lives in a particular place for a “considerable time” as stated by CJ Latham in FC of T v Miller (1946) 73 CLR 93. This “ordinary meaning” is determined by examining six factors, which are interconnected.
The first factor is the individual’s physical presence in Australia during the income year. This considers whether the individual spent time physically in Australia and, if so, how much time. However, physical presence alone is not decisive. An individual may spend some time in Australia without being a resident, especially if they do not maintain a home or settled life in Australia. For example, in Mynott v FC of T [2011] AATA 539, the individual spent 468 days in Australia over a four-year period. This limited presence supported the conclusion that the taxpayer was not a resident of Australia.
The second factor is the frequency, regularity and duration of visits to Australia. The focus is not only on why the individual returned, such as for work, family, or personal reasons. Rather, the question is whether the visits show a pattern of continuity, routine or habit consistent with residing in Australia. For example, in Noorden v FC of T (1963) HCA 21 (Noorden), the individual was found to be a resident here because, between overseas jobs, he regularly returned to his wife and children in Australia. He most importantly also continued to describe himself as an “Australian resident” on immigration documents. These facts suggested that Australia remained his settled home.
The third factor is whether the individual continues to maintain a place of abode in Australia. If an individual has not established a permanent home overseas but keeps a home available in Australia, this may suggest that they have not truly ceased residing in Australia. This is especially relevant where the move overseas appears temporary or uncertain. If the individual’s Australian home remains available for their use, while their overseas accommodation is short-term or work-related, this may indicate that Australia remains their place of residence. For example, in Noorden, the individual owned a residence as a joint tenant with his wife. Similarly in Iyengar v FC of T [2011] AATA 856 (Iyengar) the taxpayer was found to be an Australian resident because he made regular mortgage payments for his family home in Australia while living in Dubai.
The fourth factor is the strength of the individual’s family and business ties to Australia. Family ties are often given significant weight because they may show where the individual’s personal and domestic life in Australia remains centred. Business ties are relevant, although usually less important than family ties. In Iyengar, the taxpayer was found to be an Australian resident because his family remained in Australia and he continued to maintain a family home here. He was found to retain a “continuity of association” through regularly visiting his wife and children who remained in Australia. Despite working overseas, his ordinary life remained connected to Australia.
The fifth factor is the individual’s habits and mode of life before and after leaving Australia. The question is whether the individual’s lifestyle has genuinely changed in a way that shows they have relocated overseas. If there is little difference between the individual’s life before and after the move, this may indicate that Australia remains their true place of residence. In Levene v IR Commrs [1928] AC 217, the court considered the taxpayer’s pattern of life, movements and personal circumstances when determining residence, where he would frequently return home between overseas jobs. Practically, the courts look to things like:
- Sports clubs and memberships;
- Enrolling children in school; or
- Maintain mail delivery to an Australia address.
Finally, nationality may be relevant, but it is usually not decisive. Australian citizenship does not automatically make an individual a tax resident. However, nationality may become more important where the individual has no clear permanent home, or is moving between countries without establishing strong roots anywhere else. In those cases, Australian nationality may support the conclusion that the individual’s continuing connection is with Australia.
Domicile test
Under this test, a person is treated as an Australian resident if their legal domicile is in Australia, unless the ATO is satisfied that their permanent place of abode is overseas.
A domicile is an old English residency concept originally created to continue to tax English merchants who would be travelling for many years at a time. Essentially, a person’s domicile is the country in which they were born. This is known as the domicile of origin.
However, people are not restricted to one domicile forever. You can adopt a new domicile of choice, but this requires that you make a choice to make your home indefinitely in another country (section 10, Domicile Act 1982 (Cth)). This requires you to prove that you have an intention to permanently change the country in which you will be living indefinitely.
Generally, the court will assess the intention of the person using many of the same factors discussed for ordinary residency, including:
- The intended and actual length of the stay;
- The establishment of a home overseas;
- Any family members remaining in Australia; and
- Familial and finical ties to Australia and the other country.
As might be expected, it is very hard to prove that you have an intention to permanently change your domicile of origin. Accordingly, most Australians departing Australia for a significant period accept that they may remain domicile here, but then rely on the fact that they are establishing a permanent place of abode overseas.
A ‘permanent’ place of abode does not mean that you have to live in the foreign country forever. There can be vague notions that a person expects to eventually return to Australia at some stage.
In FC of Tv Applegate 79 ATC 4307, the taxpayer had established a permanent home in Port Vila, they were admitted as a solicitor there are had no other connection to Australia (aside from his domicile status). Although he was forced to return to Australia due to health reasons, he had sufficiently established that his place of abode in Vanuatu was intended to be permanent. The court noted that this concept is intended to be ‘less than a permanent place of abode in which the taxpayer intends to live for the rest of his life.’
Similarly, in FC of T v Jenkins 82 ATC 4098, the taxpayer had moved overseas on a three-year posting. He had tried to sell his main residence, but had been unable to find a buyer, and had ended up renting it out. Although he eventually returned early due to ill health, the court did accept that his stay was not ‘temporary (in contradistinction to permanent) simply because the limits of the stay were fixed and ascertainable’. He was considered to have established a permanent place of abode overseas.
By contrast, in Boer v FC of T 2012 ATC, the taxpayer was provided with basic accommodation by his employer in Oman. He worked rotational work patterns and made regular returns to Australia. In this scenario, the taxpayer failed to prove that he had established a true overseas home.
However, the question is really one of fact and degree, focusing on the strength and durability of the person’s connection to the overseas country. In Harding v Commissioner of Taxation [2019] FCAFC 29, the taxpayer was living in various serviced apartments in Bahrain, moving between them quite regularly. He still had close ties to Australia, with his family and many of his assets remaining here. While he made regular visits, the intention had been for the family to move to Bahrain with him. The Court in this case took a broad view of ‘place of abode’, finding that it could refer to a town or a country, rather than a specific dwelling. Given his long-term residence and intentions to remain there, that was sufficient to constitute a permanent place of abode.
183 day test
The 183-day test is mainly relevant to individuals moving and immigrating to Australia, rather than Australians emigrating. However, it should be noted that the ATO will consider you a resident of Australia if you are physically present in Australia (whether visiting or living) for more than half the year and your usual place of abode is not overseas.
A usual place of abode is a less stringent test than a permanent place of abode. If you have a place that you are regularly living at overseas, then this should be sufficient to meet this test.
Superannuation test
The superannuation test applies to Australian Government employees who are members of the Public Sector Superannuation Scheme or the Commonwealth Superannuation Scheme. If the test is satisfied, the person is treated as an Australian resident for tax purposes, even if they are physically living overseas and may not satisfy the ordinary “resides” test.
The PSS has since stopped accepting new members and will only have very limited application.
Moving overseas does not automatically end your Australian tax obligations, and the consequences of getting your residency position wrong can be significant. Before you leave, it is worth taking a careful look at your living arrangements, family and business ties, and overall intention so you can properly sever your Australian tax connections and avoid an unexpected dispute with the ATO. For help understanding your position and planning your departure with confidence, speak to our team on 1300 654 590 or email us.
