Recent Court Case Underpins Importance of Abode for Australian Expats – There has been a recent spotlight on Australians living overseas specifically when it comes to tax residency. The recent Handsley case in May of this year has further hit home how important it is to set up a “permanent place of abode” when declaring yourself a non-resident of Australia for taxation purposes.
In the Administrative Appeals Tribunal case of Handsley and the Commissioner of Taxation, an Australian expat was declared to have been a tax resident of Australia despite the evidence showing that he had no intention of living and working in Australia.
Handsley was an Australian citizen who lived in Australia until 30 June 2012. In July of 2012 he left Australia to commence a 3 month working contract in various overseas locations (which was later extended to 11 months).
During the 2012/13 financial year Handsley lived in multiple locations for varying lengths of time but most importantly only spent 50 days in Australia. Handsley claimed that his new home was in the Philippines with his new partner but he only spent a total of 21 days in the country. Throughout the 2012/13 financial year he spent 43 days in Vietnam, 22 days in Singapore and 127 days in Malaysia.
The taxpayer also sold all of his assets in Australia before leaving overseas. This included selling his car, his family home and other belongings. He only retained an Australian Super fund and bank accounts.
To be considered a non-resident of Australia for tax purposes an individual must show the following (Income Tax Assessment Act 1936):
- The individual did not reside in Australia under ordinary concepts AND
- The individual must either:
- Change their domicile to a place outside of Australia OR
- Establish a permanent place of abode outside of Australia
It was determined that Handsley did not reside in Australia under ordinary concepts. Under the resides test it was clear to see that the taxpayer was no longer a resident of Australia due to his work and relationships being overseas and the fact that majority of his time was spent outside of Australia. The taxpayer had formed an intention to move his life outside of Australia.
Because Handsley was deemed to have an Australian domicile by birth he was required to, either by choice or law, establish a new domicile in another country to meet this test. Handsley had not established any permanent living arrangements overseas and the Tribunal was unable to determine if a new domicile had been established.
Permanent place of abode test
It has been previously determined in the widely followed Harding case that a series of temporary places of abode is acceptable to satisfy the permanent place of abode test IF the temporary residences are within the same town or region.
The Harding case ruled that a non-resident was deemed to have a permanent place of abode outside of Australia despite living in “temporary” accommodation since he had stayed within the same area/region for the entire period.
Because Handsley had moved and traveled to so many different countries during his time overseas, the Tribunal determined that he had not established a permanent place of abode. Handsley did not settle in one specific place and create a home.
The outcome for Handsley
Due to the fact that Handsley could not satisfy the domicile or permanent place of abode test, he was determined to be a tax resident of Australia in the 2012/13 financial year. Handsley had not set up a permanent home in one place overseas due to his extensive travel.
This outcome further solidifies the ATO’s stance that if you want to be considered a nonresident of Australia for taxation purposes, you must concretely prove that you have settled in a new country or jurisdiction on a permanent basis.
This case highlights the importance of establishing a permanent place of abode when you move overseas to work or live. The Harding case changed the precedent when it comes to permanent place of abode to include not only the physical home that you live in but also the town or region that you are taking up residence in. What this means is that while you are not required to purchase a house in a new country, you need to demonstrate to the ATO that you have truly set up a new “home”.
The implications of the Harding case are that the permanent place of abode test has become more subjective and in essence, easier to satisfy. The ATO has sought special leave with the Australian High Court to appeal the decisions in the Harding case and there are currently talks that the Board of Taxation are reviewing the income tax residency rules for individuals.
While the Australian tax residency rules are currently in a volatile state of change, our guidance to clients remains the same. If you move overseas and no longer wish to be considered a tax resident of Australia it is important that your actions and intentions mimic those of a nonresident.
Retain all rental agreements, work contracts and even receipts of furniture and household items purchased while overseas. Each bit of evidence showing that you have set up a new home and life overseas helps build your case should the ATO ever decide to audit and question your residency.