Changes to clarify the tax residency tests for individuals
A Draft Ruling is due to be issued by the ATO in September which seeks to clarify the tax residency tests for individuals after a decision of the Full Federal Court threw doubt on some aspects of the ATO’s interpretation of the domicile test. In short, the Full Federal Court found that “place” of abode can also refer to a town or country, rather than the narrow view of a particular apartment or a specific residence. In addition to issuing the Draft Ruling, the ATO will also be consolidating and updating various residency rulings.
Changes to clarify the residency tests for individuals are expected to be released in September 2022. This will be in the form of a Draft ATO Ruling that will provide preliminary guidance and clarification of the law to enable individuals to self-assess their residency status. It was initially flagged for release in February 2022 and seeks to incorporate the Full Federal Court’s decision in Harding v FCT [2019] FCAFC 29.
The Harding case
In the Harding case, a taxpayer who was a dual citizen (Australian and British), left Australia to work in Saudi Arabia in June 2009, intending to do so indefinitely if not permanently. His wife and children remained in Australia, but he expected them to join him towards the end of 2011. However, the taxpayer and his wife separated in October 2011. He lived in an apartment building in Bahrain, commuting daily to Saudi Arabia.
From June 2009 to June 2011 the taxpayer lived in a 2-bedroom apartment, but then moved to a one-bedroom apartment in the same building for 12 months. In June 2012 he moved back into a 2-bedroom apartment in the same building. The issue was whether the taxpayer had a “permanent place of abode” in Bahrain in the 2011 income year. If not, he was a resident of Australia on the basis of the domicile test.
At first instance, the Federal Court decided that while the taxpayer was not a resident under the ordinary concepts test, he was a resident of Australia under the domicile test as he did not have a permanent place of abode outside of Australia considering that this accommodation in Bahrain was temporary. This was overturned on appeal.
The Full Federal Court found that “place” of abode also refers to a town or country. On the evidence, the Full Court found that Bahrain was the taxpayer’s “permanent place of abode” in the 2011 income year and therefore he was not a resident of Australia based on the domicile test. The High Court refused the Commissioner’s application for special leave to appeal.
Harding ATO Decision Impact Statement
In the Harding Decision Impact Statement, the ATO noted that it intended to apply the Full Federal Court’s construction in relation to the domicile test. Therefore, in seeking to determine whether an individual’s permanent place of abode is outside of Australia, it will consider whether the person has:
- definitely abandoned residence in Australia, and
- commenced living permanently in a specific country overseas.
This, however, will depend on the individual facts and circumstances surrounding the person’s departure from Australia, their arrangements in relation to the overseas country and nature of their presence there. For example, the nature of the dwelling or dwellings may be one of the factors that will be taken into account by the ATO to determine whether an individual is permanently living overseas.
According to the ATO, it will also be consolidating and updating various residency rulings including Taxation Ruling IT 2650 (Residency – permanent place of abode outside Australia) to reflect the views of the Full Federal Court, in particular, the interpretation that “place of abode” refers not only to a dwelling but can also refer to a country.
Taxation Ruling TR 98/17 (Residency status of individuals entering Australia) will also be updated.
Keep up to date
With the start of the new financial year, this is just one of the new Draft Rulings the ATO plans to issue. There are many other planned Draft Rulings or Determinations which may have wide reaching implications including on trusts, GST matters and FBT.
To stay up to date with these changes and other developments, follow us on LinkedIn.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.