Mercia | Taxation, Business & Finance Advisers

RESIDENCY GUIDELINES

There are four tests of residency contained within the definition of ‘resident’ in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA.  They are alternative tests in the sense that even if an individual is not a “resident” according to ordinary concepts (see (a) below) within the common definition they may fall within one of the other tests – There are four main tests for residency:

• Residency – the “resides” test
• Residency – the “domicile” test
• The 183 day rule, and
• The Superannuation test

(a) Residency according to ordinary concepts

This test provides that whether a person resides in Australia is a question of fact that depends on all the circumstances of each case, with the following factors to be considered:

• If the person returns to the country of origin – the frequency, regularity and duration of those trips and their purpose can be decisive factors. If the only reason for the person’s absence from Australia is business, this may not be enough in itself to support a claim that the person is not a resident.
• The extent of family and business ties which the person has, in Australia and in the country of origin.
• Whether the individual is accompanied by his or her family to Australia and on return trips to the country of origin.
• Whether the person is employed in the country of origin.
• Whether a place of abode is still maintained in the country of origin or is available for the person’s use while there.
• Whether personal effects are kept in Australia or in the country of origin.
• The extent to which any assets or bank accounts are acquired or maintained in Australia and in the country of origin.
• Whether the migrant has commenced or established a business in Australia.

(b) The domicile test

 An individual is a resident of Australia under the domicile test if he or she has a domicile in Australia unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia. Under the Domicile Act 1982, a person acquires a domicile of choice in Australia if the person intends to make his or her home indefinitely in Australia. The domicile test is discussed in Taxation Ruling IT 2650. Domicile generally means the country you were born in unless you migrate to another country – then you adopt a “domicile of choice”.

(c) The 183 days test

A returning expatriate, or new migrant having regard to their terms of their migrant visa, who is present in Australia for more than 183 days (continuously or intermittently) in a tax year is, generally speaking, a resident of Australia under the 183 days test.  This is unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence.

(d) The Superannuation Test

This is a “statutory” test and an alternative to the ordinary tests of residence – that is to say that individual’s may be “residents” under this test when they do not in any way reside in Australia in the ordinary sense.  In effect individuals are “deemed” to be residents if they “are an eligible employee for the purpose of the Superannuation Act 1976 or is the spouse or a child under 16 years of age of such a person.’ This test applies mainly to people working for the Australian Government overseas.

Factors the ATO consider for Residency

Tax Ruling No. IT 2650 sets out the factors the ATO will consider when determining whether a person is a resident or non resident for tax purposes in Australia. The Ruling states that the following factors need to be taken into account:

• the intended and actual length of the individual’s stay in the overseas country: As a broad rule of thumb, a period of about 2 years or more would generally be regarded by this Office as a substantial period for the purposes of a taxpayer’s stay in another country. It must be stressed, however, that the duration of the taxpayer’s actual or intended stay out of Australia is not, of itself, conclusive and needs to be considered with all of the factors in the case.

If, however, an individual with a usual place of abode in Australia has no fixed or habitual place of abode overseas but moves from one country to another or moves constantly within the same country (for example, from town to town or even from suburb to suburb) any association with a particular place overseas would be purely temporary or transitory and he or she would not be considered to have adopted an alternative domicile of choice or a permanent place of abode outside Australia. In such case, if the person could not be said to have acquired a domicile of choice outside Australia, the taxpayer would be considered to be a resident of Australia under the definition of “resident”.

• any intention either to return to Australia at some definite point in time or to travel to another country

• the establishment a home outside Australia:

The fact that an individual has established his or her home (in the sense of a dwelling place; a house or other shelter that is the fixed residence of a person, family or household) in an overseas country would tend to show that the place of abode in the overseas country is permanent. Acquisition of a home in the overseas country would be a very relevant though not conclusive factor. On the other hand, individuals or a family group who “make do” in temporary accommodation with limited resources and facilities such as in barracks, singles’ quarters, aboard ships, oil rigs, or mining towns, will be less likely to be considered to have established a permanent place of abode overseas.

• the abandonment of any residence or place of abode the individual may have had in Australia

• the duration and continuity of the individual’s presence in the overseas country

• the durability of association that the individual has with a particular place in Australia:

The relevance of bank accounts maintained in Australia varies depending on the types of accounts. If a taxpayer closes all bank accounts in Australia and transfers all funds (including investment funds) to accounts in the overseas country, this would indicate less durability of association with a place in Australia than if all accounts in Australia were maintained. On the other hand, even if an individual closes all accounts for everyday use (such as cheque and savings accounts) and maintains a long term investment account, it is still possible to establish that, on the basis of other factors, the individual has a permanent place of abode in the overseas country.

Similar considerations apply in relation to the place of education of children. For example, an individual may be considered to have a permanent place of abode in an overseas country even though his or her children continue their schooling in Australia due to the absence of adequate educational facilities in the overseas country. However, the fact that the children continue their schooling in Australia despite the presence of adequate educational facilities in the overseas country, would tend to show a more durable association with a place in Australia.

The weight to be given to each factor will vary with individual circumstances of each case and no single factor is conclusive.

RESIDENCY EXAMPLES

The following are some examples of how the tax office determines whether a person is a resident or a non resident for income tax purposes:

1. An Australian resident employee of a mining company was transferred overseas for a temporary work assignment for a period of 2 years and intended to return to Australia at the end of that period. The purpose of the assignment was for the employee to gain wider work experience. The employee was initially accompanied by his wife and children but the children returned to Australia to continue their schooling. The employee spent his annual holiday in Australia. During his absence from Australia he rented out his home and maintained bank accounts in Australia. He made no investments in the overseas country and remitted all money in excess of living requirements to Australia for investment. In those circumstances the taxpayer was not considered to be a resident of Australia under the ordinary meaning of the word “resident” but was considered to be a resident under the extended definition of that term.

Result: resident.

2. A person who had just completed tertiary studies decided to leave Australia for an unspecified period of time to work in one overseas country to gain work experience. Before leaving she closed all bank accounts except for a 5-year interest bearing deposit. She had no established home in Australia and no spouse or children in Australia. While she was forced to return to Australia within 18 months due to an illness, she was considered to be a non-resident as it was her original intention to remain outside Australia for an unspecified period of time and she was considered to have a permanent place of abode in the overseas country.

Result: non-resident.

3. The opposite conclusion would have been reached if she had intended to (and did) spend one year each in 2 countries and then had travelled for a further period of one year, making do in temporary or transitory accommodation in each country as she went. In that case she would not have a permanent place of abode in any of the overseas countries and would continue to be a resident of Australia.

Result: resident during the 3-year overseas stay.

4. A bank manager was posted to the New Hebrides for 2 years. During that time he and his family lived in a furnished house provided by the bank. The taxpayer’s home in Australia was let. On leaving Australia, the taxpayer expected a further overseas posting after his 2-year period. He advised the Department of Social Security that the family was leaving Australia permanently and child endowment payments should cease. The taxpayer was considered to have abandoned his place of residence in Australia and to have formed the intention to, and in fact did, reside outside Australia. His place of abode in Vila was not merely temporary or transitory; rather, it was intended to be and was in fact his home for the time being (Case S19 85 ATC 225; 28 CTBR (NS) Case 29).

Result: non-resident.

5. A bank officer was posted from Australia to the New Hebrides for 2 years only and never intended to stay any longer. During his overseas posting he maintained bank accounts in Australia, into one of which family allowance payments continued to be made, and let his Australian home unfurnished. He was accompanied by his wife and children. His place of abode in the New Hebrides was considered to be temporary or transitory for two reasons. Firstly, he lived, by the bank’s continuing permission, in a house leased by the bank in the New Hebrides. Secondly, having regard to the 2- year period of his appointment, the taxpayer’s relationship with his place of abode in Port Vila lacked ” a more enduring relationship” (see Applegate per Fisher J 79 ATC at p.4317; 9 ATR at pp 910-911) with the particular place of abode than that expected to exist where a person ordinarily resides there or has there his usual place of abode (Case Q68 83 ATC 343; Case 132 26 CTBR(NS) 913).

Result : resident.

6. An Australian resident employee of a mining company was transferred overseas for a temporary work assignment for a period of 2 years and intended to return to Australia at the end of that period. The purpose of the assignment was for the employee to gain wider work experience. The employee was initially accompanied by his wife and children but the children returned to Australia to continue their schooling. The employee spends his annual holiday in Australia. During his absence from Australia he rented out his home and maintained bank accounts in Australia. He made no investments in the overseas country and remitted all money in excess of living requirements to Australia for investment. In those circumstances the taxpayer was not considered to be a resident of Australia under the ordinary meaning of the word “resident” but was considered to be a resident under the extended definition of that term.

Result: Resident 

7. An engineer was sent by his Australian employer to the Philippines on a project assignment for a minimum period of 3 to 4 years and he decided to relocate his family in the Philippines. In fact, the assignment was terminated after 2 years and the taxpayer returned to Australia. It was always his intention to return to Australia at the completion of the project. He retained his Australian home and rented it out. On arriving in the Philippines, the taxpayer and his family initially resided for short periods at a hotel and in an apartment. Later, he sub-leased a house which the family occupied until their return to Australia. Having regard to the nature and quality of his use of the place of abode in the Philippines, the taxpayer was considered to have established a permanent place of abode outside Australia. The taxpayer did not establish a regular pattern of visit to Australia during the 2 years while we worked in the Philippines.

Result: Non-Resident

8. An Australian missionary went overseas for a period of 4 to 6 years with the probability of again being posted overseas for a similar period after completion of her furlough leave in Australia. She and her husband owned a house in Australia which they rented out during their absence. They intended to return to Australia at the end of their missionary work. She was considered to be a non-resident during the period of her absence overseas. However, during the period of furlough in Australia and while she was in Australia awaiting reappointment to another overseas post, she was not considered to have a permanent place of abode outside Australia and was a resident of Australia.

Result: Non resident during the overseas absence

The above describes the principles and examples the below are some helpful hints to consider that assist you in substantiating the ceasing of Australian residency and establishing residency outside Australia.

Checklist of things to do before leaving Australia permanently include:

• Close personal bank accounts
• Cancel surplus credit cards in Australia, keep one until you are able to obtain a credit card from overseas
• Send letter to Superfund that you are leaving Australia
• Letter to private Health Insurance
• Send a letter to the electoral to advise of your move outside Australia.
• Cease any Australian memberships
• Arrange a postal forward from your address to an Overseas address OR arrange for your relative to forward correspondences to you Overseas
• Sell personal car – (keep until you are sure that you have decided to leave Australia permanently, say 6 months after the job commences)

Checklist of things to do after leaving Australia permanently include the following in the chosen place of permanent residence outside of Australia:

• Establish personal bank accounts
• Establish personal credit cards
• Join a local Superfund that you are leaving Australia
• Establish private Health Insurance
• Join local community memberships, sporting associations, etc
• Establish a postal address to receive your Australian forwarded mail
• Purchase a car
• Sign a lease for rental of a residential accommodation that serves as your new home
• Look for and keep as evidence your efforts to find a residential property to become your new home
• Purchase a new home

Tax Implications on becoming a non resident.

If you go overseas and cease to be an Australian resident, or a resident trust for CGT purposes, you are taken to have disposed of certain assets for their market value at the time you cease being an Australian resident. If you are an individual, you may choose to disregard all capital gains and capital losses you made when you stopped being a resident.

If you ceased being a resident before 12 December 2006 and you make this choice, those assets are taken to have the necessary connection with Australia until the earlier of:

• a CGT event happening to the assets (for example, their sale or disposal), or
• you again becoming an Australian resident.

If you ceased being a resident on or after 12 December 2006 and you make this choice, the assets are taken to be taxable Australian property until the earlier of:

• a CGT event happening to the assets (for example, their sale or disposal), or
• you again becoming an Australian resident.

The effect of making this choice is that when working out your capital gains and capital losses on those assets, we take into account the increase or decrease in the value of the assets from the time you cease being a resident to the time:

• of the next CGT event, or
• you again become a resident.

The way you complete your tax return is sufficient evidence of your choice. For more information see what the <ATO> has to say.