Tax residency – flaws in the ATO’s ‘checklist’ approach

The recent Full Federal Court decision in Harding’s case, which considered the Australian tax residency status of Mr Harding, provided a win for the taxpayer after many years of dispute. While the facts of this case are interesting and will provide a useful reference point for many practitioners and taxpayers, the decision itself also provides an insight into the internal processes and general positions that the ATO appears to have been applying to taxpayers who have lived outside of Australia for extended periods of time.

In more recent times, the ATO is more actively monitoring information provided by AUSTRAC. This has turned the Commissioner’s attention to two particular areas:

• resident taxpayers who have potentially not appropriately brought all their worldwide income into their tax returns; and
• individuals whose tax residency may be in question.

In relation to this second area, given the potential for significant revenue to be raised for the ATO given that individuals earning income by living and working overseas are only taxed upon such earnings if they are Australian tax residents, the ATO has recently increased its compliance activities in this area, assigning teams to undertake such reviews.

On 22 February 2019, the Full Federal Court handed down its decision in relation to one such case: Harding v Commissioner of Taxation [2019] FCAFC 29. The case has been in dispute between the ATO and Mr Harding for a number of years. This dispute is centred around the issue of Mr Harding’s tax residency for the 2011 income year. The Full Federal Court’s decision was a unanimous finding that Mr Harding was not an Australian tax resident in 2011.

While residency disputes and cases are not exactly rare, this case was particularly interesting for several reasons, including the fact that the taxpayer’s wife was living in Australia during the tax year in question (albeit, the marriage dissolved later in 2011) and that the taxpayer had been living in fully furnished accommodation, rather than in accommodation that he had self-furnished. No doubt, there are case summaries that are available to read and it is worth doing so as the facts are detailed and interesting.

However, this case also serves to gives an insight into the internal processes and general positions that the ATO appears to have been applying to taxpayers who have lived outside of Australia for extended periods of time.

The inference from certain particulars of this case is that it appears that the ATO’s reviews into a taxpayer’s residency status has as a component a checklist of factors. Some of these factors are listed in paragraph 59 of the decision. From this paragraph and other sources, we can see that the ATO quite rightly look at the following matters:

1. Where the taxpayer was born (in Australia or elsewhere);
2. Their Australian citizenship status;
3. Whether they hold an Australian passport;
4. Whether there is an Australian domicile;
5. Whether the individual lived in that domicile, and whether it was a family home;
6. Whether family members move with the taxpayer to live with them;
7. The longevity and nature of the overseas employment, focusing on the contract terms and visa requirements;
8. Retention of an ownership interest in an Australian home whilst away from Australia;
9. Frequency and length of return visits to Australia and whether the individual lives in the family home during that time (or whether that home is rented out);
10. What is stated on immigration/passenger cards when returning to/visiting Australia (although there have been many cases stating this is not a determinative matter);
11. Financial support provided to the individual’s family while living overseas;
12. Nature of the accommodation. This includes whether it is owned/leased personally or provided by the employer, who has the liability for utilities, the length of rental commitment, whether the individual is obliged to (or does) furnish the accommodation, as well as whether the accommodation is for their exclusive use;
13. Whether the Australian family home or the overseas location is used as their address for correspondence;
14. Country where financial investments are made;
15. Maintenance of bank accounts in Australia;
16. Status on the electoral roll; and
17. Maintenance of a Medicare account, Australian private health insurance, a driver’s licence and a superannuation account in Australia;

With some thought, the checklist also indicates which questions the ATO seems not to be considering:

1. The importance of the taxpayer’s intention (although it is acknowledged that this is sometimes difficult to prove);
2. The length of time the taxpayer has been out of the country at the time of review;
3. Whether the taxpayer is also a citizen of any other country;
4. Whether passports are held in relation to other countries;
5. In the taxpayer’s circumstances, which (if any) long-term visas are available in the other country. and if none, whether there is a pattern of renewed visas which indicate a longer-term intention and permanency to the foreign employment;
6. The impact of visas on employment contracts and whether there is a similar pattern of unbroken renewals signifying a longer-term employment intention of both the employer and the individual;
7. Whether investments are made or held outside of Australia;
8. Whether it is reasonable to expect individuals to dispose of all Australian investments rather than treating existing investments as a residual consequence of former residency in Australia;
9. Whether visits to Australia properly support a conclusion that the taxpayer is returning to the place they consider their home, or are merely temporary visits to their former home that may still hold a lesser connection (or are even just in Australia in the course of performing their employment duties);
10. Existence and use of bank accounts in the foreign country;
11. Recognition that Australian superannuation cannot be withdrawn by Australian citizens until the conditions of release have been met; and
12. Concerns an individual might have regarding healthcare in the country they live in such that maintenance of Australian health cover is a prudent decision.

All residency cases are heavily fact driven and the outcomes provided by this case may not have wholesale application – thus the importance of looking at all the facts.

Given the above, as well as anecdotal experience about the ATO’s approach to residency reviews, gives the perception that individuals are treated as Australian tax residents quite readily from the ATO’s perspective: even in cases where they have lived away from Australia for many years and despite the existence of factors indicative of the taxpayer being resident in an overseas country.

Interestingly, by the date of the Full Federal Court decision being given in late February 2019, the ATO were still arguing that Mr Harding was an Australian resident. This is despite the fact he had left Australia nearly ten years earlier with no intention of living here again and after he had met and married a woman overseas (and was, presumably, living happily ever after—other than his income tax woes). Compare this to paragraph 10 of the Commissioner’s ruling IT 2650, where he states that a person’s actions are consistent with not retaining a domicile in Australia (which is one of the tests of tax residency) where they indicate that the person has no intention to return to Australia on a clearly foreseen and reasonably anticipated contingency (an example of a clear intention to return would include at the end of their employment).

This combative approach taken by the ATO (which seems at odds with the ATO’s own rulings) when combined with the ATO’s willingness to invest significant resources in chasing Mr Harding through the AAT and the Courts may well have cost Mr Harding as much (or more) in legal fees as the tax the ATO was trying to levy, even with the decision awarding costs to Mr Harding. So, in some ways I wonder if it is a pyrrhic victory for Mr Harding.

The immediate question that now arises is whether the ATO will seek to appeal this case all the way to the High Court?

Longer term, it will be interesting to see whether the ATO takes a more balanced approach when dealing with future residency cases or whether it chooses to continue taking its current checklist of ‘Australian residency only’ factors approach, leaving taxpayers with a choice of giving up or paying significant fees to contest the issue.

If we see a Decision Impact Statement where the ATO’s view is that Harding’s case stands on its facts and thus it believes that it has limited precedential value for other taxpayers then I for one will know the answer.

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.