Tax resdidency for individuals – the domicile test

In my last post I wrote about residence according to ‘ordinary concepts’, i.e. the common law test of residence. Australia’s tax legislation extends the definition of resident by adding three statutory tests. In this post I will explain one of these statutory tests – the domicile test. Thist typically applies to individuals who are usually residents of Australia but have moved overseas and are not currently living in Australia.

The domicile test says that a person whose domicile is in Australia is a resident of Australia, unless the Commissioner is satisfied that the person has a permanent place of abode outside of Australia. Central to this test are the concepts of domicile and permanent place of abode so I will explain each in turn.

Domicile

At birth, everyone is attributed with a ‘domicile of origin’, typically the country they were born in. Unlike residency, where a person can be a resident of multiple places at the same time, a person can only have one domicile at a time. Therefore, your domicile of origin is retained until it is replaced with with a new ‘domicile of choice’, i.e. a country that you intend to reside in indefinitely.

The onus of proof that a new ‘domicile of choice’ has been created lies with those who assert that the domicile of origin has been lost. An extended period overseas, for example under a two year working visa, would generally not be sufficient where there is an intention to return to Australia on a clearly foreseen and reasonably anticipated contingency (e.g. at the end of the foreign employment). However, having only a vague possibility of returning to Australia one day would be sufficient to show a that a domicile of birth had been abandoned. The old English case of Winans and Anor v Attorney General deals with the issue of domicile.

Permanent place of abode

The domicle test states that you can be domiciled in Australia but not be a resident for tax purposes if you have a permanent place of abode outside of Australia. A place of abode is simply a residence, a place where one lives with one’s family and sleeps at night. But what exactly is meant by permanent? This was discussed in the cases of FC of T (Federal Commissioner of Tax) v Applegate and FC of T v Jenkins as well as more recently in the ATO’s ruling IT2650.

Applegate’s case explains that ‘permanent’ needs to be considered in context and contrasted with temporary or transitory. A permanent place of abode does not need to be forever or even for the foreseeable future. Unlike a domicile, which requires an intention to live outside of Australia indefinitely and without any specific intention of returning, a taxpayer can have a permanent place of abode overseas and still intend on returning to Australia. However, the taxpayer must still establish the other country as their fixed and habitual place of abode.

Tax ruling IT2650 lists factors that the Commissioner takes into account when determining if a taxpayer has a permanent place of abode outside of Australia. Basically, these factors compare the durability of the taxpayer’s association with Australia with the durability of their association with the foreign country. The ruling mentions the following factors;

a)      The intended and actual length of the individual’s stay in the overseas country. A broad rule of thumb is that less than two years at a habitual place of abode overseas would be regarding by the ATO as a transitory period and not sufficient to establish a permanent place of abode.

b)      Any intention either to return to Australia at some definite point in time or to travel to another country.

c)       The establishment of a home outside Australia.

d)      The abandonment of any residence or place of abode the individual may have had in Australia.

e)      The duration and continuity of the individual’s presence in the overseas country and

f)       The durability of association that the individual has with a particular place in Australia. In particular, regard is had to maintenance of bank accounts and education of children.

Factors c, e and f are particularly important but no single factor will be conclusive.

In light of those factors, ff you’d like to argue that you are no longer resident of Australia, for example because you are living and working overseas for an extended period of time and don’t want your foreign employment income to be taxable in Australia, you may want to consider taking the following steps; Cancel your private health insurance, sell your cars and other assets, advise your bank and companies you invest in of your change in residency and cancel your sporting and social club memberships. These may help strengthen your case should the ATO disagree with your assessment.

In my next post I will explain the final two tests – the 183 day test and the superannuation fund test. These two tests are quite simple so it will be a shorter post.

As always, if you have an questions please don’t hesitate to ask in the comments.

Cheers,

Simon

All advice in this blog is of a general nature. I’ve done my best to make sure it is accurate but I give no guarantees. Make sure you seek professional advice that is specific to your situation.

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2 thoughts on “Tax resdidency for individuals – the domicile test

  1. Hi i was a backpacker in Australia for 1 year with a working holiday visa. Am i considered a resident for tax purposes if i worked continuosly for 6 months without leaving the country?

    • Hi Shash (also my sister’s name),

      Even though you were in Australia for more than half of the year you will still not be considered a tax resident if the Commissioner is satisfied;
      – That your usual place of abode is outside Australia and
      – You do not intend to take up residence in Australia.

      From your question it sounds likely that these requirements will be met and therefore you will not be considered a resident for tax purposes.

      Cheers,
      Simon

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