Taxing issues for departing taxpayers

The following article originally appeared in the November 2016 issue of The Taxpayer. This is the monthly journal of Tax & Super Australia (formerly Taxpayers Australia).

taxing-issues-for-departing-taxpayers

If you have any questions abou the issues raised in the article, please don’t hesitate to leave a comment, send me an email or contact me via LinkedIn.

There are a number of excellent articles in the magazine and I encourage you to get hold of a copy.

I will be contributing regularly to The Taxpayer. My next article will appear in December and will be on rental income and the small business CGT concessions.

Simon

Tax residency for companies – part 2

In part one I wrote about the central management and control test and whether or not it had two requirements. For now let’s assume it does – carrying on a business in Australia and having central management and control in Australia.

Carries on a business in Australia

For the purposes of this test the Commissioner will consider virtually all companies (other than dormant companies) to be carrying on a business. Where that business is carried on depends on what it does. A company with operational activities (e.g. a trading, service, manufacturing or mining business) will be resident in Australia if those activities take place in Australia i.e. if their offices, factories or mines are situated in Australia. Conversely, where a company earns its income through passive investments, the company will be resident in Australia if the investment decisions are made in Australia.

Central management and control

Central management and control does not refer to the day-to-day running of the company but rather to high-level decision making processes. That includes things like reviewing strategic directions, major agreements, significant financial matters and overall performance. Typically (but not always) these powers will be vested in the board of directors of a company. If the directors do in fact manage and control the company then central management and control will generally be located where the directors meet. The Commissioner says that if the majority of board meetings are held in Australia, the central management and control of a company will be taken to be in Australia, unless that situation is artificial or contrived. The courts too have tended to focus on formal acts (which has opened the door for manipulation) though they have sometimes shown a willingness to consider a wider number of factors.

Central management and control will not always be exercised by the board of directors of a company. This can be illustrated by the contrasting cases of Union Construction v Bullock and Esquire Nominees. In Unit Construction the parent company (located in the United Kingdom) effectively took over management of the company from its board of directors. Therefore the court found that central management and control was in the UK, despite the constitution expressly provided that the director’s meetings were not to take place in the United Kingdom. In Esquire Nominees the director’s meetings were held in Norfolk Island but the agenda was prepared in Australia by accountants acting on behalf of the beneficial owners. The Norfolk Island directors would invariably follow the advice of the accountants but the court ruled that central management and control remained with the Norfolk Island directors. Justice Gibb explained that although the accountants were influential, the final decision lay in Norfolk Island and the directors would not agree to any recommendation that was improper or inadvisable.  From this we get the principle that a director can delegate some of his or her decision making power and still retain central management and control, provided they at least review and consider the actions of the delegated decision-maker.

 Voting power test

The final test of corporate residency sayst that a company, not incorporated in Australia, will be resident if it carries on business in Australia and has its voting power controlled by shareholders who a residents of Australia. Two comments are worth mentioning here. Firstly, a shareholder is somebody who appears on the company’s share register (Patcorp Investments). The test therefore does not look through to the ultimate beneficial owner of the shares. Secondly, shareholders with the capacity to control the company’s general meeting but who do not in fact exercise that control, do not control the voting power (Aluminium Corp Ltd).

Finally, just like a natural person, a company can be resident of two or more countries. This was a finding of the Swedish Central railway case. Just like with individuals, Australia’s double taxation agreements (DTAs) typically contain tie-breaker rules designed to allocate a single place of residence for the purpose of the DTA. I will get to double taxation agreements eventually, but before then I will finish with residency of other entities and then move on to discuss where income is sourced. I hope you stick around.

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.

Tax residency of corporations – part 1

Now that we have discussed individual residency, it is time to move on to corporate residency. The approach taken to determine the residence of both types of taxpayer is similar in many regards. In the old English case of De Beers Consolidated Mines Ltd v Howe Lord Loreburn said;

“In applying the conception of residence to a company, we ought, I think, to proceed as  nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business”

While the early cases remain relevant, we now have a statutory definition of corporate resident. The Income Tax Assessment Act 1997 says that “a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia” is a resident.

This definition is comprised of three tests – the incorporation, central management and control and voting tests. The rest of this post will discuss these in turn.

Incorporation test

If a company is incorporated in Australia it will be a resident of Australia. While this test is very simple to apply, it is open to easy manipulation.

Central management and control test

If a company is not incorporated in Australia it will still be a resident if it “carries on business in Australia, and has…its central management and control in Australia”. Whether this test has two parts (and in my opinion it does) or just one is a matter of great controversy.

In the De Beers case mentioned above Lord Loreburn went on to add that “the real business (of a company) is carried on where the central management and control actually abides”. He regarded that as the “true test”. Later, in the Australian case of Malayan Shipping, Justice William rejected the argument that law could not refer only to the management and control of the business but must also refer to the actual operations themselves. The judge found that the reason for the wording of the Act was “to make it clear that the mere trading in Australia by a company not incorporated in Australia will not of itself be sufficient to cause the company to become a resident of Australia”. Malayan Shipping is thus authority for the proposition that if a company’s central management and control is in Australia then ipso facto it must be carrying on a business in Australia. This appears to be the majority view.

However, the Commissioner takes a differing view. In Tax Ruling TR 2004/15 he asserts that the test does have two requirements, and generally other acts of carrying on a business need to exist before the central management and control test is satisfied. In the Commissioner’s words Lord Loreburn’s analogy of a company keeping house and doing business is replicated in the two requirements of the test. The Commissioner’s position is based on the ideas that the courts should not easily consider any word or sentence used in an Act as superfluous and nor should judicial statements supplant or supersede the words of the law itself. TR 2004/15 argues that only where a company’s business is management of its investment assets and where it undertakes only minor operational activities, will both tests be satisfied by the same set of facts.

So the cases say one thing but the Commissioner says another. What’s a taxpayer to do? Well, tax rulings are binding on the Commsioner but not on taxpayers. Therefore if you like the Ruling you can apply it in the knowledge that the ATO won’t stop you. However, if you disagree (and are willing to argue your position in the courts should it come to that) you can ignore it in the knowledge that you have strong judicial precedent to support you.

There’s still lots more to go through regarding corporate residence so stay tuned for part two.

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.

Tax residency for individuals – temporary resident

Bonus post! I intended my last one to be the final post on the topic of individual residency but I wanted to add this brief one on temporary residents.

 

Since the 1st of July 2006 there has been a new category of resident – the temporary resident. I believe the new category was created to encourage more people to come work in Australia.

You are a temporary resident if

  1. You hold a temporary visa granted under the Migration Act 1958 and
  2. You and your spouse are not Australian residents within the meaning of the Social Security Act 1991 (typically someone who holds a permanent residency visa or is an Australian citizen)

The benefit of being a temporary resident is that you will not be taxed on most foreign source income and on capital gains relating to assets that aren’t Taxable Australian Property. You will also be exempt from interest withholding tax (more on this in later posts). However, you are still taxed on your employment income.

If you are thinking of moving to or from Australia and aren’t sure what this could mean for your tax bill, please don’t hesitate to ask me a question in the comments.

My next posts will stay on the topic of residency but shift the focus to consider the residency of companies and other entities.

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.

Tax residency for individuals – the 183 day and superannuation fund tests

We’re almost there! In the previous posts I’ve introduced the concept and significance of residency, explained the common law meaning of residency and outlined the domicile test. In this final post on the subject, I’ll end with a brief overview of the final two statutory tests – the 183 day test and the superannuation fund test.

183 day test

The 183 day test generally applies to individuals who are usually residents of Australia but during the income year are not living in Australia. It says that a person is a resident of Australia if they are here continuously or intermittently for more than half of the year (183 days) unless the Commissioner is satisfied that their ‘usual place of abode’ is outside Australia and that they do not intend to take up residence in Australia.

A backpacker who came to Australia on a 12 month working holiday Visa and returns home at the end of their trip would not be a resident under this test even though they are in Australia for more than half the year because their usual place of abode (i.e. the place they ordinarily reside) remains their home country.

If you satisfy the 183 day test you are only treated as a resident for the days you are actually present in Australia, not the entire income year (though this isn’t completely settled and others take a different view). Finally, it should be pointed out that if you are in Australia for more than 183 days but these straddle two income years (e.g. from February to November) you would not be in Australia for more than half of either income year and therefore not be a resident.

Superannuation test

This test generally applies to people who are usually residents of Australia but during the income year are not living in Australia. It has a limited application and is mainly designed to catch Australians working in diplomatic missions abroad and their families. It extends residency to eligible employees for the purposes of the Superannuation Act 1976. This is basically somebody who is employed by the Commonwealth government. It is designed to catch Australians living in diplomatic missions abroad. Note that eligible employee includes those on extended unpaid leave.

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.

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.

Tax residency for individuals – the resides test

In my last post I introduced the concept of residence for tax purposes and explained that Australia has four tests to decide whether or not someone is a resident. In this post I will explain how the first of those four tests – the resides test – operates.

This test asks if you reside in Australia. ‘Resides’ is not defined anywhere in the tax legislation and so the term takes on its ordinary, dictionary meaning. The Shorter Oxford English Dictionary defines it to mean ‘to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live, in or at a particular place’.

Various cases such as Federal Commissioner or Taxation v Levene, Federal Commissioner of Taxation v Miler and more recently Iyengar v Commissioner of Taxation have considered just what it means to reside somewhere. While each case is decided on its merits and unique set of facts, certain important factors can be gleaned from them.

The Commissioner, in Tax Ruling 98/17, has outlined his view and which factors he considers to be important. This Tax Ruling is very important as it applies to most individuals entering Australia. There is also another tax ruling, IT 2681, that has a more specific application to business migrants (people who come to Australia under a business visa) and the factors in this ruling are very similar to TR 98/17.

Importantly, TR 98/17 states that if you come to live in Australia for less than six months, you will, in most cases, not be considered to reside here under this first test. However, if you come for more than six months (whether or not you intended for your trip to be that long when you first arrived), the Commissioner will look at your behaviour to see whether it is consistent with residing here. He will look at your day to day behaviour over your time spent in Australia, compare it to your behaviour before you enter Australia, and see if it reflects a degree of continuity, routine or habit that is consistent with residing here.

The ruling lists the following factors as relevant;

Intention or purpose of presence – a settled purpose such as employment or education may be taken as evidence of an intention to reside in Australia.

Family and business/employment ties – whether or not your family has joined you can be a very significant factor.

Social and living arrangements – have you joined a sporting club or community organisation? Have you redirected mail to Australia, enrolled your children in school or committed to a residential lease? All these things would suggest that you are a resident.

Maintenance and location of assets – if you’ve bought a home or a motor vehicle, or if you have opened a bank account in Australia, it would add weight to the conclusion that you are a resident.

Period of physical presence in Australia – as stated earlier, the Commissioner considers six months to be a considerable time in Australia. As a general rule, he will treat overseas students studying in Australia as residents if the course of study extends beyond 6 months. However, I must stress that whilst time in Australia is an important factor, it is not decisive. The ruling gives numerous examples of people who came to Australia for more than 6 months and were not considered to be residents.

A person needs only to pass one of the four tests to be considered a resident. Therefore if the resides test is passed there is no need for you to consider the other three statutory tests. However, if you aren’t a resident under the common law resides test you must consider these other statutory tests. One of these tests – the domicile test – is the subject of my next post so stay tuned.

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.