Edited version of private advice

Authorisation Number: 1051806105636

Date of advice: 19 February 2021

Ruling

Subject: Residency

Question 1

Was Mr A an Australian resident for taxation purposes pursuant to subsection 6(1) of the Income Tax Assessment Act 1936 (the ITAA 1936) for the 20XX income year?

Answer

No

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Mr A (the Taxpayer) is an individual who is and continues to be an Australian citizen. The Taxpayer was born in Country X. He obtained Australian citizenship on BB/CC/DDDD after having moved to Australia with the intention to reside here indefinitely.

The Taxpayer is neither an eligible employee for the purposes of the Superannuation Act 1976 nor a member of the superannuation scheme established by deed under the Superannuation Act 1990. The Taxpayer is also not the spouse of such a person.

After living in Australia for a few years, on XX June 20XX, the Taxpayer departed Australia with the intention to move back to Country X indefinitely in order to re-establish his life and business interests in Country X. Around this time, the Taxpayer terminated various Australian memberships and lodged an overseas notification form with the Australia Electoral Commission, which removed him from the electoral roll.

The Taxpayer's immediate family is in located in Australia while the rest of his extended family are located in Country X. The Taxpayer undertakes business activities in Country X.

The Taxpayer had and continues to have a residence available for his use in Country X. The wife of the Taxpayer owns a property in Australia which is available for his occupation on his visits to Australia.

As a result of acquiring Australian citizenship the Taxpayer is no longer a citizen of Country X. He obtained a visa which allows him to live and work there on a temporary basis. He intends to apply for a work permit which will allow him to stay in Country X on a more permanent basis.

Subsequent to returning to Country X on XX June 20XX the Taxpayer returned to Australia for a few short trips.

In balancing his work ties and his family ties the Taxpayer has chosen to preference his work ties since returning to Country X. The Taxpayer has sufficient wealth that he does not need to work to support himself.

The Taxpayer returned to Australia on YY February 20XX for what was planned as a short visit but was forced to stay in Australia for several months because of the Covid-19 travel restrictions. As a result the Taxpayer was in Australia for more than 183 days in the 20XX income year. The Taxpayer departed Australia for Country X on ZZ October 20XX after being granted an exemption by the Department of Home Affairs to return to that Country.

Relevant legislative provisions

Subsection 995-1 of the Income Tax Assessment Act 1997

Subsection 6(1) of the Income Tax Assessment Act 1936

Reasons for decision

Question 1

Summary

The Taxpayer is not an Australian resident for taxation purposes pursuant to subsection 6(1) of the ITAA 1936 for the 2020 income year.

Detailed reasoning

The term "Australian resident" is defined in subsection 995-1(1) of the ITAA 1997 to mean a person who is a resident of Australia for the purposes of the ITAA 1936.

The terms "resident" and "resident of Australia" are defined in subsection 6(1) of the ITAA 1936 which relevantly reads:

resident or resident of Australia means

(a)       a person, other than a company, who resides in Australia and includes a person:

(i)        whose domicile is in Australia unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia;

(ii)       who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that the person's usual place of abode is outside Australia and that the person does not intend to take up residence in Australia; or

(iii)      who is:

(A)      a member of the superannuation scheme established by deed under the Superannuation Act 1990; or

(B)      an eligible employee for the purposes of the Superannuation Act 1976; or

(C)      the spouse, or a child under 16, of a person covered by subparagraph (A) or (B);....

Residence according to ordinary concepts

The statutory definition of resident in subsection 6(1) of the ITAA 1936 consists of four tests. Relevantly, the 'residency according to ordinary concepts' or the 'ordinarily resides' test provides that 'resident or resident of Australia means: (a) a person, other than a company, who resides in Australia ...'.

Where a person resides in Australia under ordinary concepts, Australian residency is established and the other tests need not be considered: FCT v Applegate 79 ATC 4307; (1979) 9 ATR 899 (Applegate); paragraph 12 of Taxation Ruling TR 98/17 Income Tax: residency status of individuals entering Australia (TR 98/17).

Whether a person is a resident of Australia is a question of fact and degree to be determined having regard to the circumstances of the particular case.

As there is no definition of the word 'reside' in Australian income tax law, the ordinary meaning of the word must be considered. The Macquarie Dictionary defines 'reside' as 'to dwell permanently or for a considerable time; have one's abode for a time', and the Shorter Oxford English Dictionary defines it as 'to dwell permanently or for a considerable time, to have one's settled or usual abode, to live, in or at a particular place'.

Paragraph 18 of TR 98/17 states that the period of an individual's physical presence in Australia is not, by itself, decisive. Instead, an individual's behaviour over the time spent in Australia should be examined to see if it reflects a degree of continuity, routine or habit that is consistent with residing in Australia.

Paragraphs 20 to 21 of TR 98/17 state that all the facts and circumstances that describe an individual's behaviour in Australia are relevant, and no individual factor is necessarily decisive, but that the following factors will be particularly useful: intention or purpose of presence; family and business/employment ties; maintenance and location of assets; and social and living arrangements.

In Hafza v Director-General of Social Security (1985) 6 FCR 444 (Hafza) at 449-450, Wilcox J discussed the concept of residency in relation to legislation which had incorporated the 'residency' definition from the ITAA 1936:

Physical presence and intention will coincide for most of the time. But few people are always at home. Once a person has established a home in a particular place - even involuntarily: see Commissioners of Inland Revenue v Lysaght [1928] AC 234 at 248 and Keil v Keil [1947] VR 383 - a person does not necessarily cease to be resident there because he or she is physically absent. The test is whether the person has retained a continuity of association with the place - Levene v Inland Revenue Commissioners [1928] AC 217 at 225 and Judd v Judd (1957) 75 WN (NSW) 147 at 149 - together with an intention to return to that place and an attitude that that place remains "home": see Norman v Norman (No 3) (1969) 16 FLR 231 at 236. It is important to observe firstly, that a person may simultaneously be a resident in more than one place - see the facts of Lysaght (supra) and the reference by Williams J to "a home or homes" - and, secondly, that the application of the general concept of residence to any particular case must depend upon the wording, and underlying purposes, of the particular statute in relation to which the question arises. But, where the general concept is applicable, it is obvious that, as residence of a place in which a person is not physically present depends upon an intention to return and to continue to treat that place as "home", a change of intention may be decisive of the question whether residence in a particular place has been maintained.

In Hafza, Wilcox J stated that a lack of physical presence in a place does not necessarily lead to a conclusion that a person has ceased to be resident there. Rather, His Honour stated that the relevant test is whether the person has retained a 'continuity of association', an intention to return, and an attitude that the place remains 'home'.

In Harding v FCT [2018] FCA 837 (Harding), Derrington J discussed the use of a 'checklist' of relevant factors that had been developed in the AAT through analysis of various residency decisions, such as in Re Iyengar v FCT (2011) 85 ATR 924 and Re Sneddon v FCT (2012) 89 ATR 739, and stated at [46] that:

Those decisions identified a number of topics relevant to the ascertaining of a person's residence in Australia such as the person's physical presence in Australia, their nationality, the history of their past residence and movements, their mode of life and habits, the frequency, regularity and duration of visits to Australia, their purpose for visiting or leaving Australia, the remaining family and business ties with Australia in comparison to any other foreign country and the maintenance of the place of abode.

His Honour noted at [46] that:

However, these factors do not constitute some kind of rigid formula for the determination of whether a person is a resident. They do not each invariably apply in all cases. They are merely the constitutive indicators or objective facts which are frequently relevant to the determination of the nature and quality of a person's presence in or association with a particular location. A consideration of those objective matters will also reflect the actual state of mind of the person in question concerning their intention to treat a place as their home. [Emphasis added.]

Although the decision in Harding was the subject of a successful appeal in Harding v FCT [2019] FCAFC 29 (Harding Full Court), the majority of the Full Federal Court accepted Derrington J's conclusion in respect of the 'ordinarily resides' test.

In assessing the question of residence, it is therefore useful to consider the factors that have been identified as relevant by the Courts and Tribunal, and which have been set out by the Commissioner in paragraphs 20 to 21 of TR 98/17.

In Harding, Justice Derrington observed that it was an unusual case where a person had a family and owned a home in Australia where they returned to visit their family and did not reside in the country. In making this observation, Justice Derrington recognised that:

Mr Harding put his career and lifestyle ahead of his relationships with his wife and children and pursued the work opportunities in the Middle East. This same attitude was reflected a few years later when he sacrificed his relationship with Ms Gonzalez to move to work in Oman. On his departure from Australia, Mr Harding's intention was to permanently leave Australia and his residence here. He intended to resume his residency in the Middle East in one country or another and to pursue his career there regardless of what his family did.

In contrast in FC of T v Pike 2019 2020 ATC 20-764; [2020] FCAFC 158 (Pike), the taxpayer (who lived, worked and formed enduring friendships in Thailand during the relevant eight years) was found to be a resident of Australia according to ordinary concepts. At first instance Justice Logan (2019 ATC 20-730; [2019] FCA 2185: upheld on appeal to the Full Federal Court) found that:

when Mr Pike returned to Australia he was not, as his submissions invited me to conclude, a resident of Thailand, Tanzania or, as the case may be, Dubai in the UAE, returning as a visitor to Australia. Rather, he returned as husband (de facto) and father to resume living -residing - with his wife and children at the family home. It was not just their family home; it was his also.

It was also concluded in Pike that the Taxpayer had to work overseas out of financial necessity due to his skill and experience and the absence of relevant work in Australia which meant that the earning potential of that skill and experience could only be realised by living and working abroad.

Although residency is a matter to be determined on a year by year basis, events that occurred outside the period in question are also relevant in determining the nature and quality of a person's association with Australia.

The Taxpayer's actions and mode of life have reflected a change in his mode of life, such that his continuity of association with Australia has been affected. His actions demonstrated that he had moved permanently to Country X. Throughout his extended stay in Australia he intended to return to Country X as soon as he could and did so after being granted an exemption from the Department of Home Affairs. He should not be considered a resident of Australia under the 'ordinary resides' test.

The Taxpayer is therefore not considered to be a resident of Australia for the purposes of the 'ordinary resides test' for the period from 1 July 20XX to 30 June 20XX.

Domicile/ Permanent Place of Abode

The second test of residency in subsection 6(1) of the ITAA 1936 (the 'domicile test') provides that:

"resident or resident of Australia" means:

(a) a person, other than a company, who resides in Australia and includes a person:

(i) whose domicile is in Australia, unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia; ...

Domicile of origin and domicile of choice

"Domicile" is a legal concept to be determined according to the Domicile Act 1982 and to the common law rules which the courts have developed in the field of international law. The primary common law rule is that a person acquires at birth a domicile of origin, being the country of his or her father's permanent home. This rule is subject to some exceptions. For example, a child takes the domicile of his or her mother if the father is deceased or his identity is unknown. A person retains the domicile of origin unless and until he or she acquires a domicile of choice in another country or, or until he or she acquires domicile by operation of law (Henderson v. Henderson [1965] 1 All E.R.179; Udny v. Udny [1869] L.R.1 Sc.& Div. 441; Bell v. Kennedy [1868] L.R.1 Sc.& Div. 307 (H.L.)).

The common law test of domicile has now been restated in section 10 of the Domicile Act 1982 which provides:

The intention that a person must have in order to acquire a domicile of choice in a country is the intention to make his home indefinitely in that country.

Furthermore, section 7 of the Domicile Act 1982 provides:

The rule of law whereby the domicile of origin revives upon the abandonment of a domicile of choice without the acquisition of a new domicile of choice is abolished and the domicile a person has at any time continues until he or she acquires a different domicile.

In Terrasin v Terrasin (1968) 14 FLR 151, Justice Selby observed that a person alleging a change of domicile had to prove by "clear and cogent evidence that the change has taken place". His honour referred to the decision of Lord Curriehill in Donaldson v M'Clure (1857) 20 D 307, where his Lordship said:

...it is proper to keep in view what is meant by animus or intention to abandon one domicile for another. It means something far more than a mere change of residence. It imports an intention not only to relinquish those particular rights, privileges, and immunities which the law and the constitution of the domicile confer on the denizens of the country, - in their domestic relations...in their purchases and sales and other business transactions...in their political or municipal status, - and in their daily affairs of common life; but also the laws by which the succession to property is regulated after death. The abandonment or change of a domicile is therefore a proceeding of a very serious nature, and an intention to make such an abandonment requires to be proved by satisfactory evidence.

The Commissioner's views on the acquisition of a domicile of choice are outlined in Taxation Ruling IT 2650 Income tax: residency - permanent place of abode outside Australia (IT 2650). Paragraph 10 of IT 2650 states that:

In determining a person's domicile for the purposes of the definition of "resident" in subsection 6(1), it is necessary to consider the person's intention as to the country in which he or she is to make his or her home indefinitely. Thus, a person with an Australian domicile but living outside Australia will retain that domicile if he or she intends to return to Australia on a clearly foreseen and reasonably anticipated contingency e.g., the end of his or her employment. On the other hand, if that person has in mind only a vague possibility of returning to Australia, such as making a fortune (a modern example might be winning a football pool) or some sentiment about dying in the land of his or her forebears, such a state of mind is consistent with the intention required by law to acquire a domicile of choice in the foreign country - see In the Estate of Fuld (No. 3)(1968) p. 675 per Scarman J at pp. 684-685 and Buswell v. I.R.C (1974) 2 All E.R. 520 at p. 526.

Furthermore paragraph 21 of IT 2650 states that:

In order to show that a new domicile of choice in a country outside Australia has been adopted, the person must be able to prove an intention to make his or her home indefinitely in that country e.g., through having obtained a migration visa. A working visa, even for a substantial period of time such as 2 years, would not be sufficient evidence of an intention to acquire a new domicile of choice.

Thus, the Taxpayer acquired his "domicile of choice" in place of his "domicile of origin/birth" by forming the intention to make Australia his residence indefinitely. At the latest it would have been when he obtained Australian citizenship on BB/CC/DDDD.

As the Taxpayer had only been back in Country X for X months on a temporary visa before being forced to remain in Australia because of the Covid-19 travel restrictions, he has not abandoned his domicile of choice in Australia. As stated in paragraph 21 of IT2650, a working visa, even for a substantial period of time such as 2 years, would not be sufficient evidence of an intention to acquire a new domicile of choice.

Permanent place of abode

IT 2650 sets out the Commissioner's view on the application of the domicile test, although this ruling is currently under review as a result of the recent decision in Harding v FCT [2019] FCAFC 29 (Harding Full Court).

The Commissioner's view on the implications of the decision in Harding Full Court has been set out in the Decision Impact Statement on Harding v FCT [2019] FCAFC 29 (the Harding DIS), which relevantly states that:

Regarding the domicile test, the Commissioner will apply the Full Federal Court's construction and, in determining whether the Commissioner is satisfied that a person's permanent place of abode is outside Australia, will consider whether the person has:

•         definitely abandoned residence in Australia, and

•         commenced living permanently in a specific country overseas.

In deciding whether the person's permanent place of abode is outside Australia, the Commissioner will consider the facts and circumstances surrounding the person's departure from Australia, their arrangements in relation to the overseas country and nature of their presence there.

The Commissioner notes that the definition given to 'place of abode' was inclusive. We consider that the nature of the dwelling, or dwellings, and the particular use made of it, or them, will form part of the relevant facts and circumstances taken into account as to whether a person has definitely abandoned residence in Australia and commenced living permanently in a country overseas. In this respect, we note that the factors listed in paragraph 23 of IT 2650 ... remain relevant.

Each case will turn on its facts. The facts in this case provide an illustration of where a person's permanent place of abode is outside Australia and are an application of the law to the specific facts of that case.

Relevantly, Davies and Steward JJ in Harding Full Court considered the meaning of 'place' in the phrase 'permanent place of abode', and concluded at [40] that:

...the rationale of the exception...is that a person domiciled in Australia is not to be made subject to federal income tax when they have abandoned in a permanent way their Australian residence. For the promotion of that rationale, it is unnecessary for the taxpayer to live outside of Australia in any particular way. It follows that the word 'place' should accordingly be read as including a reference to a country or state.

However, Their Honours continued at [40]:

Having said that, we do not favour the proposition that it does not matter if the taxpayer is not permanently in one country but moves between foreign countries. In our view, the words 'permanent place' require the identification of a country in which the taxpayer is living permanently.

Relevantly, Mr Harding had been dwelling in a serviced apartment building in Bahrain and commuting to work in Saudi Arabia. Notwithstanding the amount of time Mr Harding physically spent outside Bahrain, he was nonetheless considered to be living permanently in Bahrain, and therefore to have a permanent place of abode outside Australia.

As stated in the Harding DIS, the Commissioner continues to consider that the following factors listed in paragraph 23 of IT 2650 are relevant in determining whether a taxpayer has a permanent place of abode outside Australia.

a)    the intended and actual length of the taxpayer's stay in the overseas country;

b)    whether the taxpayer intended to stay in the overseas country only temporarily and then to move on to another country or to return to Australia at some definite point in time;

c)    whether the taxpayer has established a home (in the sense of dwelling place; a house or other shelter that is the fixed residence of a person, a family, or a household), outside Australia;

d)    whether any residence or place of abode exists in Australia or had been abandoned because of the overseas absence;

e)    the duration and continuity of the taxpayer's presence in the overseas country; and

f)     the durability of association that the person has with a particular place in Australia, i.e. maintaining bank accounts in Australia, informing government departments such as the Department of Social Security that they are leaving permanently and that family allowance payments should be stopped, place of education of the taxpayer's children, family ties and so on.

In respect of intention, Davies and Steward JJ in Harding Full Court cited with approval the following statement from Wilcox J in Hafza v Director-General of Social Security (1985) 6 FCR 444 at [42]-[45]:

The question of 'presence' is relatively straight-forward and that is particularly when there is evidence of a person's physical presence in a particular place. However, where a person has more than one residence or the question is whether they remain resident in a particular location given that they spend significant time in other locations, different issues arise. In such situations there needs to be consideration of the connecting factors or the continuity of association between the person and the particular location. Here, the question is whether the connecting factors or the continuity of association are such that they establish that the person retains a 'presence' in the community as a resident. Factors such as a home, a family unit, possessions, relationships with people and institutions and the like are all relevant to the determination of whether the person has maintained a presence in the community as a resident despite being physically absent.

The determination of whether or not a person has the intention to treat a particular place as their home will involve a consideration of numerous factors. Certainly, the evidence of the taxpayer as to their intention at the relevant time will be significant as would be any contemporaneous statement made by a taxpayer as the location of their residency. However, the objective manifestation of a person's intention is often a more accurate indicator of their state of mind at a particular time in the past than is an assertion about that alleged prior intent. A person's present belief about what their intention may have been in the past will necessarily be affected by their sub-conscious and the context in which they called upon to identify that past intention. That is especially so when, at the relevant time, the person did not then consider what their then intention may have been.

Even evidence of a person's contemporaneous statement as to their intention at a particular time in the past should be approached with a degree of care. Whilst that is likely to be more accurate than their present assertion of what their previous intention was, the value of the contemporaneous evidence will be affected by the circumstances of the statement and reasons for the making of the statement.

That being so, the more cogent evidence of a person's prior intention as to where they resided are the objective facts which reflect the person's then intention. In ascertaining whether a person intended to make a particular place their residence or to terminate their residency in a place, the facts and circumstances surrounding their mode of living will be a strong indicator of their presence in or continued association with a particular place and the intention accompanying that presence.

The Taxpayer's level of connection with Australia changed as at XX June 20XX, and it can be concluded that he definitely abandoned his residence in Australia. Having considered the facts and circumstances of the case, it should be concluded that from XX June 20XX the Taxpayer commenced living permanently in Country X.

Were it not for the Taxpayer being trapped in Australia from YY February to ZZ October 20XX because of the Covid-19 travel restrictions, he would have spent significantly more time in Country X than Australia in the 20XX income year. The Commissioner is therefore satisfied that the Taxpayer had a permanent place of abode outside Australia for the 20XX income year.

183 Days Test

The third test of residency in subsection 6(1) of the ITAA 1936 (the '183-day test') provides that a resident is someone:

(ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that the person's usual place of abode is outside Australia and that the person does not intend to take up residence in Australia;

As the inclusion of the word " intermittently " suggests, presence in Australia need not be continuous for the purposes of this test - all the days a person is physically present will be counted.

Generally, a usual place of abode is the abode customarily or commonly used by a person when physically present in a country. The place of abode need not be fixed but must exhibit the attributes of a place of residence or a place to live, as against overnight, weekly or monthly accommodation of a traveller. Whether preceded by the word " permanent " or " usual " the term " place of abode " can also refer to a town or country (see Harding).

Although the Taxpayer has been physically present in Australia for more than 183 days, the Commissioner has determined that the Taxpayer is not an Australian resident under this test as the Taxpayer would not have been in Australia for this long had it not been for the Covid-19 travel restrictions.

The 183-day test does not have application in this case as the Commissioner has already made the determination that the Taxpayer has abandoned his residence in Australia and formed an intention to, and did in fact, reside in Country X.

Superannuation Test

The fourth test of residency in subsection 6(1) of the ITAA 1936 (the 'Superannuation test') provides that a resident is someone:

(iii) who is:

(A) a member of the superannuation scheme established by deed under the Superannuation Act 1990; or

(B) an eligible employee for the purposes of the Superannuation Act 1976; or

(C) the spouse, or a child under 16, of a person covered by subparagraph (A) or (B)

The Taxpayer does not fall within (A), (B) or (C) and is not therefore an Australian resident for taxation purposes under the superannuation test.

Australia-Country X Double Taxation Agreement

As the Commissioner has determined that the Taxpayer does not meet any of the four tests in the definition of resident in subsection 6(1) of the ITAA 1936 to be considered an Australian tax resident for the 2020 income year it is not necessary to apply the tie-breaker provision Article X of the Australia-Country X Double Taxation Agreement.

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