Individual & Company Tax Residency Issues

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Individuals - Inbound & Outbound Tax Residency Issues

The primary test of tax residency concerns where you live. If you reside in Australia, you are considered an Australian resident for tax purposes and you do not apply any of the other residency tests. If this test does not apply, there are 3 other tests:

  1. The domicile test: You are an Australian resident if your domicile (generally speaking, where your permanent home is located) is in Australia, unless the Commissioner of Taxation is satisfied that your permanent place of abode is outside Australia;
  2. The 183-day test: If you are present in Australia for more than half the income year, whether continuously or with breaks, you may be said to have a constructive residence in Australia, unless it can be established that your usual place of abode is outside Australia and you have no intention of taking up residence here; and
  3. The superannuation test: This test ensures that Australian government employees working at Australian posts overseas are treated as Australian residents.

The decision in Harding v Commissioner of Taxation [2019] FCAFC 29 (decided 22 February 2019) considered the meaning of "permanent place of abode". Where a person has their permanent place of abode may be referrable to a town, village, suburb or a country. A person who has their permanent place of abode outside of Australia is not subject to Federal income tax laws in Australia.

Its crucial to consider the facts of a particular person’s circumstances in determining their residency status and from what date their residency commenced or ceased. As the cases have shown, different outcomes arise under different circumstances.

Even if a person is a resident of Australia for tax purposes, some or all of their income derived overseas may be exempt from income tax in Australia, depending on the circumstances.

The decision in Harding's case

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Dual Residency

Depending upon the circumstances, a person may be a dual tax resident because there may be inconsistent tax residency rules between Australia and other countries.

Specific Inbound Tax Residency issues

If you become a resident of Australia for tax purposes, there are a number of specific tax problems which may arise including:

  1. assessable income from an issuance of shares, options or other property from an employer at the time you are a tax resident of Australia; and
  2. capital gains tax (CGT) arising from the disposal of shares or options at the time you are a tax resident of Australia.

Specific Outbound Tax Residency issues

If you cease being an Australian resident, for CGT purposes, you are deemed to have disposed of assets that are not taxable Australian property for their market value at the time. This may result in serious tax consequences for the taxpayer depending upon the circumstances.

Resuming Tax Residency

Australians returning to live permanently in Australia should be aware that there are special capital gains tax issues which arise for foreign tax residents who commence to live in Australia.

Common Reporting Standards for foreign tax residents

From 1 July 2017, the Common Reporting Standard (CRS) is the single global standard for the collection, reporting and exchange of financial account information on foreign tax residents. Under it, banks and other financial institutions will collect and report to the ATO the financial account information on non-residents. The ATO will exchange this information with the participating foreign tax authorities of those non-residents. In parallel, the ATO receives financial account information on Australian residents from other countries' tax authorities.

Companies - Central Management & Control Issues

The test for when "central management & control" was considered by the High Court in 2016. The issue of central management and control can affect Australian companies with overseas operations and foreign companies with Australian operations.

The existence of a double tax agreement between Australia and the company's place of domicile may be material to whether the corporate group will be required to pay double taxation.

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