Residency – Individuals (and trusts) LIV Taxation & Revenue Discussion Forum: Session 5 Presenter: Sam Campbell, Senior Associate, Sladen Legal 19 September 2019
Sam Campbell Senior Associate Sladen Legal scampbell@sladen.com.au 03 9611 0135 sladen.com.au
What we will cover? What we will cover? • Why is residency important? • The individual residency tests – a recap • Harding v FCT, Handsley v FCT • Reform and the Board of Taxation paper • Practical considerations • Residency of trusts Sladen Legal
Why is residency important? • Aus residents are assessed in Aus on ordinary and statutory income from all sources • Foreign residents assessed on income from Aus sources or on income on a basis other than source (eg, CGT) Sladen Legal
Individual residency tests Resides test – where someone lives Domicile test – see Domicile Act/domicile of origin v domicile of choice 183-day test – bright line test/if fail, consider usual place of abode and if not intend to reside in Aus Commonwealth superannuation test – less relevant (last of these funds to accept members did so in 2005) Sladen Legal
Individual residency tests (cont) Sladen Legal
Dual residence Possible for individuals to be residents of more than one country Dual residence is often resolved in DTAs – 44 DTAs between Aus/other countries Article 4 “tie breaker” in Aus/UK DTA determines residence solely based on: • the state where the individual has a permanent home (if permanent home in both states, or neither, the state with which the personal and economic relations ( PER ) are closer) • if PER cannot be determined, the state in which the individual is a national; • if a national of both (or neither), the Competent Authorities decide Article 4 refers to ‘permanent home’ rather than ‘permanent place of abode (c.f. section 6 definition) ATO say Article 4 “tie breaker” may not work for CFCs and transfer trusts Sladen Legal
FCT v Harding • In February 2009, Mr Harding relocated to Bahrain. He worked in Saudi Arabia and lived in Bahrain. Mr Harding and his first wife (Mrs Harding) agreed that she (and their youngest child) would join him in Bahrain at the end of 2011. • In the meantime, Mr Harding took up a lease in an apartment building called “Classic Towers”. Between 2009 and 2015, Mr Harding moved between three apartments in Classic Towers, all on a fully furnished basis. • Although Mr Harding made various plans to relocate Mrs Harding and their son to Bahrain, Mr and Mrs Harding separated in about October 2011. After their separation, Mr Harding remained in Bahrain and formed a new relationship in 2012 Sladen Legal
FCT v Harding (cont) Federal Court: • Taxpayer did not “reside” in Aus • Taxpayer did not have a permanent place of abode outside Aus Full Federal Court: • Permanent place of abode = country or state (not dwelling) Commissioner refused special leave (13 September 2019) Handsley v FCT (AAT): applies Harding Sladen Legal
Handsley v FCT • Mr Handsley, an aircraft mechanic, worked in Vietnam, Turkey, China, Singapore and Malaysia, and spent the year in multiple locations for short periods, spending just 50 days in Australia • He had separated with his wife of 17 years and had intended to build a new life with his new partner, a Filipina, although he had not applied for a long-term visa or residency status anywhere outside Australia • Mr Handsley sold what had been a family home to complete a divorce settlement in early 2013, did not own a motor vehicle in Australia, and did not have any place in Australia that he could call his own or in respect of which he had any long-term entitlement to return to Sladen Legal
Handsley v FCT (cont) • AAT decision contains a useful summary of the individual residency law • Taxpayer did not “reside” in Aus • Because of short stays (no more than 45 days in one country), the Taxpayer did not have a permanent place of abode outside Aus • Focused on movements and length of time Sladen Legal
Board of Taxation Report Report released in 2018 Recommendations: • modernise the tests to provide greater certainty and reduce compliance costs • “Two-step” approach: - inbound = 183-day test in a 12-month period [similar to NZ/UK]; Sladen Legal
Board of Taxation Report (cont.) - outbound = work FT overseas, less than 31 days in Australia, considered Australia tax non-resident = previously resident of Australia, less than 16 days in Australia, considered Australian tax non-resident; = individual never resident of Australia, less than 46 days in Australia, considered Australian tax non-resident - If first limb fails, second limb looks, objectively, at facts and circumstances [‘points test’] – weighting different for inbound v outbound tests • Anti-avoidance rule (‘resident of nowhere’) = remain resident of Australia unless establish tax residency in another jurisdiction Sladen Legal
Ceasing to be a resident • CGT event I1 happens (to all assets except Taxable Australian Property ( TAP ) – taxable Aus real property, asset used in carrying on a business through an Aus PE or an option/right to acquire the above) • Can disregard capital gain or loss (but assets become TAP) • Deemed acquisition of assets on becoming a resident Sladen Legal
Practical considerations • Accommodation • Employment • Family and business ties • Investments • Sporting or cultural connections • Regulatory issues Balance factors – measure size of footprint in Aus v footprint overseas Develop evidence book now (contemporaneous evidence) Sladen Legal
Residency of a trust • A resident trustee at any time during the income year or CMC in Aus at any time during the income year (s95, 97 Act) • Multiple trustees • Residency of trust v company – trust: the CMC v company: CMC (company have multiple CMC?) [note: Bywater , Fundy (Canadian decision), BOT review] • Harding may make it easier for a trust to become a foreign trust (1 day residency in Australia enough) • Scenario: testamentary trust with foreign resident trustee, could be taxed as a foreign trust Sladen Legal
Residency of a trust (cont) • Different test for CGT if a unit trust • any property of trust situated in Aus or the trust carries on business in Aus • the CMC of the trust is in Aus or Aus residents hold more than 50% of the trust Unit trust could be a non-resident for Aus tax purposes but a resident trust for CGT purposes (Eg. Foreign trustee with CMC but Aus resident hold more than 50% of units) • CGT event I2 if a trust ceases being a resident trust – only exception relate to TAP • Deemed acquisition of assets if trust becomes a resident • A trust that ceases to be (or becomes) a resident trust for CGT purposes does not make a capital gain / loss for relevant income year unless the asset is TAP and Division 855 applies Sladen Legal
Questions.
Thank You Sladen Legal
Disclaimer: The material and opinions in this paper are those of the author(s) and not those of Law Institute of Victoria. The Law Institute of Victoria did not review the contents of this presentation and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.
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