In the last two or three years there appears to have been a concerted attempt by the ATO to challenge the claimed non-residency status of individuals who are working overseas, who have a significant connection with Australia. There have been a succession of reported decisions mainly in the Administrative Appeals Tribunal on this issue. The withdrawal of the exemption for Australian residents with employment income earnt overseas (when away from Australia for more than 90 days), appears to have made the residency issue more acute: repealed s23AG. Most of these AAT cases have been lost by taxpayers, but in a notable case because it was before an AAT constituted by a bench of three including a Presidential Member (who is also Federal Court judge), as well as a Deputy President, and a Senior Member), the correctness of some of the earlier single member AAT decisions was questioned in deciding that the taxpayer was indeed a non-resident (Dempsey [2014] AATA 335).
 
The problem is that in some instances, the ATO’s methodology involves making no prior enquiry of the taxpayer, but rather focuses on money flows into Australia, usually to an Australian resident spouse. This is done by AUSTRAC information being matched to the individual working overseas, and to whom the money was sent. The ATO’s enhanced data matching capability with less human involvement, as accelerated this approach.
 
Because the taxpayer does not know they are being looked at, the taxpayer sometimes returns to Australia for a holiday or to visit family, only to be served with assessments or amended assessments including the moneys remitted to Australia as the taxpayer’s alleged assessable income, without any prior enquiry as to the source of the funds, or to sufficient facts and circumstances which are necessary to determine a taxpayer’s residency status. In an extreme case, the ATO might then also serve on the taxpayer, a Departure Prohibition Order preventing them leaving Australia until they pay the tax claimed, or otherwise provide security to the ATO. The ATO garnisheeing the taxpayer’s Australian bank account the day it serves the assessments is another sometimes resorted to tactic.
 
The ATO use of the onus of proof as a primary weapon to raise these assessments, and the entrapment philosophy behind this scenario, may well constitute an objectionable methodology, against which complaint may be made.
 
Unfortunately, the taxpayer is put to a great deal of time and expense dealing with those assessments or amended assessments, even when they should never have been raised in the first place, as enquiry of the taxpayer should have revealed information which should have satisfied the ATO of the taxpayer’s non-resident status.
 
This issue often is exasperated by the taxpayer not having filed any returns since they left Australia to work overseas. That means that the normal 2 and 4 year limitation periods do not start to run against the Commissioner i.e. that the ATO can raise an original assessment at any time in relation to the tax years for which the taxpayer has not lodged. Whilst the ATO has no limitation in any event where there is “fraud or evasion”, a reasonable argument that a taxpayer is a non-resident, even if it turns out not to be correct, should be a defence to a claim that the omitted overseas income was a not returned due to “fraud or evasion”. The fact that Australia has no limitation on how long the ATO can go back, is a frightening prospect. The recent media reports that the ATO is data matching all real estate transactions in Australia going back to the introduction of Australian CGT in 1985 i.e. more than 30 years, underscores the problem. It is noted that in the UK there is an absolute limit of 20 years. Such a limitation in Australia, is overdue, but has become a more critical issue with a more aggressive ATO.
 
The current uncertainty as to the application of the residency criteria was also apparent in recent times in the UK, which lead them to enact more “bright line” statutory tests, to assist in answering the residency question. The same result may follow here in due course.
 
There are a number of things taxpayers can do to minimize their risk:

  • Filling immigration entry and exit cards as a visitor and not a resident. Quoting the overseas residency address when possible. When having to give an Australian address which is not a hotel, using C/- the person the taxpayer is staying with.
  • Don’t leave large amounts of money in the taxpayer’s name in Australian bank accounts, or owed to the taxpayer at call, by parties in Australia. This avoids the garnisheeing of those amounts. Note the ATO can’t garnishee a joint bank account where the other account holder is not allegedly liable to any tax.
  • Don’t remit money to Australia that can be invested overseas, at least until the taxpayer’s residency status is clear.
  • Limit visits to Australia while working overseas. For instance, the taxpayer’s family might be happy to meet the taxpayer in a holiday spot overseas.
  • Limit assets in the taxpayer’s own name in Australia.
  • File a non-resident tax return in Australia each year of absence to give rise to an assessment for that year. The taxpayer will need some Australia source income not subject to a final withholding tax (as little as one dollar), to give rise to that assessment. Then the 2 or 4 year limitation periods should be available.
  • If there is a job choice, all other things being equal, consider residing in countries that have double tax agreements with Australia, as the “tie-breaker” on dual residence in those agreements can be used to resolve the issue in favour of the treaty country. This doesn’t require the taxpayer to sell their residential property. If it can be let out when the taxpayer is away, it is not available for their use, and as long as the overseas residential property, is owned, or let for significant period by the taxpayer, the tie-breaker will be available. As long as the taxpayer resumes residence within 6 years of the main residence having been let out, the CGT exemption for main residences is preserved. This 6 years can be renewed by the taxpayer returning for a short period of residence in that residential property, each 6 years.
  • Retain sufficient documentation to prove your version of the facts. Often taxpayers don’t know this might become an issue, and don’t retain papers from their foreign employment and residences e.g. leases, which makes the taxpayer’s burden of proving the assessments are wrong, extremely difficult.

 
In the event you or your clients have the misfortune to be caught up in such an ATO assertion of residency status, the provision of relevant information (backed up by appropriate evidence), often makes the problem go away, but not without significant time and effort being expended. The way that information is presented may be crucial. Knowledge of what the ATO needs to know, rather than just answering the ATO’s questions is important. The focus of their questions will be in proving their assertion, not in disproving it e.g. they ask, when in Australia, where do you reside?
 
Pointon Partners have significant experience in this area, and in international tax generally.
 
Please contact Anthony Pointon or Robert Gordon on (03) 9614 7707 if we can be of assistance.

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