Aussie tax residence different

Taxing Times is a weekly column that looks at various aspects of tax and money management.
Taxing Times is a weekly column that looks at various aspects of tax and money management.

In February and April I wrote about a decision of the Taxation Review Authority (TRA) that found a taxpayer was still a New Zealand tax resident despite living predominantly outside New Zealand for more than 10 years. In those articles I highlighted why I thought the authority's decision was flawed.

Normally I would not bore readers with yet another story on the same topic. However, a very recent decision of the Administrative Appeals Tribunal (AAT) of Australia (perhaps they read The Southland Times) further highlights the flaw in the way this issue has been approached by the TRA and the Inland Revenue Department (IRD) in New Zealand.

Both countries tax authorities it seems lost objectivity in this space when the taxpayer concerned had been earning tax-free income in a foreign country. However, unlike our courts in recent times that are prone to lapping up the New Zealand commissioner's views, the AAT gave the Australian Tax Office (ATO) commissioner a kick in his britches for trying it on.

While the laws in this area in our respective countries are not identical, the courts nonetheless apply similar tests when considering the matter. When determining tax residence in New Zealand, the location of a person's dwelling and at the person's wider circumstances such as intentions, family, social, business/job ties and the like, are considered.

In Australia, you are a tax resident if you "reside" there. If you do not reside in Australia you could still be considered an Australian tax resident if your domicile is Australia, unless your permanent place of abode is outside Australia.

The ATO states on its website that in determining where a person "resides" it will consider intentions, family, social and living arrangements, business/ employment ties, maintenance and location of assets and the like. You will spot the similarity.

In the recent AAT case, a taxpayer named Dempsey worked on a building project in Saudi Arabia from September 2007 until May 2010. While living and working in Saudi Arabia, he maintained his former home in Australia, which also stored his furniture and vehicles. Dempsey visited Australia about twice a year to holiday and see his children.

The ATO argued that Dempsey resided in Australia. The AAT concluded that Dempsey was not an Australian resident for tax purposes under the tests in Australia.

In its decision, the AAT rejected the wide interpretation of the law as applied by the ATO. The AAT also explicitly warned against relying on checklists for determining tax residence - which incidentally is the approach used by Inland Revenue.

Further, the AAT gave the ATO a bit of a dressing down in making it clear that the tax-free status of the overseas country cannot affect a taxpayer's liability to tax in Australia. The AAT stated that Dempsey "was not obliged to make a donation to Australian consolidated revenue in respect of income derived from non- Australian sources just because that income was not subject to taxation abroad. Nor was he obliged to make such a donation because he retained Australian citizenship".

Much of the emphasis Inland Revenue has given to the way it interprets and applies our test of tax residence derives from cases when the taxpayer concerned earned tax-free income abroad.

In Australia, the AAT has seen right through this and sent the ATO back down the snake to the start of the game.

Craig Macalister is the tax principal at accounting firm Crowe Horwath. Contact: 03 211 3355

The Southland Times