Q&A: Part Year Resident or Non-foreign Resident for Tax Purposes



Article from Outlook magazine May/June 2020 edition.

Scenario

My client was born in Australia and has lived here all her life(as have her family). She left for London on 1 February 2019, where she will occupy a bedroom at a friend's place while she looks for casual bar or hospitality work. She also intends to use this as base from which to travel to and from Europe. At the end of her travels, she aims to obtain the appropriate visa and find full-time work in the hospitality industry(for which she is qualified) and live in England for a number of years. Is she no longer an Australian resident for tax purposes (and at what point did this cease), and what are the tax consequences either way?

Question

At what point is an Australian living in London a part-year resident or non-resident for tax purposes.

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Guidance

The question of whether a person is a resident of Australia for tax in a particular income year can be one of the most difficult issues in tax law to determine. Not only it will depend on the precise facts and the intention of the taxpayer(which may change at relevant times), but it can also involve a judgement-call at the relevant time. Also, the issue of when a person ceases to be resident(and part-year residency occurs) is a very common scenario and highly relevant to the taxation of the taxpayer's income in that year.

The starting point, of course, is the definition of resident of Australia found in s 6 of the Income Tax Assessment Act 1936 (ITAA 1936). It provides that a "resident of Australia" means: 
(a) a person other than a company who resides in Australia and includes a person:

  • whose domicile is in Australia unless the commissioner is satisfied that the person's permanent place of abode is outside of Australia
  • 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 
  • who is: 
    • a member of the superannuation scheme established by deed under the Superannuation Act 1990 etc
One of the problems with this definition is that it does not state that it applies on an income year by income year basis - albeit, it has always been taken that a taxpayer's residency status is worked out on an income year basis and that it can change from one income year to another.

So putting aside the provisions dealing with being a resident of Australia under the superannuation measures, the first and primary is someone who "resides" in Australia. For these purposes resides is not defined and would take its ordinary meaning, this is generally understood to mean to live at a particular place on a permanent, but not necessarily, everlasting basis.

Therefore, in this case it would be correct to conclude that she resides in Australia in the relevant income year (ie the 2019-20 income year) at least until the time of her departure to England.

This, in turn, raises the issue of part year residency and its tax consequences.

Note: Although not necessary to decide, she would also qualify as a resident of Australia under the secondary tests for resident of Australia. This is broadly on the basis of being domiciled in Australia of having lived here for more than half the income year and not having established a permanent or usual place of abode outside of Australia in that time.

So, given the conclusion that she was a resident of Australia until she left for London on 1 February, the issue becomes what are the tax consequences of this part-year residency for the 2019-20 income year.

Firstly, the precise period of this part-year residency period is ascertained under the rules in s 18 of the Rates Act 1986(the Act). This results in her being a resident of Australia in the 2019-20 income year for the seven month period from 1 July 2019 to 31 January 2020.

Secondly, Cathy's individual resident tax free threshold for the entire 2019-2020 year of income will be adjusted downwards(pro-rated) in accordance with the formula in s 20(1) of the Act.

This, in turn, will mean that in the 2019-20 income year, in accordance with the principle in s 6-5(2) and (3) of the ITAA 1997, this pro-rated threshold will apply to Cathy's assessable income (A) from all sources both within and outside Australia for the period she is a resident of Australia, and (B) from sources within Australia while she is a foreign resident.

This, in effect, means that the resident tax rates do not change on the basis of her part-year residency - but only the relevant tax free threshold.

On the other hand, assessable income she derives from sources outside Australia during the five-month period that she is a foreign resident in that income year will not be subject to tax in Australia (ie it will be outside the Australian taxing jurisdiction).

However, for following income years after 2019-20, Cathy will be assessed as a foreign resident and only pay tax in Australia on Australian sources assessable income at foreign resident rates (with not tax-free threshold).

CAPITAL GAINS TAX

It should also be noted that on your client ceasing to be a resident for tax purposes, CGT event l1 will apply to deem her to have disposed of all her Australian sourced CGT assets for their market value at that time. This is subject to an exception pre-CGT assets which remain outside the CGT net and taxable Australian property (s 855-15 of the ITAA 1997) which will always remain subject to CGT regardless of the taxpayer's residency status.

However she can instead choose for CGT event l1 not to apply, in which case all her CGT assets will be treated as taxable Australian property until they are actually subject to a relevant CGT event or she becomes a resident of Australia again for tax purposes. Importantly, any such choice must be made in respect of all the CGT assets she owns, not just one of them.
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