Contributed by Heidi Maguire, Content Specialist, Wolters Kluwer
What was anticipated to be the major event in the realm of residency and international taxing rights this year — the handing down of the High Court decision of Addy v FC of T — has been temporarily sidelined. As recently highlighted in the article Interpreting the tax residency rules during COVID-19 (¶58_2021) by the same author, the pandemic has created a special set of circumstances more pressing when evaluating the source of income. Various government responses to the pandemic and ATO guidance are flagged in that article. Sitting quietly in the wings is the final say on the validity of the so-called “backpacker tax”.
While we await the High Court’s decision, this article reflects on the 2 Full Federal Court residency decisions handed down in 2020: FC of T v Pike 2020 ATC ¶20-764;  FCAFC 158 and FC of T v Addy 2020 ATC ¶20-756;  FCAFC 135. It then hypothesises what effect COVID-19 might have had if the taxpayers’ circumstances in those cases had overlapped with the pandemic. But first, it is perhaps useful to restate how Australia’s current tax residency rules apply to individuals as interpreted by the Full Federal Court in Harding v FC of T 2019 ATC ¶20-685;  FCAFC 29 (and omitting, for convenience, the Commonwealth superannuation fund test).
The ordinary concept and 183 day tests of residency
In regard to individuals, s 6(1) of ITAA 1936 defines a “resident” or “resident of Australia” to mean a person who resides in Australia, including:
• a person whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia (the ordinary concepts test) or
• a person 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 (the 183 day test).
Generally, business migrants who come to Australia intending to reside here permanently are treated as residents from the time of arrival. However, individuals coming to Australia for only a year or so (eg backpackers) are usually not regarded as residents as they are likely, post-Harding, to be viewed as having a permanent or usual place of abode outside Australia. Conversely, individuals who leave Australia to work overseas for lengthy periods of time but maintain a family home in Australia will generally be viewed as remaining residents of Australia, other than in exceptional circumstances.
Harding was one of those “exceptional” circumstances where it was held that the taxpayer’s maintenance of a home and family ties in Australia did not lead to the conclusion that he was a resident of Australia. Relevantly, the full court’s decision in Harding decreed that the term “place of abode” integral to both tests of residency did not necessarily refer to a particular dwelling but could also refer to a town or country. It was now open to an individual who lived in a succession of rental premises overseas to establish that they were no longer a resident of Australia.
The corollary effect was that an individual living in Australia could no longer substantiate their claim to be a resident (and thereby their entitlement to the tax-free threshold on income earned in Australia) on the basis they no longer had a particular household to return to in their country of origin. A continued perception of their country of origin as “home”, combined with an intention to return there in the near future, now sufficed for that country to constitute a place of abode, whether preceded by the word permanent or usual (see MacKinnon v FC of T 2020 ATC ¶10-534;  AATA 1647).
The Harding decision has done little to clarify the residency regime. Indeed, in March 2019 the Board of Taxation released a report (Reforming individual tax residency rules — a model for modernisation) in which it stated that the decision demonstrated the ongoing uncertainty for taxpayers and the ATO. According to the Board, it has become clear that the individual tax residency rules must be reformed as they “no longer reflect global work practices given the increasing frequency and nature of interactions with the rules, increasing compliance burden, and increasing number of disputes”.
In its report, the Board sets out a model for simplifying and modernising the current individual tax residency rules. The Board has designed its proposed rules to re-focus tax residency in 3 critical ways:
• making physical presence the primary measure of residency — moving Australia to closer alignment with international practice
• focusing on Australian connections — providing that 2 individuals with identical physical presence and other connections to Australia should be treated the same
• adopting only objective criteria — removing any requirement to test intention or undertake broad, holistic examinations to promote simplicity, consistency and certainty.
As at the time of writing, the Government is yet to formally respond to the Board’s recommendations.
The Full Federal Court decision of FC of T v Pike concerned the application of the tie breaker rule in the Australia/Thailand DTA to determine whether Australia or Thailand had taxing rights in respect of the income of a dual resident. The taxpayer in Pike had come to Australia from Zimbabwe in 2005 with his family but was unable to find suitable employment. He took up a position with a firm in Thailand where he was based between 2006 and 2014, occupying a succession of rental premises that also accommodated his family when they visited. During that time he returned to Australia to visit his family several times a year and supported his partner and their sons financially. He also continued to support his family members in Zimbabwe.
The taxpayer in Pike was found to be both a resident of Australia and a resident of Thailand in the relevant years. However, for taxing purposes, he was held to be a resident solely of Thailand. The tie-breaker rule in the Australia/Thailand DTA deemed the taxpayer to be a resident of Thailand for taxing purposes because his personal and economic relations were closer to Thailand than Australia.
But what if Mr Pike was unable to return to Australia during any of the relevant years? Would he have been found not to be a resident (at least for those particular income years) as per the taxpayer in Harding? Conversely, what if he had returned to Australia for a brief visit but was unable, due to travel restrictions, to return to his home in Thailand for several months? The taxpayer’s extended presence in Australia might well have tipped the scale in favour of a finding that his personal and economic relations were closer to Australia than Thailand, thereby bestowing taxing rights on Australia.
It is worth noting that, in upholding the decision at first instance in regard to the application of the Australia/Thailand DTA, the full court in Pike observed at  that: “An appeal court will not overturn the decision of the primary judge merely because it prefers an outcome different from that adopted by the primary judge where both outcomes are equally available or finely balanced … this is such a case”.
In Addy v FC of T, the taxpayer was a UK citizen who entered Australia on a working holiday visa. She stayed for 18 months before returning to her family home in Kent, where she had left most of her clothing and personal possessions. The proceedings were originally seen as a suitable vehicle to test the operation of the Australia/UK DTA. Due to not being so suitable, they soon descended into a train wreck of an analysis on residency. Ultimately the full court accepted that Ms Addy was a resident of Australia, in spite of evidence to the contrary. That was because, in the absence of the Commissioner turning his mind to whether her usual place of abode was outside Australia and whether she intended to take up residence here, the only conclusion that the court could reach was that Ms Addy was a resident pursuant to the 183 day test.
Having so determined, the issue of the validity of the backpacker tax remained alive. That is, was the application of the working holiday tax rate of 15% to Ms Addy’s income contrary to the non-discrimination clause (Art 25) of the Australia/UK DTA as it was “other or more burdensome” than the taxation and connected requirements to which Australian nationals in the same circumstances would be subjected? The majority of the full court thought not, finding that the imposition of tax consequent upon the holding of a working holiday visa did not offend either the terms of Art 25 or its normative purpose. It was not a form of indirect or disguised discrimination based solely on nationality.
However, in dissent, and in line with Logan J at first instance, Davies J considered that the 15% rate of tax imposed on Ms Addy’s working holiday taxable income was discriminatory and thus an infringement of Art 25. Had she been a resident Australian national who was not a working holiday maker deriving the same income from the same activities, she would have paid tax at a different rate and been entitled to the benefit of the tax-free threshold. With the judicial scoreline now poised at 2:2, and more at stake than just one backpacker’s tax liability, leave to appeal the full court’s decision to the High Court was granted.
As alluded to above, the taxpayer’s residency in Addy was somewhat contrived for the sake of running a test case. Were it not for a technicality, she had failed both residency tests. However, had Ms Addy been living in Australia when the pandemic broke out and she stayed on longer, her resident status may have been differently perceived. In particular, had Ms Addy’s intention changed and she decided to stay on in Australia indefinitely because it was no longer safe to return “home”, then arguably she would have met both tests, at least from the point in time her intention changed. In order to substantiate her position, evidence of her actions coinciding with her intentions would have needed to be tended (as the taxpayer successfully did in Gurney v FC of T 2020 ATC ¶10-549;  AATA 3813). Evidence such as her entering into a formal lease and/or having had her parents ship over the bulk of her possessions from the UK may well have sufficed.
Conjecture aside, we continue to await the High Court’s decision in Addy and the Government’s formal response to the Board’s report. When the working holiday makers finally return to our shores will some of them be able to establish residency and access the tax-free threshold as per Australian residents? Or will they all be subjected to the backpacker tax rate of 15% on income earned regardless of residential status? Or will there be another test of residency for backpackers (and expatriates) to meet altogether? The full court’s observation in Pike at  acknowledges just how arbitrary a judicial outcome can be in cases of residency. The application of the current residency rules is uncertain enough without throwing a pandemic into the mix.