Ruling Compendium TR 2023/1EC







This Compendium of comments provides responses to comments received on draft Taxation Ruling TR 2022/D2 Income tax: residency tests for individuals. It is not a publication that has been approved to allow you to rely on it for any purpose and is not intended to provide you with advice or guidance, nor does it set out the ATO's general administrative practice. Therefore, this Compendium does not provide protection from primary tax, penalties or interest for any taxpayer that purports to rely on any views expressed in it. | Summary of issues raised and responses: All legislative references in this Compendium are to the Income Tax Assessment Act 1936, unless otherwise indicated. | The draft Ruling could go further to provide clear and quantifiable rules, particularly with respect to physical presence in Australia. Without this, it is expected there will still be a need for legislative reform of the residency legislation in the future. | Physical presence in Australia is one factor. The statutory test requires a consideration of all of the facts and circumstances and no single factor is decisive. | '(a) a person ...' (the 'a' in front of person is missing). | Paragraph 11 of the final Ruling has been updated. | Employers, to determine the correct rate of withholding that should apply to the salary or wages of their employees, need to determine their residency status. A safe harbour should be provided where, if they have made reasonable efforts to determine the residency status of the employee at the time the withholding occurs, then there should be an administrative approach whereby the Commissioner will accept the withholding as it has been made (and not impose or fully remit failure to withhold penalties). | We note that Law Administration Practice Statement PS LA 2007/22 Remission of penalties for failure to withhold sets out that each case must be considered on its own facts and circumstances - firstly, whether a failure to withhold penalty applies and then, on a case-by-case basis, whether there are grounds for remission. | The superannuation residency test should be covered in the final Ruling, in particular, when it does and does not apply for current and former government employees. Specifically, it should consider what occurs if they have moved from the public sector to the private sector. | Given the limited number of funds this applies to, this is not a commonly arising issue and so the scope of the final Ruling has not been extended to cover the superannuation test in detail. However, paragraphs 96 and 97 have been added to the final Ruling to clarify the funds to which it applies, and that the test only applies where the member is an active member. | It is noted there is a consistent use in the draft Ruling of terms such as 'long term' or 'short term' or 'considerable time'. Generally, the use of these terms is not accompanied by suggested time periods (other than paragraph 74 of the draft Ruling preserves the previous 2-year 'rule of thumb' in relation to what is considered a substantial period of time). While the subjectiveness of these phrases does not provide absolute certainty that would otherwise be provided by a bright-line test, the draft Ruling and the associated case law provides a significant resource upon which well-advised taxpayers can draw. | The length of time a person has been in Australia or away from Australia is not determinative on its own. Rather, the person's facts and circumstances must be considered as a whole in context and it is only once this is done that it can be determined as to whether they are a resident or a non-resident. | However, the comments in paragraph 19 of the draft Ruling as to what the test looks to are made without reference to the aspects of the test identified by Wilcox J in Hafza v Director-General of Social Security [1985] FCA 201; 6 FCR 444 (Hafza) with the result that the draft Ruling confusingly refers to 'factors that commonly inform [the] connection [to Australia]' without providing context for how those factors may be relevant in a particular circumstance. | In Hafza, Wilcox J recognised that the concept of ordinary residence has 2 elements - viz physical presence and intention to treat that place as home. His Honour then observed, at [449] that the test of whether a person remains resident of a place where they are not physically present for a period 'is whether the person has retained a continuity of association with the place [referring to Levene v Inland Revenue Commissioners [1928] 1 AC 217 (Levene)], together with an intention to return to that place and an attitude that that place remains 'home'' and considered in Commissioner of Taxation v Addy [2020] FCAFC 135 (Addy) at [74]. The reference to Levene is to the concluding passage of Lord Chancellor Viscount's Cave's speech rejecting counting days as the test of where a person was ordinarily resident. The Lord Chancellor stated that ordinary residence connotes 'residence in a place with some degree of continuity and apart from accidental or temporary absences'. It follows that facts and matters that shed light on the following matters may be relevant to the determination of a person's residence: | The second sentence of paragraph 20 of the draft Ruling states that the test looks to a person's 'connection' to Australia and proceeds to list 'factors' said to 'inform that connection'. There are 2 principal problems with that paragraph. | Firstly, the draft Ruling's focus on facts and matters directed to a person's 'connection' with Australia unduly narrows the statutory inquiry which is informed not only by presence and 'continuity of association' with Australia (or a particular place within Australia) but also by the person's presence and association with a place outside of Australia and that person's intention. The proposition underlying paragraph 20 of the draft Ruling is made explicit at paragraph 24 of the draft Ruling where it states that a person's connection with or residency 'of another country does not necessarily diminish any connection to Australia'. The reference cited in support of that proposition is the following passage from the reasons of Logan J in Pike v FCT [2019] FCA 2185 at [57], where the learned primary judge stated: | The point is that it is no part of the ordinary meaning of reside in the 1936 Act that there be a "principal" or even "usual" place of residence. It is important that, as used in the definition in s 6(1) of the 1936 Act, "resident" not be construed and applied as if there were such adjectival qualifications. On the facts of a given case, the local dual residence examples given may find analogues in a conclusion that a person is a resident of more than one country, according to the ordinary meaning of the word "resident". | That passage provides neither express nor inferential support for the proposition stated in paragraph 24 of the draft Ruling, which informs paragraph 20 of the draft Ruling. | The proposition should be deleted from paragraph 24 of the draft Ruling and paragraph 20 of the draft Ruling should be redrawn consistent with principle. | Secondly, for the reasons outlined above, mere 'connection' of any nature with a place does not inform the application of the test. In particular, the incorporation of the concept of 'continuity of association' into the test of ordinary residence does not invite an inquiry into any mere 'connection' a person retains or creates with a place. It must be a 'connection' that informs whether the person has retained a continuity of association in the relevant sense. | While the content of paragraph 20 of the draft Ruling is no doubt intended to be informed by the commentary that follows in paragraphs 25 to 52 of the draft Ruling, in light of the above, it is suggested that paragraph 20 of the draft Ruling is recast to reflect the law as stated above. In particular, it is suggested that it be recast to clarify that the factors enumerated in paragraph 20 of the draft Ruling are factors that inform the test articulated by Wilcox J in Hafza which has been accepted as good law in subsequent appellate decisions. | Another reason for suggesting that paragraph 20 of the draft Ruling be recast is that it will clarify the comments at paragraph 29 of the draft Ruling. The draft Ruling, in the context of outlining the Commissioner's views on the relevance of the period of physical presence in a place, states in the second sentence that where a person who has previously spent a long time in Australia spends a shorter time in the relevant income year, that 'shorter period ... assumes less relevance if the person has retained a continuity of association with Australia ...'. Nowhere in the draft Ruling does the Commissioner clarify what is meant by that reference to 'continuity of association'. As already outlined, paragraph 20 of the draft Ruling fails to distinguish 'continuity of association' from mere connection and the concept is nowhere else explained. Footnote 18 of the draft Ruling refers to the reasons of Derrington J in Addy at [76]. [76(d)] refers to the concept of 'continuity of association' without explaining it, and identifies 'relevant circumstances' that to a reader not immersed in tax law are not easily reconciled to paragraph 20 of the draft Ruling. | These issues should be addressed in the final Ruling. | Regarding the comments on paragraph 24 of the draft Ruling, the proposition being put in that paragraph is that because the statutory question is whether a person resides in Australia, a person can still meet that statutory definition regardless of where else in the world the person may reside or have stronger connections. We consider that the principle that having a connection to or being a resident of another country does not necessarily diminish connection to Australia is supported by the referenced passage by Logan J in Pike v Commissioner of Taxation [2019] FCA 2185 (Pike). His Honour made that particular observation in the context of considering dual residents and that there is no 'necessary antipathy' between finding a person resides in Australia and also, at the same time, resides in another country. | However, we agree that this does not render a person's connections overseas irrelevant to the factual inquiry. To make this clearer we have removed the words 'the factors focus on your connection to Australia' from the first sentence of paragraph 24 in the final Ruling. | The concept of residency as it applies for migration and social security purposes is different to residency for taxation purposes. Therefore, the position in paragraph 34 of the draft Ruling that statements or declarations made as to whether a person is a resident for the purposes of the entry into or exiting from the country can be applied for taxation purposes is not appropriate. This is because they are not directed where a person is a resident for tax law purposes. | However, statements in declarations made in relation to obtaining visas and incoming and outgoing passenger cards can still be relevant for determining residency for taxation purposes. This is because they provide contemporaneous evidence of the taxpayer's intentions of where they intended to reside at the time they were completed. This was confirmed by Derrington J in Addy at [81-82]. | A person's intention will always be of 'significance', as will the person's physical presence. Neither is dispositive. The concern is that paragraph 35 of the draft Ruling obscures the important point that the 'weight' to be afforded to 'evidence' of a person's stated intention 'depends on the circumstances': those circumstances include both the context in which the statement is made and its contemporaneity or otherwise as to a person's intention at a particular point in time. Those circumstances and the effect they may have on weight were discussed by the primary judge in Harding at [42-45 in a passage that Davies and Steward JJ (Logan J agreeing at [2]) described as 'plainly correct' (Harding at [61]). It is suggested that paragraph 35 of the draft Ruling be redrafted to separate the issues of the 'significance' attributed to intention vis-à-vis physical presence on the one hand, and the weight to be afforded evidence of intention on the other hand. | Additionally, this paragraph states that an individual will not have a permanent place of abode if that individual moves from place to place. This is inconsistent with the decision in Harding and paragraph 64 of the draft Ruling which states that a permanent place of abode refers to '...physical surroundings in which you live, extending to a town or country'. | It is suggested that further clarity and guidance is needed to paragraph 66 of the draft Ruling to contemplate long-term and ongoing employment arrangements in multiple jurisdictions to ensure the determination of 'permanent place of abode' is consistent with the outcome in the Harding case. | Consideration is required of a person's facts and circumstances to determine, if they relocate to a place overseas, whether they have established their permanent place of abode at a place or places. | Paragraph 66 of the draft Ruling notes there are no 'hard and fast rules' to determining whether an individual has a permanent place of abode outside Australia. The Ruling should provide clearer guidelines to taxpayers to provide certainty of outcome and simplicity of self-assessment. We recommend that an objective and quantifiable rule is added to this paragraph. | As a starting base, it is recommended adding a statement that an individual will not be a resident of Australia if they: | Determining whether a person's permanent place of abode is overseas requires consideration of the person's facts and circumstances. Statements or rules in addition to that of the statutory test are outside the scope of this Ruling. | As currently drafted, paragraph 71 of the draft Ruling seems to make an individual's intention to return to Australia the decisive factor in determining residence which is inconsistent with the general principles and guidelines in the draft Ruling. It is suggested paragraph 71 of the draft Ruling be deleted or reworded to provide a more balanced approach to the 'objectively observable' actions supporting an individuals' intention and considering the duration and nature of overseas ties. | The 'rule of thumb' set out in what is now paragraph 77 of the final Ruling (which was retained from Taxation Ruling IT 2650 (now withdrawn)) is that if the departure is for less than 2 years, it is unlikely this would result in the person having their permanent place of abode overseas. Stays of 2 years or more need to be considered in the context of all the relevant facts and circumstances. | The reference to special celebration such as Christmas in paragraph 73 of the draft Ruling provides a narrow view on acceptable return travel and limits how many trips can be spent in Australia. It is suggested the ATO instead makes reference to periods of leave or holidays. It should also not preclude limited return travel for work relating to the foreign employment. | The wording does not preclude limited return travel for foreign employment. However, the situation of a person who remains domiciled in Australia and who returns to work in Australia is a more nuanced situation and all the relevant facts and circumstances must be considered. We have not, therefore, added such a situation to the list of situations which would typically not result in Australian residency being resumed. Such cases require further consideration, taking all of the facts and circumstances of the person into account. | ... temporary accommodation such as hotels, camp sites, barracks, dongas or accommodation arranged or owned by the employer on a non-exclusive basis may indicate the presence overseas is not permanent. | It is suggested the draft Ruling make it clear that this is indicative only and there may be instances where the accommodation is temporary only as a precursor to the individual finding more suitable long-term accommodation. It should also reference the High Court decision in Koitaki Rubber at [249] where Williams J said: | The place of residence of an individual is determined, not by the situation of some business or property which he is carrying on or owns, but by reference to where he eats and sleeps and has his settled or usual abode. If he maintains a home or homes he resides in the locality or localities where it or they are situated, but he may also reside where he habitually lives even if this is in hotels or on a yacht or some other place of abode. | Further, the new footnote 50 of the final Ruling states that a stay in short term accommodation as a precursor to finding long term or permanent accommodation should be considered in conjunction with other factors in deciding a person's residency. | Example 9 of the final Ruling provides an example of such a situation.. | The draft Ruling also does not contemplate situations where there are 2 permanent homes in separate locations. | An understanding of the Commissioner's view on the accommodation arrangements outlined in situations such as those outlined and how the nature of such arrangements would determine an individual's permanent place of abode under the domicile test would be welcome. It would also be useful to have further guidance on how the outcome in Re Mayhew and Federal Commissioner of Taxation [2013] AATA 130 (Mayhew) is being applied in this draft Ruling. | As outlined in paragraph 80 of the final Ruling (consistent with paragraph 77 of the draft Ruling), in situations such as those advanced, the significance of the status of the home can vary depending on the context. Every person's context is different. We do not consider that we can be more definitive in this regard as doing so may risk elevating (or not as the case may be) the status of the home inappropriately. We have, however, provided further examples as we consider that examples are the best way to illustrate how the status of the home may feature in a residency decision (noting that the referenced decision of Mayhew is, as are all residency decisions, an outcome based on its facts). | Furthermore, the draft Ruling does not contemplate situations where a working holiday maker visa is obtained by an individual as a temporary measure with a view to obtaining a longer-term visa. | Additional commentary from the Commissioner as to why the 183-day test does not apply to individuals on working holiday maker visas and why this differs from the conclusions reached in the Addy case would bewelcome. | For situations where a working holiday maker visa is initially obtained so that an individual can relocate to Australia and subsequently obtains a longer-term visa, and provided this can be supported by other relevant facts and circumstances, our view is that the intention to reside in Australia on a longer-term basis should conclude that the individual would be considered a resident from when they first arrive in Australia, including the period the individual is on the working holiday maker visa. | The view expressed in the final Ruling is not that visa type is dispositive of the outcome. The visa in the situation of a working holiday maker is relevant in so far as it sets out the terms and conditions on which the person enters and stays in Australia. Those terms and conditions include that the requisite intention must be that of having a holiday in Australia. | We agree, however, that where the person who enters on a working holiday maker visa changes that intention and this is supported by a change in behaviour, they may be a resident. Paragraph 104 has been added to the final Ruling to clarify this. | Further, as inbound people also have the temporary residency provisions to fall back on, should they be a resident, the Ruling is of greater importance to outbound people. Therefore, there should be greater focus on outbound people. | The principles that apply to determining residency for an individual apply equally to both inbound and outbound taxpayers. We do not consider that it would be useful to distinguish between the examples on this basis. | The situations in (e) and (f) are complex, requiring consideration of situations with extensive facts and circumstances where a small change to the situation can have a material impact. Due to their complexity, an example is not suitable for inclusion in a Ruling of this nature. | We consider that examples on situation (g) would be misleading without a consideration of the relevant double-tax agreement (DTA) which contain specific Articles addressing employment income of ship crew and is beyond the scope of this Ruling. | We agree situation (h) will be rare and have not included such an example. | In terms of persons in the examples moving or relocating to Australia, they contain an underlying assumption that the person has never been an Australian resident or had an Australian domicile. However, they do not state this. This should be clarified and state whether, if the person had previously been an Australian resident, or had an Australian domicile, the conclusion in the examples would change. | To the extent there is an impact, such as when the example is applying the domicile test, then this will be apparent from the underlying facts of the case. Therefore, a separate disclosure in all examples is not considered necessary. | The draft Ruling does not acknowledge that wealthier persons may not need to dispose of Australian assets before leaving for overseas, while a less wealthy person may have to dispose of them. For instance, why would a wealthy person need to dispose of a share portfolio or investment properties that are good investments. Holding such properties may be justified for a resident or a non-resident. | The amount, nature and type of investments that people hold in Australia is a relevant fact and circumstance for determining their residency status and this is made clear in paragraph 52 of the final Ruling. | Example 4 of the draft Ruling refers to a 'definite change or break' from Mexico. While the Example concludes that Conchita does not become an Australian resident, the phrase 'definite change or break' has more relevance to ceasing residency than gaining residency. See, for example, Glyn v Revenue & Customs [2013] UKFTT 645 (TC). | We consider that it is relevant to compare the behaviour in and out of Australia regardless of whether the person is entering or leaving Australia. | In relation to the ordinary concepts test, provided it was Mark's initial intention to live and work in Brazil for the duration of the 2-year temporary assignment, he should not be considered a resident under the ordinary concepts test. His wife and children's return to Australia would mean they should be considered residents from the date of their return, but Mark's residency status should be considered separately to theirs. | While having his immediate family return to Australia would suggest an enduring connection to Australia, Mark's intention was to move overseas for a substantial period, and his limited physical presence in Australia during this time (only an annual holiday and visits for milestone events) would also suggest that he is not a resident of Australia for the period in question under the ordinary concepts test. | The continuance of superannuation in Australia as referenced in the Example would typically be the employer's decision and therefore outside of Mark's control. As such, it would not be a significant factor in this case. | In relation to the domicile test, while Mark has a domicile in Australia, it appears that he has a permanent place of abode outside Australia. If this is not the case, this point should be elaborated upon. It is not accepted that Mark's spouse establishing a permanent place of abode in Australia automatically results in him also establishing the same permanent place of abode when the facts indicate otherwise. | Mark has a documented intention to be in Brazil for a period of 2 years and is physically present in Brazil for most of this time. A serviced apartment is not necessarily a temporary or transitory form of accommodation. There are also different cultural norms globally with respect to permanent housing such as serviced apartments and furnished accommodation. While not often seen as permanent in Australia, these are more commonly used as long-term accommodation in other countries. | Given Mark's accommodation is provided by his employer, the type of accommodation he has in Brazil would likely also be the employer's decision and therefore outside of Mark's control. | We agree that Mark's residency status is separate to that of his family. In our view, the pattern of behaviour displays a continuity of association with Australia consistent with residing here. We would consider Mark to remain a resident under the domicile test and have added further commentary to explain our conclusion. | Where examples discuss persons in relationships, would the conclusions change if the people in the examples were living apart, but the relationship was not in 'difficulties'? For example, in Example 5 of the draft Ruling if the wife returned to Australia because of difficulties in the marriage, and in Example 6 of the draft Ruling if the wife staying in Australia was not due to marriage difficulties. | The examples in the final Ruling are included to illustrate how the concepts underlying the residency test are applied in practice. | As noted in paragraph 74 of the draft Ruling, 2 years is a substantial period and sufficient to abandon Australian residency. The maintenance of a car and a property in which his soon to be ex-wife was living in should not be considered an enduring connection to Australia. | With respect to the domicile test, there is no suggestion that he does not have a permanent place of abode in Brazil from January. A temporary work assignment of a significant length (2 years or more) should be seen as of equal or near-equal weight to a permanent contract. | Regarding the 2-year 'rule of thumb', see comments at Issue 14 of this Compendium. | In Example 8 of the draft Ruling, reference is made to 'remnants of prior residence'. It is not clear what connections Brian maintained which were the remnants. The draft Ruling states the conclusion without setting out the facts. | Example 10 of the final Ruling has been clarified. | There are insufficient facts to explain why Stuart has not established a permanent place of abode outside of Australia other than his moving between countries and apartments. | The Ruling should be specific about the nature of the connection to China and the 'various countries', including the specific town or country. It should also have regard to the factors in paragraph 67 of the draft Ruling including the length of stay in each place, the nature of the accommodation (although see paragraph 64 of the draft Ruling and Harding) and the durability of association. | As noted at Issue 24 of this Compendium, it is not possible in a Ruling to set out every single fact that may feature in a residency case. Consistent with paragraph 8 of the final Ruling, the Example illustrates a point or principle rather than provide the exhaustive analysis one might expect in, for example, a private ruling. | The guidelines provided in paragraph 65 of the draft Ruling in determining which place of abode is an individual's permanent place of abode should be adopted in this Example. | This is consistent with Davies and Steward JJ in Harding where their Honours stated at [38]: | It follows that there is no incongruity in a person physically living permanently in another country whilst retaining at all times an Australian domicile. For that purpose and critically, what has to be abandoned for the purpose of subpara (i) of the definition, is not "Australia" but "residence" in Australia. | When in Example 10 of the draft Ruling reference to 'regular order of his life' is made, what if Corey's only work was in Spain? The Example seems to assume Corey is retired or just an investor. | Corey's employment status or otherwise is not decisive in deciding the outcome of Example 10 of the final Ruling. The principle being illustrated is that a person who continues to live for substantial, regular periods each year in Australia cannot be said to have their permanent place of abode overseas. | The commentary provided for Example 14 of the draft Ruling is not agreed with. The commentary in paragraphs 97 to 98 of the draft Ruling asks to consider holistic facts and circumstances and the fact pattern in this Example would suggest that Ryan's behaviour is consistent with residing in Australia (that is, personal belongings packed into long-term storage in Ireland, initial intention to be in Australia for 12 months and subsequently extended via an additional working holiday maker visa, resigning from his job in Ireland and obtaining a 12-month lease for accommodation in Australia). Furthermore, his second year in Australia suggests that his usual place of abode is in Australia as he has leased accommodation and bought furniture to live in it. | Further, in relation to what is now Example 18 of the final Ruling, Ryan is having a holiday in Australia and works to support that holiday. He does not intend to reside in Australia permanently. He has not done anything further to establish a more permanent connection to Australia. | The Commissioner should administer the law as it is declared by the courts. Generally speaking, that includes administering the law as declared by a superior Court where that decision is subject to an appeal that is not concerned with or does not disturb the relevant aspect of the decision from which the appeal was made. Such a decision may still be persuasive. | Nonetheless, in issuing public rulings, it is considered that it would aid clarity and certainty for the Commissioner to express principles of law primarily by reference to authorities that are binding precedents where possible. For example, rather than referring to the reasons of Derrington J in Addy ((referred to in the draft Ruling as 'Addy appeal') at [83] (reversed on appeal to the High Court: [2021] HCA 34) as authority for the proposition in the second sentence of paragraph 25 of the draft Ruling explaining the distinction between staying and residing in Australia, reference could be made to Hafza and the binding authorities endorsing that decision. | It is also suggested that in footnote 7 of the draft Ruling that the reversal of the decision in the 'Addy appeal' by the High Court be noted. | Examples of references to non-binding authorities in the draft Ruling are: | The Full Federal Court's decision in the Addy appeal is the final decision on residency. The High Court appeal was concerned with the application of the non-discrimination article of the relevant DTA only. In doing so, the decision on residency of the Full Federal Court was accepted, both by the parties to the case as it was not appealed, and by the High Court in it deciding the non-discrimination article applied in that case, which could only occur if indeed Ms Addy was a resident. | In Harding, Derrington J's decision on ordinary residence at first instance was also upheld by the Full Federal Court on appeal. | Disputes concerning residency often occur where there are factors that point both towards and against a conclusion that a person is resident in Australia. A significant number of residency disputes are ultimately determined by the tie-breaker provisions in a DTA. It is recommended that public guidance be issued as a matter of priority dealing with the application of both the tie-breaker provisions and the scope of any inconsistencies between DTA and domestic law residency concepts that may be relevant to the application of those provisions. | Considering the tie-breaker tests in detail and the implications of them would considerably add to the complexity and length of this Ruling and is considered outside the scope of this Ruling. | The draft Ruling should be expanded to cover off on all relevant taxation obligations of inbound and outbound workers including superannuation guarantee. | This is outside the scope of this Ruling.