The key tax issue for Australian expatriates in Thailand (indeed in any country) is whether or not they continue to be a resident of Australia for tax purposes. This article focuses on that issue to highlight the difficulties in determining residency, the effect residency has on how salary is taxed, the consequences of determining residency in contradiction to the Commissioner of Taxation’s view and the steps that an expatriate worker can take in order to minimize the risks associated with Australian tax residency.

Why is it important?

Expatriate workers will usually be paying tax in the country where they are working. In many cases the tax on their salary in the country where they work will be lower than the tax they would pay on the same amount in Australia. The following table shows the difference in tax payable on earnings between Australia and Thailand. The earnings and tax figures have been translated at the rate of 30 THB per Aus$ and are before allowable deductions in either country.

Australian dollar earnings

60,000

100,000

140,000

Australian tax*

11,076

25,012

39,780

Thai tax (in Australian dollars)

10,500

22,167

34,500

Difference

576

2,845

5,280

*Not including Medicare levy which may increase to 2% from 1 July 2014 or the Medicare levy surcharge which is an extra 1% for those who do not hold appropriate private health insurance.

An Australian resident for tax purposes is assessed on income earned from all world-wide sources. A  non-resident is only assessed on income from Australian sources. Source of income is a topic for another day but in most cases a salary earned from work completed in Thailand will not be Australian sourced income. If an expatriate is a non-resident, his or her earnings will not be assessed in Australia. 

Getting it wrong can be costly. The ATO has fought and won a number of cases recently where expatriates returned to Australia after several years of thinking that they were non-residents and not required to pay tax in Australia on their earnings from overseas. The ATO took a different view and assessed the returning expatriates on the difference between what the Australian tax was and what they paid in the foreign country. Under the foreign tax credit system, Australian residents get a credit for tax that they can prove was paid to an overseas tax authority. Cold comfort. Add on penalties and interest and the decision to consider themselves a non-resident of Australia for tax purposes became an expensive (and stressful) one.

Some commentators have suggested that falling tax revenues received by the government over recent years have led to the focus on this area in which the ATO has relatively good prospects of lucrative success.

How will the ATO know?

Computers. They will know when you left. They will know where you went. They will know how long you stayed. They will know if you worked and for whom (via visa information). They know what industry you work in and will be able to estimate how much you will have earned. They will know what the tax rates are where you were working. They will know how much cash you transfer back when you return. They will know. In addition, it has become a common occurrence for the ATO to conduct tax audits on returning expatriates notwithstanding the fact that they may have been away from Australia for a number of years.

Is an expatriate still a resident of Australia for tax purposes?

Australia uses four tests for residency and applies them on a fact and circumstances basis. A person only needs to satisfy one of the tests to be an Australian resident for tax purposes. They are generally referred to as follows:

  1. Ordinarily resides test;
  2. Domicile test;
  3. Half an income year test; and,
  4. Superannuation test.
     

For the expatriate, the most relevant tests will almost always be the ordinarily resides test or the domicile test. In some cases, the courts have made conclusions that make it difficult to distinguish between the two. Nonetheless, there is guidance from the cases and ATO taxation rulings and there are some salient points that the expatriate can take away.

Ordinarily resides test

This is often referred to as the common law test. The question here is whether a person’s behaviour has the degree of continuity, routine or habit that is consistent with residing in Australia. Many factors are relevant:

  • Where the usual place of abode is;
  • Where the family is;
  • Where children are at school;
  • The number, reason and duration of visits to Australia;
  • The extent of business ties with Australia;
  • The extent of family and social ties with Australia;
  • Ownership of real estate in Australia;
  • The location of other assets and personal effects; and,
  • Where bank accounts are maintained.

There are no strict criteria and there is no strict weighting of what may be the relevant factors. To make matters worse, different decided court and tribunal cases seem to come up with conflicting views. Some cases place reliance on the location of personal effects. Others suggest that is not relevant.

Domicile test

A person who is domiciled in Australia will be a resident of Australia unless he or she has a permanent place of abode outside Australia. Domicile is a strict legal concept and beyond the scope of this article. However, some general comments as they relate to expatriates can be made.

There are generally two types of domicile relevant to the expat. Domicile of origin and domicile of choice.  The domicile of origin of a person is the domicile of the person’s father when they were born. In order to obtain a domicile of choice a person must intend to obtain that domicile and act as though the new jurisdiction is the person’s new permanent home. Determining domicile can be a tricky exercise. As a general rule, if you are travelling on an Australian passport and, or, you consider Australia home then you are likely to be domiciled in Australia. If that is the case, you will be considered an Australian resident unless you have a permanent place of abode outside Australia. What’s permanent? That’s a very good question.

One possible scenario that can be offered to explain permanent is that it doesn’t mean everlasting or eternal but it is more than temporary or transitory. The most important factor is a person’s intention to make a home outside Australia, but this is not determined by asking the person what their intention is. It is determined by the facts of the situation. This is where there seems to be significant overlap with the ordinarily resides test although this is unlikely to be helpful to the expatriate. The ATO will take the facts as they stand and fit them into whichever test they need to in order to get the residency outcome that they desire. Relevant factors for the domicile test include:

  • Intended length of the stay overseas;
  • Actual length of stay overseas;
  • Continuity of stay overseas;
  • Intention to return to Australia;
  • The establishment of a home overseas paid for by the person (not the person’s employer); and,
  • The existence of any residence in Australia.

In terms of the length of stay, a general rule of thumb is two years. An absence of 2 years or more is indicative of non-resident status although many unsuspecting taxpayers have spent much longer out of Australia and have returned to family, friends … and a tax bill.

Where do double tax agreements fit in?

In the context of this article, a double tax agreement will provide a tie breaker test if a person is considered a resident of BOTH countries who are parties to the agreement, under their respective domestic tax laws. DTAs are complex documents and for present purposes, suffice to say that they do exist and should not be ignored.

What to do?

Get advice from a qualified, registered Australian tax practitioner. At a minimum, this will assist in establishing what is known as a reasonably arguable position (RAP) which in turn will assist in minimizing potential penalties in the event that the ATO takes a different view to you.  In the event that some of the factors point to a conclusion that you are a resident of Australia for tax purposes then changes can possibly be made: bank accounts closed, investments sold, personal effects taken out of storage and donated.

A final thought

Sometimes the worst thing is uncertainty. Not realizing until it’s too late that the ATO view of a person’s circumstances are that they are a resident of Australia and not being able to do anything about it until it’s too late – the money has already been spent. This uncertainty can be alleviated to a large extent by obtaining a private ruling from the ATO. Presenting all the facts. Describing all the circumstances. And asking; ‘am I a resident of Australia for tax purposes?’ The answer will usually come within 28 days and if you don’t get the answer you are after you can begin the process of making the necessary changes to get that desired residency outcome.

RSM (Thailand) Limited can advise clients on any Australian residency issues that they may be faced with and we welcome you to make on appointment and to call in for a coffee

Stephen Lawrence CA (Australia) TEP

BA MA(Psych) MCom MappTax