Distributing to a non-resident beneficiary in your Family Trust – it just got harder

A modern Australian Family Discretionary Trust has 100,000 of beneficiaries. They have no rights so you make the class of beneficiaries as wide as you can. It is not just family members.

A beneficiary in your Family Trust falls into two groups:australian tax resident

1. resident of Australia for tax purposes (residents); or

2. non-resident of Australia for tax purposes (non-residents).

Australia taxes residents on all income. This includes income and capital gains from other countries. Residents are taxed on world income.

In contrast, non-residents are only taxed by Australia on Australian income and capital gain.

It sounds like a good idea if you are earning money from overseas, to be a non-resident.

Am I a ‘resident’ of Australia?

‘Resident’ for Australian tax purposes is under section 6 Income Tax Assessment Act 1936:

(a) a person, other than a company, who resides in Australia and includes a person:

(i) whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode in outside of Australia;

(ii) 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

(iii) who is:

(A) a member of the superannuation scheme established by deed under the Superannuation Act 1990; or

(B) an eligible employee for the purposes of the Superannuation Act 1976; or

(C) the spouse, or a child under 16, of a person covered by subparagraph (A) or (B)

Test yourself

You can see you need to sell your family home, furniture and car; grab your children and spouse and leave the country to set up a new home. It is a hard test to get around.

You are a resident if:

1. you are a ‘resident’ under the normal meaning of that word; or

2. you are in Australia for 183 or more days over the last year; or

3. ‘domiciled’ in Australia with no other ‘usual place of abode’ outside of Australia; or

4. you are an employee under some Australian government superannuation schemes.

If you are not a ‘Resident’ then you are a non-resident for Australian tax purposes.

Harding v Federal Commission of Tax, Federal Court of Australia, 8 June 2018

Mr Harding was an aircraft engineer initially employed with BAE Systems. Born in Australia in 1965, he left Australia at a relatively young age and married his first wife, a British national, in 1990 in the United Kingdom. Harding’s employment with BAE Systems led him and his wife to move to Saudi Arabia later that same year.

The couple continued to live in the Middle East until the political and geopolitical situation worsened following 11 September 2001. The taxpayer’s wife and children returned to the United Kingdom for two years then came back to the Middle East in 2003. At that time it was decided the family would relocate to Australia. In early 2004 the couple built a house at Warana in Queensland, which Harding’s wife and children moved into. Mr Harding remained in Saudi Arabia until May 2006, when he ceased employment with BAE Systems. He then moved into the family home at Warana. He began to work as an operations manager in Australia for considerably less money.

In early 2009 Mr Harding received an offer of employment with a UK company to work in Saudi Arabia for a much higher salary. Mr Harding and his wife agreed that he would accept the position and relocate permanently to the Middle East. She and their third child would join him at the end of 2011. This is once their second child had finished his secondary education. Mr Harding sold all of his significant personal possessions in Australia, including his boat and car. He took all of his remaining personal belongings with him to the Middle East.

Although Harding resumed working in Saudi Arabia he chose to live in nearby Bahrain. Initially, he leased a two-bedroom unit to accommodate his family when they visited. During a visit in July 2009, Harding and his wife began looking for more appropriate accommodation and schools and pre-enrolled their youngest son in the British School in Bahrain. The taxpayer also made regular visits to Australia. In the relevant income year, the taxpayer returned to Australia four times for a total of 91 days, staying each time with his family in the Warana property. On his outgoing and incoming passenger cards, he indicated he was an Australian resident.

Marriage breaks down

The couple’s marriage broke down in 2011 and Harding moved into a one-bedroom unit in the same complex in Bahrain. The following year he moved back into a two-bedroom unit in the complex to live with a new partner, Ms G. However, his relationship with Ms G ended in 2014 when he committed to a new job in Oman due to Ms G’s reluctance to relocate to Oman with her two young daughters.

Was Mr Harding a ‘resident’?

Was Mr Harding a resident of Australia for the purposes of s 6(1) Income Tax Assessment Act 1936 for the 2010/11 income year? The ATO said he was a resident under both the ordinary concepts test and the domicile test. It argued that his overseas income was, therefore, assessable.

What the Court decided

Mr Harding lost:

1. In the determination of where a person resided their subjective intention had a role to play and could be significant. However, it was neither sufficient nor vital or decisive. Each case must is determined on its own circumstances. In this case, the taxpayer’s circumstances were unusual in that he was acutely focused on his employment and placed his personal work satisfaction ahead of his personal relationships. The ATO’s submission that Harding’s departure was conditional upon his family joining him in Bahrain was to be rejected. The objective facts surrounding Harding’s circumstances supported his oral evidence that in 2009 he left Australia for the Middle East with the intention of staying there indefinitely. This was with no intention to return to Australia and to continue to treat it as “home”. His absence from Australia and his formed intention not to return was sufficient to terminate his residency to the extent determined by the ordinary concepts test of residency.

2. The expression “place of abode” in subpara (a)(i) of the definition of resident in s 6(1) had its natural or ordinary meaning such that it referred to a house or place of accommodation or a house or place to live. There seemed little to warrant the conclusion that it was intended to have the expanded meaning contended for by Mr Harding, which would almost inevitably deprive the domicile test of all operation. Ascertaining the meaning of the expression “permanent place of abode” required a more nuanced approach. In the context in which it was used it necessarily referred to the existence of a person’s enduring habitation in their accommodation, but taking into account that the person was not intending to live there permanently or even indefinitely.

3. In Mr Harding’s circumstances, the absence of substantial domestic acquisitions indicated that he was not intending his stay in the Bahrain units to be of a significant duration or other than temporary, as did the fact that he was not required to enter into utility agreements with third parties, and did not appear to use the complex as an address for correspondence. Nor did the couple envisage the complex to be the family home when the family relocated. It followed that, in the relevant income year, the taxpayer did not establish a permanent place of abode in Bahrain. By its character, the apartment complex was a type of premises used for temporary or transitory accommodation and Harding used it as such. He did not have a permanent place of abode in the sense required under the domicile test and therefore was a “resident of Australia” in the 2010/11 income year.

Why the Court was wrong:

The Court failed to understand that:

1. people live ‘permanently’ in these fully furnished apartments; and

2. after a few red wines, on the plane, you don’t really give much thought to your Australian Departure slip. Perhaps you should write on it ‘refused to answer on the advice of my solicitor Dr Brett Davies’.

The ATO argued (and sadly no one challenged them) that the question for the Court was whether Mr Harding had a permanent place of abode outside Australia. But that is not the test. Rather, the relevant part of the definition of “resident” refers to the ATO being satisfied that the taxpayer has a permanent place of abode outside Australia. In Legal Consolidated’s view, the correct question for the Court is whether the ATO had erred in law in not being satisfied that the taxpayer had a permanent place of abode outside Australia.

Mr Harding finally wins in the Full Federal Court.

The Full Federal Court found that Mr Harding had a permanent place of abode in Bahrain. This was the case even though he lived in temporary accommodation in Bahrain. Therefore, he was not a resident of Australia: Harding v FCT [2019] FCAFC 29 (Full Federal Court, Logan, Davies and Steward JJ, 22 February 2019). He, therefore, did not have to pay tax in Australia.

Harding lived in an apartment building in Bahrain, commuting daily to Saudi Arabia. For two years he leased a 2-bedroom apartment, but in June 2011 he moved to a one-bedroom apartment in the same building when he realised that his wife and children would not join him. Twelve months later, in June 2012, he moves back into a 2-bedroom apartment, also in the same building. The apartments are fully furnished.

Under the definition of “resident” in section 6 Income Tax Assessment Act 1936, a person is a resident of Australia if their domicile is in Australia. This is unless the ATO is satisfied that the person has a permanent place of abode outside Australia. The issue, in this case, was whether Mr Harding had a permanent place of abode in Bahrain in the 2011 income year. If not, he is a resident of Australia on the basis of his domicile.harding not a resident for tax purposes

As stated above, at first instance (in Harding v FCT [2018] FCA 837) Derrington J decided that Mr Harding did not have a permanent place of abode outside Australia. This was because his accommodation in Bahrain was temporary. Accordingly, he was a resident of Australia.

In a joint judgment, Davies and Steward JJ (Logan J agreed) looked at the legislative history of the definition of “resident”, including relevant Explanatory Notes, and concluded that the phrase “place of abode” is not a reference only to a person’s specific house or flat or other dwellings. Their Honours considered that if that had been Parliament’s intention, it would have used the phrase “permanent abode” rather than “permanent place of abode”. Consequently, the phrase “place of abode” also refers to a town or country.

Their Honours said that the rationale of the exception to the test of residency based on domicile is that a person domiciled in Australia is not to be made subject to federal income tax when they have abandoned in a permanent way their Australian residence. Drawing a distinction between “someone who buys a singular flat in a foreign country as against someone who lives in a series of temporary flats in that same country does not promote the rationale of the exception”.

The evidence, in this case, showed that Harding had abandoned Australia as a place to live and work and that, in the 2011 income year, his permanent place of abode was in Bahrain. Accordingly, he was not a resident of Australia.

Davies and Steward JJ also rejected the ATO’s Notice of Contention that he resided in Australia in the 2011 income year according to ordinary concepts of residency. The quality and nature of the taxpayer’s objective connections with Australia, such as his Australian citizenship, his visits to see his family, supporting his family financially, the maintenance of a bank account, the maintenance of Australian private health insurance and the purchase of an investment property, were insufficient to overcome the significance of his intention to leave indefinitely.

Taxation of non-residence

Consider:

1. Division 855 and the limits on the taxation of non-resident capital gains

2. Division 6

3. Attribution of capital gains to non-resident beneficiaries

4. Administration: withholding and payments

Court confirms dual resident is deemed by DTA to be resident of Thailand

– FCT v Pike

The Full Federal Court has upheld a decision that although the taxpayer was a tax resident of Australia according to ordinary concepts, the Thailand DTA deemed him to be a tax resident solely of that country: FCT v Pike [2020] FCAFC 158 (Full Federal Court, Davies, White and Steward JJ, 22 September 2020).

Background of FCT v Pike

The taxpayer, his partner and their 2 children emigrated from Zimbabwe to Australia in 2005. The taxpayer’s partner transferred from the Harare office of an international accounting firm to the Brisbane office but the taxpayer, who worked in the tobacco industry, was unable to find work in Australia. Instead, in March 2006, he took up a position in Thailand with PTAL, initially as a tobacco and leaf consultant and then as a sales manager. He was granted a visa that allowed him to live and work in Thailand.

Over the next 8 years, the taxpayer continued to be based in Thailand but travelled elsewhere (on his Zimbabwean passport) in the Asian region as his work required. He lived in a succession of rented apartments or cottages in Chiang Mai, which were big enough to accommodate his partner and their children when they visited. He joined and actively patronised golf, rugby and cricket clubs during his time in Thailand and formed enduring friendships there. His salary was paid into a bank account in Thailand.

The taxpayer and his partner jointly rented unfurnished properties in Brisbane which his partner and their children lived in. They jointly purchased furniture and household appliances for those properties, as well as motor vehicles. They established a joint account with an Australian bank, into which the taxpayer regularly transferred funds to support his family.

In 2010, the taxpayer and his partner sold their home in Zimbabwe and bought vacant land in Ipswich, intending to build a family home. However, this did not prove possible and the land was sold in November 2013.

In April 2014 the taxpayer relocated to Tanzania and then in 2016, he moved to Dubai, both moves being for employment reasons. In the meantime, in 2014, he obtained Australian citizenship. His partner and their 2 children had obtained citizenship in 2010.

The taxpayer returned to Australia to be with his family 4 to 6 times each year. Most years he spent between approximately 20% and 30% of his time in Australia.

The issues were: was the taxpayer a tax resident of Australia for the 2009 to 2016 income years, as well as a tax resident of Thailand (that was not disputed); and if the taxpayer was a dual resident, which country was he deemed to be a tax resident of by virtue of the “tiebreaker” provision in the Australia-Thailand DTA (Art 4).

At first instance, in Pike v FCT [2019] FCA 2185, Logan J held that the taxpayer was a tax resident of Australia for the 2009 to 2016 years according to ordinary concepts, but was also a tax resident under the domicile test from April 2014 (see 2020 WTB 1 [27]). His Honour then decided that although the taxpayer’s personal relations were closer to Australia at an emotional level, because he undoubtedly had a range of personal relations while he resided in Thailand and his economic relations were overwhelmingly closer to Thailand, the third “tiebreaker” test in Art 4 of the Australia-Thailand DTA (the country with which the person’s personal and economic relations are closer) dictated that he was solely a resident of Thailand for tax purposes.

Decision of FCT v Pike

The Full Court firstly upheld Logan J’s finding that the taxpayer was a tax resident of Australia for the 2009 to 2016 income years according to ordinary concepts. The Court said that, save in the most exceptional circumstances, the existence of a house in Australia maintained by a taxpayer who is working overseas, and the maintenance of a family in that house, has great significance in determining the taxpayer’s residency “in that it demonstrates a continuity of association with Australia and an intention to treat that place as ‘home'”. In this case, it was plainly open on the evidence for the primary judge to conclude that when the taxpayer returned to Australia, he did not do so as a visitor but returned to resume living with his de facto wife and family at the family home.

In view of the Full Court’s decision to uphold the finding that the taxpayer was a resident according to ordinary concepts, it was unnecessary for the Court to consider whether the taxpayer was a resident under the domicile test from April 2014.

Turning to the “tiebreaker” tests in Art 4 of the DTA, the Full Court firstly rejected the taxpayer’s argument that Logan J was wrong to hold that the taxpayer had an “habitual abode” in both countries in the 2009 to 2014 income years (the second “tiebreaker” test in Art 4), when the period of time that he spent in Thailand was “considerably more” than the period of time that he spent in Australia. The Full Court said there was no reason to give the expression “habitual abode” a meaning other than the meaning conveyed by the ordinary meaning of the phrase and none of the versions of the OECD commentary supported the taxpayer’s contention that the place of habitual abode is the State where the taxpayer spends the most time.

The Full Court then upheld Logan J’s decision that the taxpayer’s personal and economic relations were closer to Thailand in the relevant years for the purposes of the third “tiebreaker” test in Art 4. In particular, there was no discernible error in his Honour’s approach in examining the taxpayer’s personal and economic considerations and an evaluation of the facts did not persuade the Full Court that his Honour’s conclusion was wrong.

Working holiday maker was a tax resident

– Gurney and FCT [2020] AATA 3813

The AAT has decided that a UK citizen who lived and worked in Melbourne for 6 months on a working holiday visa was a tax resident of Australia: Gurney and FCT[2020] AATA 3813 (AAT, O’Loughlin DP, 30 September 2020).

Background of Gurney and FCT

The taxpayer was a UK citizen who travelled with his girlfriend to New Zealand in May 2015. They lived and worked there the next 9 months, apart from a 2-week holiday in Tasmania (for the taxpayer) and a trip to the UK (for his girlfriend). They were civil engineers and in December 2015 they each applied for a 476 visa intending to find permanent, skilled work in Melbourne. They had booked non-cancellable flights from New Zealand to Australia for late February 2016, so when they found out that the processing time for a 476 visa was in excess of 4 months, they applied instead for 417 working holiday visas which were granted.

The taxpayer and his girlfriend arrived in Melbourne at the end of February 2016. On the incoming passenger card, the taxpayer stated that his intended address was Melbourne and that he intended to stay for 6 months (because that was the longest period his then visa permitted him to work in any one place). However, the taxpayer’s intention was to live and work in Australia and seek long term, indefinite, career styled employment, assuming he could change his visa.

The taxpayer was unable to find work as a civil engineer but, after a number of short-term jobs, on 18 April he started work in a customer service role at a Melbourne council. He worked there until July 2016 when he accepted a full-time position of drainage engineer at the council. However, the council could not obtain sponsorship for the taxpayer, so he and his girlfriend decided to return to the UK. They left Melbourne in October 2016, travelling first to Western Australia and then a month later to Sri Lanka.

The taxpayer and his girlfriend initially stayed at an Airbnb and a hostel before moving into a rented apartment with friends. They stayed there until August when the lease ended. They then lived in a house in Melbourne for 2 months. The taxpayer opened a bank account for everyday banking and purchased a bicycle as his main means of transport. He and his girlfriend led active social lives in Melbourne.

The issue was whether the taxpayer was a resident of Australia for tax purposes for the time he was present and working here.

Decision of Gurney and FCT

The AAT concluded that, although the taxpayer entered Australia on a working holiday visa, he intended to make his life in Australia on an indefinite basis but was unable to alter his visa and employment arrangements. He worked in Australia, he was in a relationship with someone who was with him in Australia and he intended and expected to live in Australia indefinitely. He continued to have that intention until it became clear that he would not be able to achieve his objectives. As a result, the taxpayer was a tax resident of Australia.

Relevant factors for the AAT were:

  • the taxpayer had abandoned his place of residence in the UK (he had sold or otherwise disposed of all of his assets in the UK other than some books, which were stored at his parents’ home, and a bank account with a nominal balance);
  • the taxpayer’s employment preferences and the employment he ultimately secured in Melbourne was of a kind consistent with the advancement of a career;
  • the taxpayer told prospective employers of his intent “to get a foot in the door” and of his sponsorship plans so as to stay more permanently;
  • the taxpayer’s lifestyle in Australia while working in Melbourne was materially the same as it is in the UK where he is undoubtedly resident; and
  • the taxpayer had assets in Australia of the kind he had in the UK where he was undoubtedly resident before he departed in April 2015, and disposed of those assets when he abandoned his intentions to live in Australia just as he did when he abandoned residence in the UK.

The AAT also commented that the taxpayer’s statements on incoming passenger cards were significant, but not overwhelmingly so. Those statements were consistent with what he was entitled to do in terms of his visa (on his visit to Tasmania, the taxpayer stated the purpose of his visit was a holiday).

What Gurney v FCT teaches us

Readers familiar with the Addy case might wonder how the AAT managed to conclude the taxpayer, in this case, was a tax resident when the Full Federal Court decided in Addy (FCT v Addy [2020] FCAFC) that another working holidaymaker who lived and worked in Sydney for more than 6 months was not a tax resident (see 2020 WTB 31 [834]).  Well, the AAT pointed to the following differences:

  • Ms Addy maintained a continuity of association and place of residence in the UK;
  • Ms Addy’s employment arrangements and the nature of her employment duties were entirely consistent with somebody on a working holiday. Her actual intention was to holiday in Australia rather than to establish a home here; and
  • the taxpayer’s accommodation, in this case, was of a more permanent nature than was the case for Ms Addy and, unlike the circumstance in Addy, the taxpayer did not maintain a UK place of residence.

The AAT also distinguished MacKinnon and FCT [2020] AATA 1647, where the AAT decided that the UK working holidaymaker was not a tax resident (see 2020 WTB 23 [608]).

What the Accountant, lawyer and adviser need to consider

Your professional adviser needs to be aware of the Australian tax position. They also need to know the foreign consequences of distributing income and gains to non-resident beneficiaries.

These Annual Family Trust Distribution Minutes will help you and your advisers.

For help building the Minutes please telephone us.

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
Australia wide law firm
39 Stirling Highway, Nedlands, WA

Mobile:      0477 796 959
Direct:       08 6389 0400
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Email:        [email protected]

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