31 July 2013

The ATO is currently targeting expatriates returning to Australia, sometimes after an extended time living and working overseas.

We have seen a number of instances in the last month where the ATO has suggested an expatriate was an Australian tax resident, and that the expatriate’s income earned from overseas employment should be reported as taxable in their Australian income tax returns.

The recent case of Pillay v Commissioner of Taxation [2013] AATA 447 is an example of the arguments that the ATO are pursuing to assert that an individual ‘resides’ in Australia for tax purposes. Dr Pillay was held to be a resident of Australia in the 2010, 2011 and 2012 income years, despite living and working in East Timor since 2006. The AAT accepted the ATO’s submission that Dr Pillay had had a ’continuity of association’ with Australia and was therefore a resident for tax purposes. Dr Pillay maintained a house and had bank accounts in Australia.

For expatriates living and working in countries with similar effective tax rates to Australia, the tax shortfall (if any) may not be significant, as taxpayers are generally entitled to foreign tax credits for tax paid overseas. However, for expatriates living and working in countries with low effective tax rates, the shortfall is often substantial. Our experience is that the ATO is targeting expatriates from countries with low effective tax rates, often by tracking funds transferred from overseas into Australian bank accounts.

If contacted by the ATO, it is important that you organise a detailed response to any ATO correspondence relating to your tax residency position. This includes explaining the reasons why you were a non-resident, based on the four residency tests in the domestic tax law and any ‘tie-breaker’ tests if you were living in a country with a double tax agreement with Australia.

It is also important to address any issues, such as continuing to own a house in Australia or transferring funds to Australia, that may lead the ATO to form a preliminary view that you were always an Australian tax resident.

If you do not respond or do not address the relevant tests, or if you do not provide sufficient evidence to support your position, there is an increased risk of the ATO issuing default assessments or amended assessments. An automatic 75% penalty of the tax shortfall applies for default assessments.

Our experience is that these matters are best resolved by providing a detailed response before the ATO commits to a position and raises tax assessments on the basis that you were always an Australian tax resident.

Please contact our tax team if you require assistance.

 

This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.