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I previously wrote about flag theory here – https://www.mooresrowland.tax/2019/05/flag-theory-aka-perpetual-traveler.html
Now the question often asked is this. If I keep moving and don’t spend enough time to trigger tax residency in any one country. Am I legally free from taxes full stop?
If you’re American? The answer is here – https://www.htj.tax/streamlined/
https://www.htj.tax/us-pre-immigration-planning
https://www.mooresrowland.tax/2019/09/the-best-jurisdiction-for-us-citizens.html
As for everyone else? My answer will have 2 aspects
1. National tax policy and
2. CRS
In terms of #1, I’ll use Australia as a case study. Bear with me as this will be a long answer
Australian Resident
An individual is an Australian resident for tax purposes if they pass one of four distinctive tests:
1 – Reside in Australia
2 – Domicile in Australia unless a permanent place of abode outside Australia
3 – 183 days in Australia unless a usual place of abode outside Australia
4 – Member of a Commonwealth superannuation scheme
The residency test is the primary test for residency and is known as the common law test. Common law means case law developed over time through judges’ rulings as opposed to statutory law embodied in legislation passed by legislatures or constitutional law embodied in the national constitution of Australia. So the residency test is known as the common law test because nobody can tell from s 6 (1) ITAA 1936 what reside actually means and so had to refer to case law where judges tried to put some meaning into the word. The Domicile, 183 day and Commonwealth super tests all just extend the ordinary definition of “resident” and “reside”.
Test 1 – Reside
Reside – so here we are: case law. The crux of case law is that it is constantly changing and doesn’t necessarily come to a consistent conclusion. So here is a list of the most important court cases currently referred to:
Applegate v FCT: The judge referred to the dictionary meaning of reside as in to dwell permanently or for a considerable time, to have a usual abode, to live in a particular place – see Applegate re domicile test
Iyengar [2011]: Mr Iyengar was an engineer and took up a 2+ years appointment overseas but kept a home and family ties in Australia to which he returned: Australian tax resident.
Sneddon [2012]: Mr Sneddon worked in Qatar for 2.5 years but maintained a residence, car, internet, telephone, bank accounts and super in Australia: Australian tax resident.
Murray [2012]: Mr Murray even acquired a residential property overseas: Australian tax resident.
Dempsey [2014]: Mr Dempsey worked in the building and construction industry in Saudi Arabia and intended to reside outside of Australia: Foreign resident
The Engineering Manager v FCT [2014]: An engineer worked in Oman under an annually reviewed one year contract and returned periodically to visit his wife and children in Australia: Foreign resident
Test 2 – Domicile
Under s 6 (1) ITAA 36 a person will be a resident of Australia if they have an Australian domicile unless they can prove that they have established a permanent place of abode outside Australia.
We all have a domicile – at all times – but only one at any point in time. Domicile of origin comes with birth and follows the domicile upon whom we are dependent in infancy. But our domicile of choice is in the country where we voluntarily fix our chief residence with the intention of residing indefinitely.
What is a permanent place of abode? It doesn’t have to be permanent, the intention to stay permanently is enough.
Applegate v FCT
Mr Applegate was a solicitor who was asked by his firm to establish and manage a branch office in the New Hebrides (now part of Vanuatu). He gave up a lease on his Australian apartment and moved his family to Vila in the New Hebrides. The stay was for an unspecified period of time. Illness forced Applegate to return to Australia within two years. The Full Federal Court found that although Applegate had retained his Australian domicile, he had established a permanent place of abode elsewhere: Held not to be a resident.
Boer [2012] and Sully [2012]
Two separate court cases but both were taken to not having established a permanent place of abode outside Australia: Australian tax resident
IT 2650
IT 2650 discusses when and how a person temporarily leaving Australia to live overseas acquires a permanent place of abode overseas. Factors to consider how long the individual intends and then actually stays in Australia. A period of 2 years is normally a minimum. Whether the individual established a fixed home outside of Australia. And last but not least to what extent there is a continuing association with a place inside Australia.
Test 3 – 183-Days
A person who is in Australia for 183 days or more becomes an Australian resident for tax purposes unless they can establish that their usual place of abode is outside of Australia with no intention to take up residency in Australia. The 183 days don’t have to be consecutive.
So the domicile test refers to permanent place of abode and the 183-days test refers to usual place of abode. What is the difference? No idea.
Test 4 – Commonwealth Superannuation
This the only objective test that in the mix. The only test that gives a clear Yes or No – unfortunately with very limited application. Anybody who is a member of an Australian government superannuation scheme – even if no longer contributing – is an Australian tax resident.
Residency For Part of a Year
Under the reside or domicile test a person can be a resident for part of a year – from the day they arrive or until the day they depart. But there is conflicting case law re the 183- days test:
Gregory v DCT (WA) [1937]: If resident under the 183-day test, a tax resident for the whole year.
Case S19: If resident under the 183-day test, only a tax resident for the period actually in Australia.
Temporary Resident
Temporary residents are Australian tax residents, just a special subcategory. An individual is a temporary resident if they hold a temporary migration visa like 457, 456, ETA or any visa which does not allow the holder to remain in Australia indefinitely (s995-1 ITAA 97).
Foreign Resident
An individual is a foreign resident for tax purposes if they are not an Australian tax resident. ITAA 97 uses the term foreign resident – ITAA 36 uses the term non-resident – no difference.
Working Holiday Makers
Working holiday makers are by definition on a 417 or 462 visa. They are foreign residents, just a special subcategory, regardless of the length of their stay in Australia.
My point in using Australia is to make the point that unless you can demonstrate that you are properly resident somewhere else, Australia may take the view that despite your continuous physical absence, you continue to be Australia tax resident.
This is becoming a trend with other OECD nations that practice taxing worldwide income (eg Germany or Italy) taking similar positions. So once you hold citizenship from a European country, Canada, Australia or New Zealand, this is something to consider
Now we can move onto #2
Let’s Talk About CRS
I previously wrote about it here –
https://www.mooresrowland.tax/2017/11/privacy-is-dead-long-live-privacy.html
https://www.mooresrowland.tax/2016/12/singapore-implementation-of-common.html
https://www.mooresrowland.tax/2015/11/the-clock-is-ticking-for-crs-aeoi.html
It is a framework for information exchange among countries. It therefore means that financial institutions in participating countries, are legally required to identify the tax residencies of its account holders. Information on the account activity is then communicated to the tax authorities in the jurisdictions so identified. Account holders refusing to comply with the information requests from their banks, are having their accounts closed.
So unless you, as an OECD citizen, intend to bank in one of the few non-CRS countries like North Korea, Cuba, or the Philippines (where it is very difficult for non-residents to open an account anyway), then you are forced to only bank in your country of origin. And of course, as explained above in the case with Australia, the tax authority in your home country (and your bank) will have lots of questions about the source of funds in your account.
There are ways around CRS including, banking in the USA – https://www.mooresrowland.tax/2017/04/is-usa-new-tax-haven.html, banking in non CRS jurisdictions or using certain entity structures (which I won’t get into)
But by now, I trust that the point is well made. For citizens of certain OECD nations, it is now increasingly difficult, if not impossible, to LEGALLY pay taxes nowhere. If you are successful, you will eventually find yourself having a very long conversation with a tax officer at some future point in time.
Good luck with that.
Source on Australia tax:https://www.taxtalks.com.au/tax-residency-individuals-companies/
