expanding horizons: international business for smes...• transfer pricing rules; and •...

Expanding Horizons: International Business for SMEs

August 2015

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redchip lawyers | Expanding Horizons: International Business for SMEs | page 2

Table of Contents

PART 1: INTERNATIONAL TAX ISSUES: BRIAN RICHARDS 1. INTRODUCTION.................................................................................................................................. 3 2. CASE STUDY ...................................................................................................................................... 3

2.1 CURRENT STRUCTURE .......................................................................................................... 3 2.2 OPTION ONE – INDONESIAN COMPANY SUBSIDIARY............................................................ 4 2.3 OPTION TWO – INDONESIAN COMPANY OWNED BY AUSTRALIAN TRUST ............................ 5

3. PRACTICAL DISCUSSION OF INTERNATIONAL ISSUES ................................................................ 6

3.1 BACKGROUND FACTS ............................................................................................................ 6 3.2 LOCAL LAWS .......................................................................................................................... 6 3.3 PRELIMINARY TAXATION ISSUES ........................................................................................... 6 3.4 RESIDENCE OF ENTITY .......................................................................................................... 7 3.5 SOURCE OF INCOME .............................................................................................................. 8

4. INTERNATIONAL TAX TREATIES ..................................................................................................... 9

4.1 GENERAL ............................................................................................................................... 9 4.2 INDONESIA AUSTRALIA INTERNATIONAL AGREEMENT ........................................................ 10 4.3 BUSINESS PROFITS ............................................................................................................. 12

5. PRACTICAL ARRANGEMENTS ........................................................................................................14

5.1 FINANCING THE OFFSHORE ENTITY OR ACTIVITIES ............................................................. 15 5.2 RESOURCE AND SERVICE PROVISION ................................................................................ 15 5.3 PROFIT REPATRIATION ........................................................................................................ 17

6. CONDUIT INCOME .............................................................................................................................18

6.1 SUBDIVISION 802-A ITAA 1997 ......................................................................................... 18 6.2 SECTION 802-17 ITAA 1997.............................................................................................. 19

7. FOREIGN TAX OFFSET .....................................................................................................................19 8. CONCLUSION ....................................................................................................................................20 PART 2: PRACTICAL TOOLBOX - RESIDENCY AND SOURCE: MARK LOWIS 9. RESIDENCY – THE FUNDAMENTALS ..............................................................................................21

9.1 IMPORTANCE OF RESIDENCY .............................................................................................. 21 9.2 INDIVIDUALS ......................................................................................................................... 21 9.3 THE FOUR TESTS ................................................................................................................ 21

10. SELECTED CASE SUMMARIES ........................................................................................................25

10.1 DEMPSEY V COMMISSIONER OF TAXATION [2014] AATA 335 ........................................... 25 10.2 IYENGAR V COMMISSIONER OF TAXATION [2011] AATA 856 ............................................ 27 10.3 SNEDDON V COMMISSIONER OF TAXATION [2012] AATA 516 .......................................... 32 10.4 GENERAL ANALYSIS – WHY DEMPSEY BUT NOT SNEDDON?............................................ 35 10.5 SUMMARY ............................................................................................................................ 36

11. SOURCE .............................................................................................................................................36

11.1 STATUTORY SOURCE RULES .............................................................................................. 38


PART 1: INTERNATIONAL TAX ISSUES

Presenter: Brian Richards, Specialist Tax Consultant, redchip lawyers

1. INTRODUCTION

The small business enterprise world is changing and evolving to become more global. Small businesses are no longer concentrating on domestic markets and are now seeking access to the broader economic opportunities international markets provide, albeit with some greater commercial risk.

The economic factors that are influencing global expansion and creating some greater opportunities for small business include, inter alia:

• Modern business is no longer location centric having regard to technology demands, the export opportunities of skills and knowledge, communication advancements and greater economic emphasis on innovative processes and products;

• Australia’s recent free trade agreements which provide opportunities for Australian business to access expanding markets;

• Expansion of international interest in investment in Australia has increased exposure to Australia’s products, skills and knowledge;

• The fall in the Australian dollar which makes Australia’s products world competitive (based on price);

• Australia’s poor cost of labour relative to productivity levels when compared to Asian markets; and

• Australia’s high personal rates of tax.

Notwithstanding the economic opportunities there are some offsetting factors, the taxation issues associated with international business activities are complex, involving as they do a myriad of taxation matters:

• Choice of structure to conduct the international activities;

• Financing offshore business activities;

• Fundamental rules of tax laws – residency and source of income;

• Tax rules dealing with repatriation and receipt of foreign income;

• Transfer pricing rules; and

• Australia’s international tax treaties.

As a general observation, Australia’s taxation laws are particularly penal for an Australian small business which conducts an international business. We highlight this in the following example.

2. CASE STUDY

2.1 Current Structure

Aus Co Manufacturing Pty Ltd, an Australian company, operates a manufacturing business in Australia under the following structure:


2.2 Option One – Indonesian Company Subsidiary

Aus Co Manufacturing Pty Ltd proposes to conduct business in Indonesia via a wholly-owned subsidiary company incorporated in Indonesia. The structure would therefore look like this:

In the first instance, and for the sake of the illustrations, assume the Indonesian subsidiary, Manufacturing Co PT, generates a net profit of $1 million.

The overall taxation position for Option One is as follows:

Aus Co Manufacturing

Pty Ltd

Manufacturing Co PT (Indonesian

Company)


Pty Ltd

100%

100%

Shareholders

100%

Shareholders


Transaction Tax Paid ($)

Manufacturing Co PT – Indonesian company tax (25%) 250,000 Assume all net profits are distributed to Aus Co Manufacturing Pty Ltd ($750,000)

Indonesian withholding tax (15%) 112,500 Net Dividend received by Aus Co Manufacturing Pty Ltd (NANE) nil

(Note: no foreign tax offset allowed for Indonesian withholding tax) Net Foreign income distributed by Aus Co Manufacturing Pty Ltd to its shareholders ($637,500)

Australian tax on unfranked dividend (49%) 312,375

Total tax paid 674,875

2.3 Option Two – Indonesian Company Owned by Australian Trust

Aus Co Manufacturing also considers an alternative structure, whereby the shares in Manufacturing Co PT are owned by an Australian trust, Aus Holdings Trust:

The hypothetical taxation situation for Option Two might be:


Manufacturing Co PT – Indonesian company tax (25%) 250,000

Assume all net profits are distributed to Aus Holdings Trust ($750,000)

Indonesian withholding tax (15%) 112,500

Gross Dividend received by Aus Holdings Trust and distributed to an individual beneficiary ($750,000)

Australian tax on trust distribution (49%) 367,500

Less Foreign tax offset (112,500)


Manufacturing Co PT

(Indonesian Company)


Pty Ltd

100%

Shareholders

100%

Aus Holdings

Trust


As is illustrated by the above simple analysis of the taxation obligations, it is obvious that the effective rate of tax is excessive having regard to typical small business commercial risks and expected rates of return on investment.

With that in mind, this seminar will identify the typical types of issues, questions and strategies considered when providing advices to the small business client.

3. PRACTICAL DISCUSSION OF INTERNATIONAL ISSUES

3.1 Background Facts

Let us discuss an example whereby your client – a manufacturing entity in Australia – wishes to expand its business operations to Indonesia.

Let’s start the discussion process with the assumption that, based on an understanding of commercial reasons, the offshore activities are to be undertaken via an Indonesian company.

For added points of discussion, the Australian manufacturing business is supported by:

• The company’s ownership of various intellectual property assets – patents and trade marks;

• The company continues to invest in innovation to develop improved product and processes; and

• Consulting services are supplied by the company to its clients to install the company’s products.

3.2 Local Laws

As with any country in which an Australian wishes to conduct a business, the local legal system must be considered as a threshold issue.

In Indonesia, the Foreign Investment Law specifies that foreign investment shall be in the form of a limited liability company, Perseroan Terbatas (PT), incorporated in Indonesia in accordance with the requirements of the Ministry of Law and Human Rights (“MOLHR”). A PT company having an approved foreign shareholding is known as a PMA.

An Australian entity could not, for example, conduct trading through a branch operation. This type of restrictive business activity is not universal. Accordingly, receiving advices about the local commercial legal requirements is an important threshold issue.

It is also to be noted that Indonesian law is based on civil law and not common and/or law of equity. That being the case, a trust is not a form of business structure acknowledged by Indonesian law.

3.3 Preliminary Taxation Issues

Notwithstanding the more complex tax issues, there are some basic taxation matters to be considered in the first instance:

• What is the tax residence of Manufacturing Co PT; and

• What is the source of the foreign income?

Whereas in most situations the responses to these questions are very ordinary, the threshold questions need to be considered.


3.4 Residence of Entity

In relation to any structuring arrangement which involves a foreign jurisdiction, the residency of Manufacturing Co PT needs to be examined. To put some context to this issue, consider the following observations.

Notwithstanding that an entity has been incorporated in a foreign jurisdiction, for Australian taxation purposes the company might still be an Australian tax resident if the foreign company satisfies the elements provided by following definition:

Section 6

(1) ITAA 1936 definition of “resident”:

(b) ..., or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

Accordingly, it is necessary to evaluate the following points:

• What constitutes the business of Manufacturing Co PT and whether those business activities are conducted in Australia (this is a question of fact); and

• Whether Manufacturing Co PT is “controlled” by Australians, or whether the company’s central management and control is based in Australia.

The critical issue is to identify what constitutes the location of the business, noting that where a business is conducted is not necessarily where the final transaction occurs. In a practical sense, the jurisdiction where the contractual relationships are created is an important factor, particularly where there is no physical place of business located in a jurisdiction. In the case of a manufacturing business this issue is not as relevant – the business will be located where the manufacturing activities are conducted. Where the nature of the business is based on the application of e-commerce, however, the situation is more complex because of the mobility of the business activities. In the later type of circumstances the location of the business might be structured to facilitate the company being regarded as an Australian resident or an Indonesian resident. The question of where the central management and control is located has been the subject matter of numerous tax cases and variable determinants, including: • Where the directors meet to do the business of the company (Koitaki Para Rubber

Estates Ltd v FC of T (1941) 6 ATD 82);

• Is exercised by the shareholders in general meeting (John Hood and Co Ltd v Magee (1918) 7 TC 327); and

• Was found to abide in the managing director himself (Malayan Shipping Co Ltd v FC of T (1946) 71 CLR 156).

From a practical perspective, whether Manufacturing Co PT the entity is deemed to be an Australian resident or an Indonesian tax resident is of minor consequence in the present circumstance, by reason of the following factors: • An Australian resident is subject to Australian tax on worldwide income. There are,

however, certain exclusions where, for example, the Australia company derives either a non-portfolio dividend income or branch income from the foreign jurisdiction (refer section 768-5 ITAA 1997 & section 23AH ITAA 1936); and


• A company that is incorporated in Indonesia will also be regarded as an Indonesian tax resident, notwithstanding the entity is treated as an Australian tax resident.

Notwithstanding the above discussion, in our hypothetical example it would be reasonable to accept that the Indonesian entity would be regarded as an Indonesian resident and would not be an Australian tax resident having regard to Australia’s domestic tax laws.

3.5 Source of Income

Income is assessed to Australian tax where that income has an Australian source. Having regard to the provisions of Australia’s international agreement with Indonesia, determining the proper source of income is particularly pertinent as the concept is pivotal to the “business profits” article in Australia’s international tax agreements.

There has been considerable case law concerning “source of income,” with most cases emphasising that the source of income is a matter of fact to be determined in regard to the facts and circumstances of each case. This was originally stated by Isaacs J in Nathan v. FCT (1918) 25 CLR 183:

The Legislature in using the word 'source' meant, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical, hard matter of fact.

In Tariff Reinsurances Ltd v Commissioner of Taxes (Vic) (Tariff) (1938) 59 CLR 194, Rich J said that both the form and substance of a transaction are relevant to the question of source:

We are frequently told, on the authority of judgments of this court, that such a question is 'a hard practical matter of fact'. This means, I suppose, that every case must be decided on its own circumstances, and that screens, pretexts, devices and other unrealities, however fair may be the legal appearance which on first sight they bear, are not to stand in the way of the court charged with the duty of deciding these questions. But it does not mean that the question is one for a jury or that it is one for economists set free to disregard every legal relation and penetrate into the recesses of the causation of financial results, nor does it mean that the Court is to treat contracts, agreements and other acts, matters and things existing in the law as having no significance

In Spotless Services Limited & Anor v. FCT, 93 ATC 4397 Lockhart J said:

The cases demonstrate that there is no universal or absolute rule which can be applied to determine the source of income. It is a matter of judgment and relative weight in each case to determine the various factors to be taken into account in reaching the conclusion as to source of income.

There are numerous cases that suggest that, in certain instances, the situs where the contracts effecting the acquisition/supply of the services have been executed will represent the source of the income. As Rich J said in FCT v United Aircraft Corporation (1943) 68 CLR 525:

As the question to be determined in this case is a question of fact a decision on one set of facts is not binding and is often of little help on another set of facts. In Premier Automatic Ticket Issuers Ltd. v Federal Commissioner of Taxation ... and Tariff Reinsurances Ltd. v Commissioner of Taxes (Vict.)... - cases which may, perhaps, be regarded as borderline cases - the Court considered that, on the facts in each case, the contract should be regarded as the sole source of income and that therefore the locus of the contract was the locus of the source. But it does not follow that, in every


case where a contract is one of the sources, the contract should be regarded as the sole source.

In both cases referred to by Rich J in the passage above, the court considered that the source of the income was the contract. That is, the contract created and embodied the rights giving rise to the income.

FCT v Mitchum (1965) 113 CLR 401 is a case which emphasised the location of the contractual obligations as being decisive to determine the source of the income notwithstanding that the taxpayer was physically present in Australia producing the movie “the Sundowners”. This case might be regarded as exceptional, particularly having regard to the decision in FCT v Spotless Services Limited & Anor 95 ATC 4775, the certificate of deposit was the 'critical document' as it was this that gave rise to the rights vested in the taxpayer. The place where that contract was executed was therefore determinative of geographical source. Though other facts were considered, the contract was considered the 'most significant'.

Unlike the circumstances in Thorpe Nominees Pty Ltd v. Federal Commissioner of Taxation 88 ATC 4886 (Thorpe), the fact that the contract was executed in Switzerland was not considered determinative because the activities in Switzerland were merely 'part of a pre-arranged plan' to avoid tax in Australia.

Noteworthy is that if there is any consideration to alter the source of income it must be possible to demonstrate that there are real business and commercial reasons for the activities to be based in Australia rather than the Indonesia.

As with all aspects of international tax matters, the specific facts and circumstances provide the answers. Relevantly, the specific commercial arrangements need to be considered and applied within the context of the above basic matters and following articles of Australia’s tax treaty with Indonesia.

4. INTERNATIONAL TAX TREATIES

4.1 General

There are a number of aspects of Australia’s international tax agreements – including with, in this instance, Indonesia – that have general application to proposal to conduct business in Indonesia. In particular the specific nuances of this agreement will influence the manner in which the business operations in Indonesia are structured. As a preliminary observation, it is important that you review the respective international tax agreement for the country in which the Australian entity intends to carry on business. Whilst there is a substantial commonality with most aspects of the agreements, often there are subtle differences that can seriously impact the commercial and taxation issues. Notwithstanding the above there are some preliminary matters to be noted:

(a) An Australian tax resident will only be assessable to Indonesian tax jurisdiction if:

(i) The entity is an Australian tax resident;

(ii) The entity conducts business at a “permanent establishment” in Indonesia; and

(iii) Those business activities generate a profit in Indonesia.

The above will only be relevant if the Australian entity conducts the business activities in its own capacity (that is a branch activity). There are obvious risk issues associated with this business structuring strategy.


(b) If the entity is an Indonesian tax resident, the Indonesian taxation obligations will be:

(i) Taxed either at the entity level;

(ii) Any payment by the Indonesian entity consisting of dividends, royalties or interest to a non-resident of Indonesia are subject to Indonesian withholding tax obligations; and

(iii) Subject to the type of Australian entity “receiving” the dividends, royalties or interest, the Australian entity, in certain instances, is entitled to a foreign tax offset against any Australian tax applicable to such income.

4.2 Indonesia Australia International Agreement

More particularly, the following aspects of the Australian/Indonesian International Agreement require consideration having regard to the proposed business activities:

(a) Residence (Article 4);

(b) Permanent establishment (Article 5);

(c) Business Profits Rule (Article 7); and

(d) Royalty payments.

Residence

The Indonesian agreement provides that the term “residence” will be given the following meaning (note the reference to the word “person” includes a company):

ARTICLE 4 Residence

1. For the purposes of this Agreement, a person is a resident of one of the Contracting States if the person is a resident of that Contracting State under the law of that State relating to its tax.

2. A person is not a resident of one of the Contracting States for the purposes of this Agreement if the person is liable to tax in that State in respect only of income from sources in that State.

3. Where by reason of the preceding provisions of this Article a person, being an individual, is a resident of both Contracting States, then the status of the person shall be determined in accordance with the following rules:

(a) the person shall be deemed to be a resident solely of the Contracting State in which a permanent home is available to the person;

(b) if a permanent home is available to the person in both Contracting States, or in neither of them, the person shall be deemed to be a resident solely of the Contracting State in which the person has an habitual abode;

(c) if the person has an habitual abode in both Contracting States or in neither of them, the person shall be deemed to be a resident solely of the Contracting State with which the person’s economic and personal relations are closer.

4. Where by reason of the provisions of paragraph (1) a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident solely of the Contracting State in which its place of effective management is situated.


If an entity is a dual resident according to the respective domestic laws, the tie breaker rule is determined by the place of effective management.

Permanent Establishment

Article 5’s definition of what constitutes a “permanent establishment” is a critical threshold issue in relation to the structuring advice. If an entity conducts business via a permanent establishment in Indonesia, the profits are subject to the Indonesian taxing regime (Article 7).

In any contemplation as to how the business transactions are to be configured, the concept of permanent establishment is critically important.

Article 5 provides the following definition of a permanent establishment (relevantly for the purposes of this advice).

ARTICLE 5 Permanent Establishment

(1) For the purposes of this Agreement, the term “permanent establishment”, in relation to an enterprise, means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

(2) The term “permanent establishment” includes especially:

(a) a place of management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) a mine, …;

(g) a farm, …;

(h) an installation, …, where that use continues for more than 120 days;

(i) a building site or construction, …, where that site, project or activities exist for more than 120 days;

(j) the furnishing of services, including consultancy services, by an enterprise within one of the Contracting States through employees or other personnel engaged by the enterprise for that purpose, if those services are furnished, for the same or a connected project, within that State for a period or periods aggregating more than 120 days within any 12 month period.

(3) An enterprise shall not be deemed to have a permanent establishment merely by reason of:

(a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; or

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display; or

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; or

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; or


(e) the maintenance of a fixed place of business solely for the purpose of activities which have preparatory or auxiliary character for the enterprise, such as advertising or scientific research.

(4) A person acting in one of the Contracting States on behalf of an enterprise of the other Contracting State — other than an agent of an independent status to whom paragraph 5 applies — shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if:

(a) in so acting, the person manufactures or processes in that State for the enterprise goods or merchandise belonging to the enterprise; or

(b) the person has, and habitually exercises in that State, an authority to conclude contracts on behalf of the enterprise, unless the person’s activities are limited to the purchase of goods or merchandise for the enterprise; or

(c) the person has no such authority, but habitually maintains in the first mentioned State a stock of goods or merchandise from which the person regularly delivers goods or merchandise on behalf of the enterprise.

(5) An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a person who is a broker, general commission agent or any other agent of an independent status and is acting in the ordinary course of the person’s business as such a broker or agent. However, when the activities of such a broker or agent are carried on wholly or principally on behalf of that enterprise itself or on behalf of that enterprise and other enterprises controlling, or controlled by or subject to the same common control as, that enterprise, the person will not be considered a broker or agent of an independent status within the meaning of this paragraph.

(6) The fact that a company which is a resident of one of the Contracting States controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself make either company a permanent establishment of the other.

(7) The principles set forth in the preceding paragraphs of this Article shall be applied in determining for the purposes of paragraph 5 of Article 11 and paragraph 5 of Article 12 of this Agreement whether there is a permanent establishment outside both Contracting States, and whether an enterprise, not being an enterprise of one of the Contracting States, has a permanent establishment in one of the Contracting States.

One of the important aspects of this definition in this instance is article 5(2)(j) which provides that an entity will have a permanent establishment if personnel are located in Indonesia for more than 120 days providing consulting services.

4.3 Business Profits

It is Article 7 that provides the taxing authority for Indonesia to tax the profits of an entity that conducts business at a permanent establishment in Indonesia. Note that this article only applies if the Australian resident directly conducts its business activities in Indonesia.

From a practical perspective the Article requires an assessment to be made of the profit attributable to the Indonesian permanent establishment of the Australian entity.

ARTICLE 7 Business Profits


(1) The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated in that other State. If the enterprise carries on business in that manner, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to:

(a) that permanent establishment; or

(b) sales in that other State of goods or merchandise of the same or a similar kind as those sold through that permanent establishment; or

(c) other business activities carried on in that other State of the same or a similar kind as those carried on through that permanent establishment.

(2) Subject to the provisions of paragraph 3, where an enterprise of one of the Contracting States carries on business in the other Contracting State through a permanent establishment situated in that other State, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment or with other enterprises with which it deals.

(3) In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses of the enterprise, being expenses which are incurred for the purposes of the permanent establishment (including executive and general administrative expenses so incurred) and which would be deductible if the permanent establishment were an independent entity which paid those expenses, whether incurred in the Contracting State in which the permanent establishment is situated or elsewhere. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on money lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, of amounts charged, (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on money lent to the head office of the enterprise or any of its other offices.

(4) No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.

(5) Nothing in this Article shall affect the application of any law of one of the Contracting States relating to the determination of the tax liability of a person in cases where the information available to the competent authority of that State is inadequate to determine the profits to be attributed to a permanent establishment, provided that that law shall be applied, so far as the information available to the competent authority permits, consistently with the principles of this Article.

(6) Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.


(7) Nothing in this Article affects the operation of any law of one of the Contracting States relating to tax imposed on profits derived by non-residents on insurance premiums collected, or from insurance relating to risks arising or to property, in that State, whether or not that law deems the existence of a permanent establishment in relation to the relevant activity.

If the relevant law in force in either Contracting State at the date of signature of this Agreement is varied (otherwise than in minor respects so as not to affect its general character) the Contracting States shall consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate.

(8) Where:

(a) a resident of one of the Contracting States is beneficially entitled, whether directly or through one or more interposed trust estates, to a share of the business profits of an enterprise carried on in the other Contracting State by the trustee of a trust estate other than a trust estate which is treated as a company for tax purposes; and

(b) in relation to that enterprise, that trustee would, in accordance with the principles of Article 5, have a permanent establishment in that other Contracting State,

the enterprise carried on by the trustee shall be deemed to be a business carried on in the other State by that resident through a permanent establishment situated in that other State and that share of business profits shall be attributed to that permanent establishment.

The Indonesian agreement Article 7(3) provides for a particular treatment of expenses in the calculation of the net profit attributable to the permanent establishment (which consequently becomes the taxing base).

The executive and general administrative expenses incurred can be accounted for; however the following expense types charged by the head office cannot be claimed:

(a) Royalty amounts for the use of patents;

(b) Commission, for specific services performed or for management fees; and

(c) Interest on money lent to the permanent establishment.

The above exclusions will be a significant determinant as to whether the Australian entity establishes a branch or a separate entity in Indonesia to conduct the foreign activities. That is, if it is expected that the Australian stakeholders wish to reduce the level of profits generated in Indonesia, the use of royalty, management and consulting service arrangements will be negated if a branch arrangement is used vis a vis a separate foreign company arrangement.

5. PRACTICAL ARRANGEMENTS

The practical issue that advisers need to consider with regard to the establishment of an offshore business activity is how to balance the following business needs:

(a) Commercial safety;

(b) Appropriate taxing levels; and

(c) Repatriation of profits.


The detailed discussion above outlines the basic taxation matters that need to be considered, however the practical requirements often require decisions that combine all of the above factors. Some considerations include:

(a) What business structure should be used?

(b) Who should be the owner of the offshore entity?

(c) How should the foreign entity or activities be financed?

(d) What resources or services are to be provided by the Australian entity?

(e) What are the expectations of the Australian stakeholders concerning profit repatriation?

(f) How do the respective taxation regimes for the respective jurisdictions interact?

Some of these matters have been raised in the context of the international tax treaties and other domestic law issues. The other points can be discussed in the context of how to shift the taxing point from one jurisdiction to another. This presumes the taxing points are considered relevant.

In our opening example of using a foreign entity to contact the business activities in the foreign jurisdiction, the overall taxing levels are arguably unacceptably high, having regard to the risk factors associated with establishing a new offshore business. Taking this point as the lead, consider the following factors.

5.1 Financing the offshore entity or activities

The relevant issues with regard to this factor are:

(a) Thin capitalisation rules – the new de minimis rules for thin capitalisation ($2m of debt deductions) practically mean that the thin capital rules are not immediately relevant to most SME business activities; and

(b) Debt financing: (i) Facilitates additional security opportunities over the foreign assets;

(ii) Repatriation of interest in relation to the debt will attract foreign withholding tax (10%) which is entitled to attract foreign tax offsets in Australia;

(iii) Debt repatriation is simpler that equity repatriation.

5.2 Resource and Service Provision

It is a well-documented arrangement for foreign entities to charge their Australian subsidiaries or representative entities for the use of intellectual property, marketing services and/or any other resource provided to the local Australian entity, thereby “shifting” the profits from Australia, in a deductible form, to some other more tax hospitable jurisdiction.

Those arrangements can similarly be arranged by the Australian entity to “shift” profits from the foreign entity to Australia. Prior to discussing this in any further detail, consider the rearrangement of our case study by introducing a cross charge factor of say $200,000 – from Manufacturing Co PT to Aus Co Manufacturing Pty Ltd. This results in net profits in Manufacturing Co PT of $800,000 and Aus Co Manufacturing Pty Ltd, generating a further $200,000 profit. This structure is outlined below:



Manufacturing Co PT - Indonesian company tax (25%) on $800,000 200,000

Assume all net profits are distributed to Aus Co Manufacturing Pty Ltd ($600,000)

Indonesian withholding tax (15%) 90,000

Net Dividend received by Aus Co Manufacturing Pty Ltd (NANE) nil

(Note: no foreign tax offset allowed for Indonesian withholding tax)

Tax on additional Australian profit of $200,000 (30%) 60,000 Net Foreign income + Australian income distributed by Aus Co Manufacturing Pty Ltd to its shareholders ($650,000)

Australian tax on dividend (49% of $710,000) 347,900

Less Franking credit (60,000)


Percentage wise (5%) this is not an insignificant reduction in tax!

There are, however, parameters that need to be considered. Most countries with which Australia has a tax treaty have a transfer pricing regime that is based on the OECD model. Not unlike the Australian angst at profits being shifted out of Australia to a different jurisdiction, foreign countries have the same concern. Accordingly, when contemplating the nature and extent of charging the foreign entity for the use of Australian resources and services the relevant transfer pricing issues need to be considered.

Payment of $200,000 for services, IP or resources

Manufacturing Co PT (Indonesian

Company)


Pty Ltd

Shareholders

100%

100%


With our hypothetical Indonesian business, it is noted that Aus Co Manufacturing Pty Ltd could appropriately charge for the provision and use of the Australian entity’s resources and services, for example:

• Intellectual property – royalty payments attract a withholding tax of 10% (withholding tax charged against the royalty income will attract a foreign tax offset); and

• Consulting services – not regarded as a royalty and take care that any Australian consultant sent to undertake the consulting activities in Indonesia do not become residents of Indonesia.

5.3 Profit Repatriation

The tax examples cited above are based on the immediate repatriation of profits to the ultimate stakeholders. This flow-through creates the extreme taxation position to illustrate the real tax impost of the entity arrangements proposed.

There are no taxation reasons why the profits generated by an active business conducted in a foreign jurisdiction with third parties need to be repatriated back to Australia or to be flowed through to the ultimate stakeholders.

The taxpayer has the commercial options to:

(a) Leave the net profits after tax in the foreign company; or

(b) Repatriate the profits back to an Australian company, “park” the profits in the Australian entity and use the present exemption provisions to fund the business growth, be it in Australia or overseas.

5.3.1 Australian Trust Conducting Branch Activities

If the business strategy and inclinations of the Australian stakeholders is for the profits to be repatriated, consider the following structuring proposition:

In countries that allow branch activities and recognise a trust, an Australian discretionary could be created for the purpose of conducting the foreign business as a branch activity.

The overall taxing consequences are as follows:


Foreign tax (25%) 250,000

Assume all net profits are distributed to its Australian trust ($750,000) it is arguable that withholding tax might be payable

112,500

The branch income is not exempt in Australia and the discretionary trust would gross up the net income with the foreign tax

Australian beneficiaries would be assessed (section 97) on $1M (say at 49%) 490,000

Subject to the FITO limits (362,500)



There are other activities or arrangements that can be considered, including:

(a) Interposing a marketing entity between the Australian entity and the foreign business activity entity. There needs to be care taken regarding transfer pricing issues (recall of the current debate/Senate enquiry about a large Australian public company, using a marketing entity located in a “preferred” tax location);

(b) Have the activities of the foreign entity adopt a distribution role; and

(c) Structure the trade activities to have the source of income.

6. CONDUIT INCOME

Where the proposed foreign operation envisages the “partnering” with foreign partners, the use of Australia’s conduit income regime is a useful taxation tool to minimise the ordinary impact of Australia’s tax system for non-residents.

Where the foreign income is received by an Australian company, the foreign income is non-assessable non-exempt income in Australia. Consequently there is no tax paid on these amounts and therefore no franking credits. Ordinarily dividends paid to a non-resident shareholder will be subject to Australian withholding tax if the dividend is not fully franked; however this additional withholding tax issue does not apply where the conduit income rules apply.

Accordingly, with these provisions, the foreign income can pass through an Australian company to its non-resident shareholders withhold any Australian tax applicable.

6.1 Subdivision 802-A ITAA 1997

Subdivision 802-A provides that a distribution that an Australian corporate tax entity makes to a foreign resident is not subject to dividend withholding tax, and is not assessable income, to the extent that the entity declares it to be conduit foreign income.

Importantly, the relevant entity receiving the foreign income must be an Australian company.

An Australian corporate tax entity has an amount that is non-assessable non-exempt income if it receives a distribution including conduit foreign income from another such entity and it makes a distribution including conduit foreign income.

Ordinarily a company’s distribution to a foreign resident is subject to dividend withholding tax unless the dividend is fully franked. Where an Australian company receives a non-portfolio dividend from a foreign company, the dividend received is non-assessable not exempt income and accordingly there are no franking credits created in relation to the foreign income.

Subdivision 802-A ITAA 1997 provides that a distribution to a foreign resident will not be subject to Australian tax, irrespective of the non-existence of franking credits.

In practical terms, if an Australian company includes foreign income, albeit a foreign dividend or foreign branch income, any distribution of amounts attributable to that foreign income, is not subject to any further Australian tax.

What this means is that if the Indonesian activities are conducted either by an Indonesian company or an Australian company via a branch method, then:

(a) Those Indonesian profits will be subject to Indonesian tax;

(b) Distributions from the Indonesian entity to an Australian company are not subject to any further tax in Australia, which maximizes the net profits for growth purpose; and


(c) To the extent that Indonesian investors receive a distribution from the Australian entity attributable to the Indonesian income, there is no further Australian tax. That means, the Indonesian profits have been subject only to Indonesian tax.

These provisions will also apply where the Australian company distributes its income to an Australian trust, which in turn distributes the income to a foreign resident.

6.2 Section 802-17 ITAA 1997

Trust estates and foreign resident beneficiaries – exempting CFI from Australian tax.

Foreign resident beneficiaries

(1) So much of a share of the net income of a trust as is reasonably attributable to the whole or a part of the *unfranked part of a *frankable distribution made by an *Australian corporate tax entity that the entity declares, in its *distribution statement, to be *conduit foreign income:

(a) is not assessable income and is not *exempt income of a beneficiary of the trust who: (i) is a foreign resident; and (ii) is presently entitled to the share of the income of the trust; and

(b) is an amount to which section 128B (Liability to withholding tax) of the Income

Tax Assessment Act 1936 does not apply.

7. FOREIGN TAX OFFSET

In those circumstances where income is derived and taxed in a foreign jurisdiction, the question as to whether the Australian taxpayers are entitled to any credits for foreign tax becomes an important issue.

Division 770 ITAA 1997 provides for an entitlement in relation to foreign tax paid (referred to as foreign tax offsets):

Section 770-10

(1) You are entitled to a *tax offset for an income year for *foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.

Note 1: The offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax - even if you paid the foreign income tax in another year.

Note 2: If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)).

With regard to the above, what constitutes the foreign tax applicable is determined in accordance with:

Section 770-15

(1) Foreign income tax means tax that:

(a) is imposed by a law other than an *Australian law; and


(b) is:

(i) tax on income; or

(ii) tax on profits or gains, whether of an income or capital nature; or

(iii) any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953.

The above provisions will cover Federal, State and withholding taxes.

Relevantly, the entitlement to a foreign tax offset requires, inter alia:

(a) The foreign income to be assessable to Australian tax; and

(b) The foreign income has been subject to foreign tax.

Consider the following matrix of whether a foreign tax offset is able to be claimed in relation to an Australian company:

Type of income Foreign tax treatment

Australian tax treatment Foreign tax offset

Branch income Taxed if permanent establishment NANE No

Dividend Subject to withholding tax NANE No

Royalty Subject to withholding tax

Gross amount assessable Yes

Where the foreign income is derived by an Australian trust and foreign tax has been paid in relation to that income, the beneficiary’s entitlement to the foreign tax offset is provided pursuant to subsection 770-130(3) below:

Section 770-130

(3) You are covered by this subsection for an amount of *foreign income tax paid in respect of the taxed amount to the extent that:

(a) the taxed amount is taken, because of section 6B of the Income Tax Assessment Act 1936 (the 1936 Act), to be attributable to another amount of income of a particular kind or source; and

(b) foreign income tax has been paid in respect of the other amount of income; and

(c) the taxed amount is less than it would have been if that tax had not been paid.

8. CONCLUSION

As Australian business seeks access to larger markets, a changing work force and changing resources and cost of production, more SME business taxpayers will be contemplating some form of global activity.

The taxation adviser will need to balance the commercial opportunities with the complexity and high tax costs associated with these global activities. This discussion countenances some of the myriad of taxation matters to be factored into the taxation decision making.


PART 2: PRACTICAL TOOLBOX – RESIDENCY & SOURCE

Presenter: Mark Lowis, Associate and Tax Specialist, redchip lawyers 9. Residency – The Fundamentals

Residency is the cornerstone of any comprehensive tax regime as it provides a context for deciding who and what will be taxed. This paper supplements and expands upon Brian Richards’ paper “International Tax Issues” which has been prepared for the Expanding Horizons seminar presented by redchip lawyers and Acis. The intention of this paper is to summarise some of the fundamental aspects of residency, yet also to draw attention to some of the more recent decisions from the AAT. It will also provide a summary of the high-level considerations in respect of source.

9.1 Importance of Residency

In Australia, the assessable income of an Australian resident includes ordinary income and statutory derived from all sources (ss6-5(2) and 6-10(4) ITAA 1997). Foreign residents are assessed in Australia on any ordinary or statutory income from all Australian sources (s6-5(3)(a) and s6-10(5)(a) ITAA 1997) – as well as any ordinary income or statutory income which must be included on some basis other than having an Australian source (ss6-5(3)(b) and 6-10(5)(b) ITAA 1997). We will consider the basic concepts of residency for individuals.

9.2 Individuals

Section 6(1) ITAA 1936 provides that a “resident or resident of Australia” means:

(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 is outside 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 sub-subparagraph (A) or (B).

9.3 The Four Tests

There are four possible bases upon which an individual may be found to be an Australian resident for tax purposes:


1. Resides Test – The person resides in Australia because of the application of ordinary concepts;

2. Domicile Test – The person resides in Australia because they are domiciled in Australia, unless their permanent place of abode is outside of Australia;

3. 183 Days Test – The person resides in Australia because they are present in Australia for at least 183 days in the relevant year, unless their permanent place of abode is outside of Australia and they don’t intend to take up residency here.

4. Superannuation Fund Test – the person is a member of an Australian superannuation fund established under the Superannuation Act 1990 (Cth) or an eligible employee.

9.3.1 Resides Test

The primary test for residency is known as the “resides test”, or the “common law test”. A person will be a resident of Australia for income tax purposes if they actually reside in Australia, regardless of nationality, citizenship or the location of their permanent home. There is no statutory definition for the term resides. Latham CJ in the High Court decision of Federal Commissioner of Taxation v Miller [1946] HCA 23 found that the word resides means to “dwell permanently or for a considerable time, to have one’s settled or usual abode, to live, in or at a particular place”. This meaning was adopted in the recent case of Dempsey and Commissioner of Taxation [2014] AATA 335, (Dempsey) which is discussed later in this paper. Determining whether someone resides in Australia is a question of fact and degree. This means that the relevant case law should be the primary guide. Attempts have been made by the tribunal to establish a structured approach to residency. In the case of Iyengar v Commissioner of Taxation [2011] AATA 856 (Iyengar), Senior Member Walsh formulated what has become known as the “residency matrix”, which placed a particular focus on the following key areas to determine residency:

(a) Physical presence;

(b) Nationality;

(c) History of Residence and Movements;

(d) Habits and “mode of life”;

(e) Frequency, Regularity and Duration of visit;

(f) Purpose of visits to or absences from a country;

(g) Family and business ties with a country; and

(h) Maintenance of a place of abode.

This checklist style approach did find favour in a run of cases such as Sneddon v Commissioner of Taxation [2012] Aata 516 (Sneddon); however this approach was recently rejected in Dempsey where Deputy President Hack pointed out that:

However useful such checklists may be, they are no substitute for the text of the statute...“reside” must be construed and applied to the facts according to its ordinary meaning... (para 101).

Furthermore, Deputy President Hack argued that:

The whole of an individual’s or corporation’s circumstances as disclosed on the evidence must be considered, questions of degree will, in particular cases, arise… understanding this is one reason why not all outcomes on particular facts on the subject of residency are readily reconcilable (para 97).


A compilation of some of the more critical case summaries, including Sneddon, can be found later in this paper.

9.3.2 Domicile Test

The domicile test extends the ordinary definition of “resident” or “resides”. A person will be a resident in Australia if they have an Australian domicile unless they can prove that they have established a “permanent place of abode” outside Australia. A person’s home, their “domicile”, is their legal relationship with a country. A person’s domicile is their permanent home, which may not be where that person resides.

“Domicile of origin” is established where one is born. It naturally follows the domicile of the person of upon which the infant depends upon.

“Domicile of choice”, however, can be acquired by someone who fixes their residence in a particular country, with the intention of residing there indefinitely. A domicile of choice can replace one’s domicile of origin.

A person may also have a “domicile by operation of law”

A person has a domicile at all times and may only have one domicile at any one time. Permanent Place of Abode The meaning of a “permanent place of abode” was considered in Applegate v FCT [1979] 9 ATR 899. Mr Applegate was a solicitor who left Australia to establish a branch office in the New Hebrides. His family moved with him. Mr Applegate was unsure from the outset how he would be in New Hebrides and illness forced Applegate to return to Australia within two years. It was found that although Applegate had retained his Australian domicile, his permanent place of abode was elsewhere. The court found that “permanent” meant more than temporary or transient but did not mean everlasting. Whether an individual intends to stay permanently may be relevant in determining where their permanent place of abode is, however it is not the only factor taken into consideration. The Commissioner also examines the factors needing to be taken into account in IT 2650, which include:

(a) The intended and actual length of the stay overseas;

(b) Whether a fixed home has been established outside Australia; and

(c) The person’s continuing association with Australia.

None of these factors are conclusive by themselves.

In Boer v Commissioner of Taxation [2012] AATA 574 and Sully v Commissioner of Taxation [2012] AATA 582, the taxpayers were held to be residents of Australia throughout their stay overseas because they had not established a permanent place of abode outside Australia.

9.3.3 183 Day Test

If a person is in Australia for a total period of more than half of an income year they will be treated as a resident unless it can be established that their “usual place of abode” is outside Australia and that they do not intend to take up residence in Australia. “Usual” in this context is taken to mean habitual or customary.

9.3.4 Superannuation Fund Test


The superannuation test is an objective test which provides that an individual will be a resident if they are a member of a superannuation scheme established under the Superannuation Act 1990 (Cth). The test was originally designed to bring salaries paid to locally engaged High Commission staff within the Australian taxable field and accordingly has a limited general application. In Baker v Commissioner of Taxation [2012] AATA 168, a taxpayer who had actually ceased to reside in Australia but had remained a member of an Australian government superannuation scheme was held to be resident – despite the fact that he has ceased contributing to the fund.

9.4 Snapshot of AAT Cases in the last 3 years regarding residency

In the three years since August 2012, the 18 residency cases below have come before the AAT. The cases have mostly concerned the application of the “residency test”. The Commissioner has had good success in these matters, winning 12 (66% success rate).

AAT Case Name Decision Date

Successful Party – ATO or Taxpayer

Inbound / Outbound

Legal Arguments/Tests

Sneddon 6 August 2012 ATO

(is a resident) OUT Resides Test

Murray 24 August 2012 ATO

(is a resident) OUT Historically

Resides Test, DTA (Singapore)

Boer 30 August 2013 ATO


Sully 31 August 2013 ATO

(is a resident) OUT Domicile/PPOA

Ellwood 7 December 2012 ATO

(is a resident) OUT Domicile/PPOA

Mayhew 13 March 2013 Taxpayer (not a Resident) OUT Domicile/PPOA

Taxpayer 22 March 2013 ATO (is a resident) OUT

Resides Test, Domicile/PPOA, 183 days/UPOA, DTA (India)

Pillay 28 June 2013 ATO


ZKBN 27 August 2013 ATO


Murray 1 November 2013 Taxpayer (not a Resident) OUT Resides Test

Guissoma 9 December 2013 Taxpayer (not a Resident) IN Resides Test

Dempsey 29 May 2014 Taxpayer (not a Resident) OUT Resides Test,

Domicile/PPOA

Agius 17 November 2014

Taxpayer (not a resident) OUT Resides Test

The Engineering Manager

24 December 2014

Taxpayer (not a resident) OUT – IN Resides Test,

Domicile/PPOA

Clemens, Jaczenko, Koustrop

6 March 2015 ATO (not a Resident) IN 183 days/UPOA

Shord 21 May 2015 ATO

(resident) OUT Resides Test, Domicile/PPOA


10. Selected Case Summaries

10.1 Dempsey v Commissioner of Taxation [2014] Aata 335

Facts

Mr Dempsey was a project manager in the building and construction industry. In June 2007 he received an email opportunity from “Fluor”, a multi-national construction group in Saudi Arabia.

Dempsey signed an employment contract relating to a project known as “Saudi Kayan”. It was expected that once the Saudi Kayan project was completed he would continue to work in Saudi Arabia with Fluor.

Whilst on the project, Mr Dempsey:

• Lived in a furnished residential apartment in a secure compound;

• Brought additional personal items with him e.g. refrigerator, bedding, linen etc;

• Had access to the apartment exclusively; and

• Had access to a vehicle supplied by Fluor.

Dempsey acquired a particular class visa that was renewable every 12 months.

Travel & Holidays

It was common practice for expatriates based in Saudi Arabia to leave the country for their holidays.

Mr Dempsey’s holidays were 2 weeks in every 13 weeks. He always travelled overseas when he had time off, his favourite destinations being Thailand and Australia. He spent most of his time in Thailand.

Mr Dempsey occasionally travelled to Bahrain on his days off to drink at a hotel, of which he was a member. Alcohol was not readily available in Saudi Arabia.

Property

Mr Dempsey had a house in Mudgeeraba, Queensland which he purchased in 2004.

He had paid off a substantial portion of his mortgage over the property by 2007, but chose not to repay the entirety of the loan in order to have access to capital.

Prior to leaving for Saudi Arabia he cleaned his house, covered his furniture and arranged for his neighbour to mow his lawn each month.

Mr Dempsey’s car was left in the garage on trickle charge and he continued to pay registration for the vehicle.

When Mr Dempsey first left for Saudi Arabia, he chose not to sell his house given the GFC and its diminished value. He also did not rent out the house. Upon his return, Mr Dempsey resumed living in the house.

Although ample evidence was put before the court regarding his holidays during the relevant tax years, Mr Dempsey spent no more than a few days in his Mudgeeraba residence.

Personal Relationships

Mr Dempsey was single during his time in Saudi Arabia.


He had two children from a former relationship but never lived with the ex-partner or his children. After the relationship ended, Mr Dempsey supported his children’s living expenses from the Gold Coast.

His former partner and children never visited him in Saudi Arabia.

Hobbies

Mr Dempsey left a collection of firearms and related equipment at his Mudgeeraba house. These were maintained in a secure armoury. He claimed to maintain his QLD residency in order to retain the appropriate licenses.

Passenger Cards

On incoming passenger cards, Mr Dempsey declared himself a “resident returning to Australia”.

On his outgoing passenger cards he declared himself an “Australian resident departing temporarily”.

Bank Accounts

Mr Dempsey did not open any bank accounts in Saudi Arabia and retained his Australian bank account.

His salary package with Fluor included superannuation contributions by his employer.

Electoral Roll

Mr Dempsey did not inform the Australian Electoral Commission of his departure for Saudi Arabia.

Income Tax

Mr Dempsey had his tax agent lodge his Australian tax returns for all of the relevant years whilst living in Saudi Arabia, which declared that:

• He was an Australian resident;

• His home address was that of his Mudgeeraba property; and

• His only income was his Australian sourced interest income.

Issues

In the 2009 and 2010 income tax years:

(a) Did Mr Dempsey reside in Australia?

(b) As he was domiciled in Australia, was Mr Dempsey’s permanent place of abode (PPoA) outside Australia?

Decision

The AAT found that:

The place of residence of an individual is determined………..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 situate, 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” (Koitaki Para Rubber Estates)

Physical presence and intention will coincide for most of the time. But few people are always at home. Once a person has established a home in a particular place – even involuntarily……a person does not necessarily cease to be a resident there because


he or she is physically absent. The test is whether the person has retained a continuity of association with the place….together with an intention to return to that place and an attitude that that place remains “home” (Hafza v Director-General of Social Security)

The AAT further decided that:

(a) The checklist of factors noted in Iyengar, while useful, was no substitute for the text of the statute and applied to the facts according to its ordinary meaning.

(b) Nationality is not a sole criterion of whether a person “resides”. Whilst it confers a right of residence, it does not lead to a conclusion that a person is a “resident”.

(c) Whilst it was not possible to precisely determine when Mr Dempsey made a home in Saudi Arabia, he had done so by the 2009 income year.

(d) His intention was to make Saudi Arabia his home for the duration of the project and beyond (which was indefinite). His visits to Australia were casual and infrequent. He had formed a lifestyle whereby his Mudgeeraba home was:

(i) Not an immediately available place to live, but merely a place to holiday and store his equipment; and

(ii) Not Mr Dempsey’s usual place of abode.

(e) Mr Dempsey’s expectation that there would be further employment at the end of the Saudi Kayan project was reasonable.

(f) Mr Dempsey did not leave family in the Mudgeeraba house.

(g) His choice not to open a Saudi bank account was logical given the restrictions imposed upon expatriates.

(h) Mr Dempsey’s failure to update the Electoral Commission in Australia did not demonstrate an intention to continue to reside in Australia.

(i) Incoming and outgoing passenger cards are relevant to the proceeds but not determinative in and of themselves.

(j) Mr Dempsey did have an intention to return to Australia to live at the end of his contract but there was no definite timeframe for this return.

(k) Mr Dempsey resided in Saudi Arabia in the 2009 and 2010 income years and was not a resident of Australia.

(l) While his domicile was Australia, his permanent place of abode was outside Australia.

(m) Mr Dempsey’s objection was allowed in full.

10.2 Iyengar v Commissioner Of Taxation [2011] Aata 856

Facts

Mr Iyengar was born in India in 1952. He immigrated to Australia with his wife and 2 children and they all became Australian citizens in June 2003. His marriage with his wife has been stable at all times.

Mr Iyengar, a civil engineer, jointly owned a house in Western Australia since 2003 which he called his “family home”.

In April 2007, Mr Iyengar accepted a site engineer role with the company Maersk in Dubai. The role was described as “temporary employment”. The posting was for a two year period, with an option to extend the contract for a further two periods of six months each.

The contract identified the specific project as Package 13. Package 13 was one of 17 packages to be completed by Maersk in the Middle East and the contract could be terminated with one month’s prior notice.


Maersk agreed to:

(a) Reimburse all of Iyengar’s medical and dental costs, local and business telephone calls, electricity, gas and heating expenses;

(b) Make a car available at no cost;

(c) Pay rent for a furnished apartment; and

(d) Pay for his airfares to Doha, Qatar and other places as required.

Mr Iyengar discovered upon arrival that he was required to source accommodation at a specific level of affordability and would be provided with an allowance to obtain the necessary furnishings. He used the Maersk allowance to purchase additional furniture and appliances.

Mr Iyengar cooked his own meals and employed a maid and a gardener at his own expense.

Mr Iyengar obtained a 3 year “work residency visa” to work in Dubai. His family did not join him to live in Dubai.

From 1 March 2009 to 31 October 2009 Iyengar was offered 3 contract extensions which he accepted.

From August 2009 to 31 Dec 2009 (when he returned to Australia) Maersk accommodated him in Doha, Qatar. When he moved to Doha, Mr Iyengar’s Dubai visa was cancelled and he was issued with a 2 year “work residency visa” for Qatar.

Mr Iyengar returned to Australia in December 2009 and resumed living with his wife.

Social Activities

Mr Iyengar joined local golf and tennis clubs and used gyms and swimming pools. He became member of a local hotel group’s restaurant program.

Family

Mr Iyengar’s wife and daughter continued to live in his WA home in his absence. His wife stayed with him for a total of 4 months over 3 separate visits (between January 2008 and February 2009).

Personal Effects

Mr Iyengar left furniture, clothing and motor vehicles at his WA home. He did take some clothing, sports gear, books and photographs with him.

He did not buy any property in Dubai as his intention was to pay down the existing mortgage on his WA home.

Travel

Mr Iyengar made two trips to Australia during his time in Dubai. The duration of the first visit was 14 days in October 2007 and the second was 10 days in August 2008.

Bank Accounts

Mr Iyengar’s salary was deposited in Australian dollars (approximately AUD $400,000).


Income Tax

Mr Iyengar’s 2008 and 2009 Australian tax returns did not include any assessable income. He declared himself to be a non-resident. No tax was payable by Mr Iyengar in the United Arab Emirates.

Issues

In respect of the 2008 and 2009 income tax years did:

(a) Mr Iyengar reside in Australia; and

(b) As he was domiciled in Australia, was his PPoA outside Australia?

Decision

The AAT found the following:

(a) That the definition of reside, as per the Macquarie Dictionary 5th Ed, was “to dwell permanently or for a considerable time; have one’s abode for a time”. The New Shorter Oxford Dictionary Vol.2 defines resides as meaning to “dwell permanently or for a considerable time, have one’s regular home in or at a particular place”.

(b) Miller v Federal Commissioner of Taxation [1946] HCA 23 should be applied – the term reside should be given a wide meaning for the purposes of section 6(1)(a) of the ITAA 1936:

“The question of whether a person “resides” in a particular country is a question of fact and degree, the courts have referred to and taken into account various factors considered to be relevant to this question.” (para 59)

“The weight to be given to each factor will vary with the individual circumstances and no single factor is necessarily decisive. In Shand v Federal Commissioner of Taxation 2003 ATC 2080 [35], questions of residency, domicile, permanent place of abode, have frequently been found by the courts and tribunals to be difficult to assess on a factual level and not easy to define in concrete legal terms” (para 60)

(c) There were a list of factors to be considered, which can be referred to as the “residency matrix”:

• Physical presence;

• Nationality;

• Habits and “Mode of Life”;

• History of Residence and Movements;

• Frequency, Regularity and Duration of Visits;

• Purpose of Visits to or Absences From a Country;

• Family and business ties with a country; and

• Maintenance of a place of abode.

Physical presence

A person’s physical presence in a country during the year of income is considered relevant. In Joachim v Federal Commissioner of Taxation 2002 ATC 2088 it was held that “…the test is whether the person has retained a continuity of association with the place, together with an intention to return to that place and an attitude that the place remains home”.

“Physical presence…for some period of time during a particular year of income is usually considered by the courts as necessary in order that a person should be a


resident in that country during that year…it does not necessarily follow that mere presence in a country for a period of time is not sufficient to make that person a resident.” (para 62)

RULED Despite his limited physical presence in Australian in the income year, it is clear that Mr Iyengar maintained a place of residence in Australia.

Mr Iyengar maintained a continuity of association with Australia, together with an intention to return to Australia. He also had an attitude that the home was his “family home”.

Evidence of Mr Iyengar’s “continuity of association” included:

• His wife, son and daughter remained in Australia;

• His “family home” was in Perth;

• He was happily married to his wife;

• He requested he be paid in AUD$ and he returned his money to pay his mortgage;

• He returned to Australia and stayed the Perth home when holidaying;

• He kept personal property at his Perth home;

• His contract of employment was “temporary” and was for a finite period of 2 years, with an option to extend for 1 year;

• He did not lease or buy any property in Dubai;

• He did not purchase any substantial items of personal property; and

• He returned to his Perth home upon completion of his employment.

Nationality

The nationality of a person would not be a factor in determining where residence is, however it may be relevant.

Habits and “Mode of Life”

It may be relevant to consider whether there had been any change or break in an individual’s “mode of life” – leading to a conclusion that they have ceased to reside there. Mr Iyengar posited that:

(a) Family and friends visited and stayed with him in Dubai;

(b) He was a member of several recreational and sporting clubs; and

(c) He dined out and was a member of the hotel’s restaurant program in Dubai.

The above are normal pursuits for most normal expatriates that are employed overseas.

RULED Mr Iyengar’s habits and mode of life while in Dubai was inconsistent with him being a resident of Australia.

History of Residence and Movements

Mr Iyengar’s conduct before he left (e.g. working in Perth subsequent to his time in the Middle East), together with his continuity of association with Australia and intention to return to Australia, is consistent with him being a resident of Australia.


Frequency, regularity and duration of visit

Where a person is a resident of one country and visits another, the frequency and regularity of their visits is an important factor. Short visits do not mean that the person is not a resident of that country.

RULED Mr Iyengar’s visits to Australia were of short duration; however this does not mean that he is not a resident of Australia. No one factor is decisive.

Purpose of visits to or absences from a country

Mr Iyengar’s intention was:

• To go to Dubai and work for as long as it took to complete his contract; and

• Use his salary to pay down his mortgage on the Perth home as soon as possible.

Family and business ties with a country

Family or business ties with a country are an important factor. The Shand decision provides that family ties will outweigh business ties where the two are in conflict. The location of an individual’s family can be decisive – Joachim.

RULED Notwithstanding that Mr Iyengar spent two years and seven months in Dubai, his family ties meant that he remained a resident of Australia. His money was earned to repay his WA home mortgage. He also took holidays in Australia.

Maintenance of a place of abode

An important factor is whether the individual maintains a “place of abode” when they are absent.

RULED Mr Iyengar maintained a place of abode in Australia. He owned the home jointly with his wife, left his personal belongings in Australia and used his wages to pay down the mortgage. Mr Iyengar identified the property as his “family home”. OVERALL SUMMARY

After weighing all of the facts, the AAT ruled that Mr Iyengar was a resident of Australia within the ordinary meaning of “resides” during the relevant years.

The “continuity of association” is established in the case, that continuity being with Australia.

Domicile

Although not necessary, the tribunal addressed the domicile test. The 3 statutory tests do not restrict the ordinary meaning of resident – they extend it. Of the three statutory tests, only the domicile test was relevant to Iyengar.

Domicile is a legal concept which can be established from the Domicile Act 1982.

Under the common law, “domicile” has been defined as the legal relationship between an individual and a territory with a distinctive legal system as the individual’s personal law (paragraph 93).

A person’s domicile is the place that is considered by law to be his or her permanent home. There are 3 types of domiciles:

1. Domicile of origin;


2. Domicile of choice; and

3. Domicile by operation of law.

A person’s domicile of origin is retained until the acquisition of a “domicile of choice”. The common law test of “domicile of choice” is the “intention” that a person has to make his or her home indefinitely in that country. That choice continues until that person makes a different domicile of choice.

RULED By 2003 Mr Iyengar had acquired a “domicile of choice” in Australia – different to his “domicile of origin” of India, as he had become a citizen.

The Tribunal was of the view that he did not change his domicile of choice from Australia to UAE.

He did not abandon Australia as a domicile of choice and he could not produce evidence that he intended to move to Dubai permanently or indefinitely.

Permanent Place of Abode Given that Mr Iyengar was domiciled in Australia, it was then relevant to determine whether his Permanent Place of Abode (PPoA) was outside Australia.

A PPoA, as defined in Applegate 77 ATC, might mean:

“…the house in which a person lived or the country, city or town in which he or she was for the time being to be found”.

“Permanent” is used in the sense of something which is to be contrasted with that which is temporary or transitory. It does not mean everlasting.

If in that year a taxpayer does not reside in Australia, in the sense in which that word has been interpreted, but has formed the intention to, and in fact has, resided outside Australia, then truly it can be said that his permanent place of abode is outside Australia during the year of income.

RULED

Mr Iyengar did not establish a PPoA outside Australia for the 2008 and 2009 income years and as such he is a resident under the domicile test.

10.3 Sneddon v Commissioner Of Taxation [2012] Aata 516

Facts

• Mr Sneddon was born in Australia.

• Prior to July 2007 he was in a de facto relationship. In July 2007 his relationship ended and he moved into rent-free accommodation with friends.

• He jointly owned an investment property with his de facto partner and operated a joint bank account.

• In December 2007 he purchased a property in Western Australia that was mortgaged to NAB.

• In early 2008 Mr Sneddon resigned from his employment to have a 3 month break to and renovate his WA property.

• In March 2008 he was approached by Fluor to work in Qatar and the UAE. He was offered a role as a “HSE Supervisor” which he accepted. He signed an employment agreement. There was no mention in the agreement as to when his employment would cease,


however a letter from the company explained that he would commence in April 2008 with an expected completion date of July 2010.

• Mr Sneddon was contracted to work on the “Qatar Gas Berth 6 Project”.

• He claimed that during the course of discussions with Fluor they indicated to him that once Berth 6 Project was completed he could continue to work on the other Middle East projects – although no evidence was produced to support this.

• Mr Sneddon was issued with a UAE residence permit and work visa that was arranged by Fluor.

• Mr Sneddon relocated to Qatar in April 2008 and commenced work that same month.

Outgoing Passenger Cards

Mr Sneddon ticked “leaving temporarily” on his outgoing passenger card instead of the “leaving permanently” box. This was his first time leaving Australia.

On each occasion that Mr Sneddon returned to Australia he recorded his WA home as the address on his incoming passenger card.

Property

Mr Sneddon worked on the WA property renovation right up until the time that he left for Qatar. As the renovations were incomplete, he was not able to lease the property.

He left the following items at the WA house:

• Two beds and mattresses;

• Appliances and furniture (lounge, refrigerator etc);

• Kitchen possessions; and

• A car. Mail

Mr Sneddon had a friend collect his mail. His friend would forward anything important.

Accommodation

Fluor provided an apartment, which Mr Sneddon lived in from April 2008 to December 2009.

Mr Sneddon paid for food, fuel and phone expenses, but utilities (e.g. gas, power, water) and insurance expenses were paid for by Fluor.

He lived alone until June 2009 when his new wife joined him. He had started a relationship with her prior to leaving Australia and she had visited him on two occasions before moving to Qatar to live with him.

Mr Sneddon and his wife moved to another apartment at their own expense in December 2009.

Travel

Every 12 weeks, Mr Sneddon would receive 22 days leave and a return airfare. During the 2009 financial year, Mr Sneddon travelled to Australia 3 times for a total period of 7½ weeks.

Bank Account

Mr Sneddon’s income was deposited into a joint bank account in Australian dollars.


AUSTRAC Records

The ATO approached Mr Sneddon and requested that he complete a questionnaire. This document showed that his earnings were used for the following purposes:

• Mortgage payments (WA home);

• Car loan expenses;

• Computer loan repayments;

• House insurance (WA property);

• Car insurance;

• Renovation costs (WA property);

• Qatar living expenses and personal items; and

• Living expenses while in Australia.

AUSTRAC computer records demonstrated that he had transferred at least AUD $116,113 from the UAE to various Australian bank accounts in his name.

Superannuation

During the 2009 year, Fluor contributed AUD $12,320 to an ING superannuation fund account.

Cessation of Work / Return to Australia

Mr Sneddon’s employment ended in July 2010 and he returned to Australia in August 2010.

He claimed that he intended to return to the Middle East but could not prove this.

Issues

For the 2009 income year:

(b) Did Sneddon reside in Australia; and

(c) As he was domiciled in Australia, was his permanent place of abode (“PPoA”) outside Australia?

Decision

Residing under the “Ordinary Concepts Test”

• Whether an individual is an Australian resident according to ordinary concepts is a question of fact and degree – Miller.

• The term “reside” is not defined in the tax legislation – it must take its ordinary meaning.

• The eight factors is Iyengar have been used by the AAT (the “residency matrix”).

Physical presence in Australia

Mr Sneddon was physically present in Australia for 7½ weeks.

He listed his WA property as his address on his incoming passenger cards.

Mr Sneddon retained various household items at the WA property, internet, telephone and bank accounts and a membership in an Australian superannuation fund.

His employment income was paid in Australian dollars into his Australian bank account and more than half of his earnings were used to fund expenses in respect of his WA property.


Nationality

Mr Sneddon was born in 1959 in Australia. He was an Australian citizen when he departed.

History of residence and movements

Mr Sneddon had never been overseas prior to his departure from Australia.

Habits and “Mode of Life”

Mr Sneddon lived in a fully furnished apartment in Qatar provided by Fluor in the 2009 income year.

He was required to pay some running costs ( e.g. food, fuel and phone expenses) but most expenses were covered by Fluor.

His Australian obligations were discharged with his employment income.

Frequency, regularity and duration of visits to Australia

In the 2009 income year, he spent a total of 7½ weeks in Australia on 3 separate trips.

Purpose of visits to or absences from Australia

Mr Sneddon’s visits to Australia were to attend a reunion, inspect renovations on the WA property, open bank accounts and assist his wife in her move to Qatar. There was no evidence provided to substantiate that Fluor would employ him for subsequent projects.

Family and business ties with Australia

Mr Sneddon’s personal ties were with Australia during the relevant income year. Qatar was merely a workplace.

Maintenance of a Place of Abode

Mr Sneddon maintained the WA property at all times.

He was not working at Fluor (and did not have an offer for employment) when he purchased the WA property. His intention was to buy, renovate and live in the property.

Mr Sneddon did not rent out the property in the 30 June 2009 year.

RULING

Mr Sneddon:

(a) Was found to be a resident of Australia for the 2009 income year; and

(b) Maintained the continuity of association with Australia, despite his physical absence from Australia.

Despite not being required to do so, the AAT found that Mr Sneddon’s domicile of origin was Australia and he did not replace that. Furthermore, he did not establish a permanent place of abode outside of Australia.

10.4 General Analysis – Why Dempsey But Not Sneddon?

At first glance, the facts in the above cases of Sneddon and Dempsey are clearly similar – their employers were even the same company! This difference was, however, that Sneddon was deemed to be an Australian resident, whereas Dempsey was not.


Upon closer inspection, there does appear to be some small factual differences and evidentiary reasons which must have been enough to turn the decision in Dempsey’s favour, such as:

(a) Dempsey, like Sneddon, left personal property in his property in Australia, but appeared to go to much greater lengths to prepare these items for long periods of absence (e.g. he covered furniture, placed his vehicles on trickle charge, arranged for maintenance of his lawn).

(b) Dempsey had spent about as much time as Sneddon in Australia on average; however Dempsey’s visits were over three years as opposed to one for Sneddon. Dempsey’s visits to Australia became less and less regular over time.

(c) Dempsey was able to produce acceptable evidence regarding the possibility that he would take part in further work once the initial project was complete. Sneddon could not substantiate his similar assertions.

(d) Dempsey had worked overseas prior to accepting employment with Fluor and accepted that this would increase his chances of further employment.

(e) The Tribunal accepted Dempsey’s evidence that he would have sold his Mudgeeraba house had the GFC not affected its value.

(f) Sneddon applied large portions of his overseas source income for Australian expenses – mortgage and loan repayments, insurances, telephone connections, etc.

Arguably, the AAT had sufficient grounds on balance to make the findings they did. It is interesting to note, however, that the AAT appeared in Sneddon to emphasise the “continuity of association” principles and the eight point matrix from Iyengar, whereas it is clear in Dempsey that the AAT attempted to decide the case based on the ordinary meaning of “resides”.

10.5 Summary

A review of the recent cases reveals some key points regarding the AAT’s position regarding the “resides test”, such as:

(a) The facts are crucial in every situation. Every analysis will involve an assessment of both fact and degree – similar facts can yield different outcomes.

(b) The AAT have shown an increasing reliance on the Iyengar eight point “resides” matrix.

(c) In Dempsey, the AAT did step away from the Iyengar test somewhat by explaining that whilst it was helpful, a “checklist” approach does not obviate a need to apply the law.

(d) Evidence is critical. Arguably, Dempsey’s success was largely attributable to the quality of his evidence and the manner in which he provided that evidence.

(e) Domicile and a continuing connection with Australia are still extremely relevant.

(f) In most cases, the AAT will try to establish what the individual’s plans were in respect of employment. Individuals may have difficulty arguing their intention to remain overseas when sufficient details regarding their overseas employment cannot be produced (e.g. an employment agreement, details of when a project was to commence and complete).

(g) Whilst relevant, incoming and outgoing passenger immigration cards are not determinative of residency in and of themselves.

11. Source

The source of income is particularly important for a non-resident, given that Australia’s domestic laws may deem that income to be assessable in Australia. Reference must be made in many cases to the relevant Double Taxation Agreements.


Given the tax offsets and exemptions/special rules applicable to some foreign sourced income (e.g. conduit foreign income, non-portfolio dividends, branch profits), source is an equally important concept for Australian residents. Source is not defined in the legislation; nor is foreign source. The definition of Australian source in s995-1 ITAA 1997 is unhelpfully “a source in Australia”. Given that there is little statutory guidance with respect to source, the common law is particularly relevant. The decision in Nathan v FCT (1918) provides that the source of income is “something which a practical man would regard as a real source of income”. The body of law suggests that most determinations require a consideration of the relevant facts within the context.

There are no general rules of law in respect of source. In each case, there is a need to assess the relevant facts; however ascertaining the character of a particular item of income can assist.

The Commissioner’s general views expressed in TD 2010/D7 and TD 2011/24 contain further analysis and provide context.

Category High Level Principles

Salary & Wages

FCT v French (1957) 98 CLR 398 – where are the duties or services performed? FCT v Efstathakis [1979] FCA 28 – in what location was the contract negotiated or made? Not necessarily where the duties are performed. FCT v Mitchum (1965) 113 CLR 401 – if the contract was made outside of Australia, the income may be deemed to be sourced outside of Australia as well, regardless of whether services were performed in Australia.

Business Income

Very much dependant on the nature of the business and the substance of the profit-earning activity. Fact based analysis required. Commissioner of Taxation (NSW) v Kirk [1900] AC 588 – it is necessary to determine all of the processes which contribute to the earning of the profit and determine the relative importance of each fact in earning the profit. Michell v Federal Commissioner of Taxation (1927) 46 CLR 413 – where a business involves buying and selling goods, the relevant processes which contribute to the earning of the profit are the making of contracts for the purchase and sale. Commissioner of Taxation v D & W Murray Limited [1929] 42 CLR 332 – where are the profits made? Re Thorpe Nominees Pty Ltd v Federal Commissioner of Taxation (1988) 25 CLR 183 – the source of income is a large view of the origin of the income – where it really came from, as a businessman would perceive it. The fact that a contract is signed in Switzerland wasn’t determinative – the source was Australia.

No specific principles – residency is relevant for Australian tax purposes. See Division 855 ITAA 1997.


Capital Gains & Losses

Dividends

Esquire Nominees Ltd v Federal Commissioner of Taxation [1973] HCA 67 – where did the company make the profits from which the dividend was paid? The source of the dividend was the place where the profit making process was undertaken by the company that issued the share.

Interest

Spotless Services Limited & Anor v Federal Commissioner of Taxation Phillips Lever Bro and Unilever.

Royalties

Federal Commissioner of Taxation v United Aircraft Corporation [1943] HCA 50 – where is the property (patent/trade mark/design) located or registered? Division 11A ITAA 1936 – withholding rules for royalties adopt a residency context.

11.1 Statutory Source Rules

The following are examples of how statute may impact on issues of source:

(a) Dividends Section 44(1)(b) ITAA 1936 provides a source rule by assessing non-resident shareholders on dividends paid out of company profits to the extent the dividend is paid from profits derived from sources in Australia. Residency of the company paying the dividend is not relevant.

(b) Royalties Section 6C ITAA 1936 provides that royalties paid by an Australian resident to a non-resident are deemed to be sourced from Australia.

(c) Capital Gains Tax Division 855 ITAA 1997 establishes a de facto source rule for foreign residents by identifying assets that will be subject to Capital Gains Tax in Australia (“Taxable Australian Property”). Capital gains and losses attributable to assets that are not Taxable Australian Property are ignored.

There are five categories of Taxable Australian Property:

1. Taxable Australian real property, which is:

(a) A direct interest in real property situated in Australia (including a lease of land situated in Australia);

(b) A mining, quarry or prospecting right if the minerals, quarry materials or petroleum are situated in Australia;

2. Indirect interest in Australian real property, which exists where you and your associates hold 10% of more of an entity (including a foreign entity), and the value of your interest is principally attributable to Australian real property;

3. A CGT asset that you have used at any time in carrying on a business through a permanent establishment in Australia;

4. An option or right over any of the above; and

5. A CGT asset that is covered under s104-165(3) ITAA 1997 (choosing to disregard a gain or a loss on ceasing to be an Australian resident).

Importantly, Australian residents are liable for CGT on all of their CGT assets irrespective of their location.

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