Australians Moving to the UK: A Brief Comparison of the Australian and UK Tax System

Daniel Wilkie   |   16 Mar 2021   |   8 min read

The Australian tax system is surprisingly different to the UK tax system.

This makes a simple comparison between the two challenging. 

Determining, from an individual taxpayer perspective, which country has higher taxes, isn’t straightforward. Both countries apply progressive rates of tax, as well as a range of potential adjustments and offsets.

Income taxes are lower in the UK due to the progressive rates of tax applying at higher levels of taxable income, but as the UK also has much higher medical contribution taxes than Australia, the UK taxpayer may end up with a higher overall tax burden.

In Australia, income tax is assessed on the taxable income of a taxpayer which is assessable income less allowable deductions while in the UK specific “allowances” may reduce the different types of income before that income is taxed. 

Australian resident taxpayers have a standard tax free threshold, regardless of the type of income or income level, while UK taxpayers have access to different allowances (tax free amounts) that can vary based on income level and the type of income they are earning.

Foreign sourced income is also treated quite differently in the UK, with a threshold applying before tax is imposed.

The following table highlights some fundamental differences between the two tax systems:

Australian SystemUK Tax System
Assessable IncomeProgressive rates of tax applied to taxable income.Progressive rates of tax applied to taxable income- but different rates apply to capital gains and different types of income have allowances deducted before taxes are assessed.
Tax Free componentStandard tax free threshold applies to all taxpayers on the first $18,200 of their income, regardless of the source of this income.A personal allowance is deducted from the taxpayer’s income before tax is assessed. This allowance is increased for married taxpayers and blind taxpayers, but is reduced for high income earners. Additional allowances are separately applied to different types of income, such as capital gains and investment income. 
Public HealthFlat rate of medicare levy applies to all taxpayers unless they are exempt. Variable rate of health insurance taxes applies, depending on income type and amount of income. This is paid by both the employer and the employee. 
Personal benefits provided by an employerPersonal benefits are taxed to the employer as fringe benefits. There are a range of concessions and exemptions that may be applied. Personal benefits are taxed to the employee, at the value of the benefit. There are some benefits that are exempt. 
Residency An individual who resides in Australia, or an Australian citizen who doesn’t setup a permanent home outside of AustraliaPhysically present in the UK for a specified period of time during the tax year
Individual Taxpayer’s Tax year1 July to 30 June6 April to 5 April
PAYG SystemPAYGW (Pay As You Go Withholding) means employers withhold some of an employee’s wage to be paid to the tax office. This helps cover the individual taxpayer’s annual tax assessment. Any excess PAYGW becomes a tax refund. PAYE (Pay As You Earn) is similar to Australia’s PAYGW system. When too much PAYE has been withheld then an individual can apply for a tax rebate (tax refund) for the excess. 
Who is Required to Lodge a Tax ReturnAll Australian residents and any non-residents with any Australian sourced income are required to lodge a tax return (some exclusions apply for residents who earn under the tax free threshold and have no PAYGW to claim, and for non-residents who only earn certain types of income, such as interest income covered by PAYGW under the DTA). Most employees’ taxes are covered by their company’s payroll system, meaning they don’t need to lodge a tax return. Tax returns may need to be lodged where:

– Income other than employment income is earned (above the allowance)
– Foreign income was earned
– You are a higher rate taxpayer (annual income over 100,000 pounds)
– You need to claim a tax rebate for excess PAYE

Residency

Australian residency is generally dependent on whether an individual actually resides in Australia, however Australian citizens may continue to be Australian tax residents while temporarily residing overseas. There are a number of tests that can be used to help determine residency.

UK residency is based on the number of days an individual is physically present in the UK during the tax year. For more complex situations that do not meet the automatic test, other factors may apply.

Tax Rates

Both Australia and the UK apply progressive rates of tax ranging from 0% to 45%.

However, while Australia has a standard initial tax free threshold for all taxpayers, the UK utilises a system of allowances that taxpayers deduct from their income before tax is assessed. The amount of allowance changes depending on a range of factors, and different allowances are applied for different types of income, such as employment income, investment income and capital gains.

Medicare/ NHS

Australians pay a flat rate of medicare (2%), unless they are exempt. High tax payers pay an additional medicare levy surcharge of up to 1.5%, unless they pay for private hospital health insurance. 

In the UK both the employer and the employee are required to pay a contribution towards national health insurance, at rates varying from 0% up to 13.8%.

Capital Gains

Both Australian and the UK impose a capital gains tax.

In Australia capital gains are simply added to an individual taxpayer’s assessable income and taxed at the marginal rate at which the income falls. Assets that have been owned for more than 1 year can be discounted by 50% before being included as assessable income. Other exemptions may also be applied to reduce or rollover capital gains.

The UK tax system gives taxpayers an annual allowance for capital gains. Any capital gains up to the allowance each year are tax free. Like Australia, there are also other exemptions that may be applied to reduce or rollover certain capital gains. 

In the UK, capital gains are taxed at a different rate to other income, and residential property is taxed at different rates to other assets. Higher/additional rate taxpayers pay 28% on residential property and 20% on other chargeable assets. Basic rate taxpayers will pay either 10% or 20% on capital gains, unless it is on residential property, in which case the rate is either 18% or 28% (depending on the size of the gain and the taxable income of the taxpayer.

Both countries have an exemption for the sale of an individuals’ main residence.

Inheritance tax

Australia does not have an inheritance tax.

Neither inheritances nor deceased estates attract any specific form of tax. Any property or investments that are inherited will attract taxes in the same way as any property or investments that were acquired personally and subsequently sold. (There are some provisions for inheriting a main residence that allow the main residence exemption to be carried over).

The UK has a standard inheritance tax rate of 40% above the tax free threshold (the standard tax free threshold is currently 325,000 pounds).

Where everything is left to a spouse, civil partner, charity or community amateur sports club, there is normally no inheritance tax to pay. When your home is given to your children (including adopted, step, and foster children), the threshold can increase to 500,000 pounds.

If an individual who is married (or in a civil partnership) passes away with an estate that is worth less than their threshold, then the unused portion of their threshold can be added to their partner’s threshold for when they die.

The inheritance tax may be reduced to 36% on certain assets if at least 10% of the net value of the estate is left to charity in the will. There are some other reliefs and exemptions to help reduce inheritance taxes on gifts donated prior to death, business relief, and agricultural relief.

Australian and UK Tax Systems

Each tax system has a range of complexities that are unique to the respective country.

In some ways the basic Australian tax return is more straightforward for the individual taxpayer.

On the other hand, the UK system’s use of deductible allowances for different types of income, provides for a range of tax planning avenues that are not available to Australians.

Since the tax systems between each country are so different, and residency changes can trigger complex tax issues, it is important to seek expert advice in both countries when making a move between Australia and the UK.

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Australian Moving to the UK: How Do I Treat Non-UK Sourced Income?

Daniel Wilkie   |   15 Sep 2020   |   6 min read

One of the top questions we are asked by Australians who are moving to the UK, is “how am I taxed on my non-UK sourced income in the UK?”

Since a UK non-resident would only be taxed on any UK sourced income, this question is predicated on the basis that the Australian is moving to the UK on a permanent basis. A permanent move means that they are ceasing to be an Australian tax resident and instead will be considered a UK tax resident.

In general, just like Australia, the UK taxes residents on their worldwide income. This means that UK tax residents have to pay tax on any income they earn, regardless of where the income is sourced. However, there is a clause for what they consider “non-domiciled” residents, whereby taxes are instead paid on a remittance basis. Since many Australians moving to the UK would fall into the definition of a “non-domiciled” resident, this is an important question. We cover what this means below. 

Australian Tax Rules on Non-Australian Sourced Income

For comparison, let’s consider the Australian rules on residency. Most people are aware that as an Australian tax resident you are required to pay Australian income tax on income you receive, regardless of where it is sourced. However there are certain exceptions for individuals who are temporary residents. Once you cease to be an Australian resident you are only required to pay Australian income tax on income that has an Australian source.

The UK operates on a similar basis, however their exemption for “temporary” residents is measured and treated differently than Australia’s exemption.

UK Residency Rules

In general, tax residents of the UK are liable for income tax in the UK, on their worldwide income. This means that it doesn’t matter where the income is sourced, it is included in the resident’s tax return.

In the UK you are automatically considered a tax resident when either one of of the following applies:

  • You spend over 183 days in the UK during the tax year.
  • Your only home was in the UK (owned, rented or lived in for at least 91 days, with at least 30 days spent there in the tax year).

Conversely you are automatically considered a non-resident if either of the following applies:

  • You spent under 16 days in the UK (or 46 if you haven’t been classed as a UK resident for the previous 3 tax years). 
  • You worked on average 35 hours a week abroad, and spent less than 91 days in the UK, of which less than 31 days you were working in the UK.

Keep in mind that in instances where an individual would be considered dual tax residents of Australia and the UK, then the tie breaker rules in the Double Tax Agreement require consideration to determine which country has taxing rights on the different sources of income.

However, while the general rule is that tax residents are assessed on their worldwide income, there is, as indicated previously, an exception. This exception is for tax residents whom the UK considers to be “non-domiciled residents”.

Non-domiciled UK Residents

Non-domiciled residents are individuals, including Australian citizens, who are only living in the UK for the short to medium term.

A UK resident who has a permanent home outside of the UK is considered to have a domicile in that other country. This doesn’t necessarily have to be a specific, physical house, but more so that the ties to their home country mean that this country is considered to be their ‘permanent’ home. When an individual has a permanent home outside of the UK they are considered to be a “non-domiciled” tax resident of the UK.

In the UK a ‘domicile’ is typically the country in which your father permanently resided when you were born. For instance, the country in which you are a citizen by descent. However, this may not be the case if you have legitimately and permanently moved to another country, with no intention of returning to your original home country. This would mean that your ‘domicile’ changes to the new country in which you begin to permanently reside.

“Remittance” Rules on Taxes on Non-UK Sourced Income for Non-domiciled Residents

For non-domiciled residents, non-UK sourced income is treated differently depending on the total amount of the non-Uk sourced income. 

Under 2,000 Pounds

If you are a “non-domiciled” UK resident then you ignore all foreign income and gains if that income is under 2,000 pounds for the tax year and you do not bring that income into the UK. You must have a bank account in your home country, and the funds from that income must stay back in the home country instead of being transferred into the UK. If this is the case then you don’t have to do anything about your foreign income when lodging a tax return.

However, if the income you earn from overseas sources exceeds 2,000 Pounds, or you bring any income into the UK, then you must report that income in a self-assessed tax return.

Over 2,000 Pounds

When the non-UK sourced income exceeds 2,000 pounds (or the income is brought into the UK), the income can’t just be ignored. The rules under which foreign income is taxed in the UK, for non-domiciled residents, is the ‘remittance basis’. This essentially means that you have a choice on how you treat the reported income.

Choice of how UK Taxes are Sorted Out

Choice 1: You can Simply Choose to Pay UK Taxes on the Income. 

If you choose this option then you will be assessed for income tax on your foreign income. If tax is paid on the Australian sourced income (or may be taxed elsewhere if it is income relating to another country), there are a number of rules that ensure you are not taxed twice on this income. In some cases this will result in a reduction to your UK taxes. 

Choice 2: You can Claim the ‘Remittance Basis’.

If you choose to be taxed on the remittance basis, then you only have to pay tax on any of the income that you actually bring into the UK.

However, in a trade off for this consideration, you will lose any tax-free allowances for income tax and capital gains. You will also be required to pay an annual charge if your residency in the UK exceeds a certain timeframe. This annual charge is 30,000 pounds if you have resided in the UK for at least 7 of the past 9 years, or 60,000 pounds if you have resided in the UK for at least 12 of the past 14 years.

The remittance basis may be a great option if you are living in the UK for less than 7 years, however, beyond this you would need to assess your situation to determine your optimal position.

Seek Appropriate Advice for your Situation

Since the remittance basis can get complicated it is best to talk to a UK tax adviser for specific advice. You need to consider your own position, your long term intentions, and where you hold your investments, including rental properties, that are generating taxable income.

See here for a brief comparison of the Australian and UK tax system.

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Non-Residents Can No Longer Claim The CGT Main Residence Exemption

Matthew Marcarian   |   28 Jan 2020   |   2 min read

On December 5th 2019 the contentious law denying non-residents the Capital Gains Tax (CGT) main residence exemption was passed.

This means that the update we previously provided on this legislation is still in force. If you are no longer an Australian resident, or are permanently moving overseas, and you still own a property that was your main residence in Australia, then you need to know what this means.

Existing Non-Residents with Main Residence Property In Australia

Did you purchase your Australian main residence before 9 May 2017? If you did then you only have until 30 June 2020 to sell your property if you want to claim the CGT main residence exemption.

After this date non-residents will not be able to claim the exemption. Basically this means you will be assessed on the full capital gain.

On the other hand, if you plan to return to Australia in the future then you may still be able to claim the exemption. If this is the case then you can wait to sell your former main residence once you return to Australia. Once you are a tax resident again then you will be assessed as an Australian tax resident. This means the law will again allow you to claim whatever main residence concession you would ordinarily be entitled to. Given the rise in Australian property prices over the last decade, this change could see an Expat caught unaware, being exposed to capital gains tax of several hundred thousand dollars (if not more), depending on the situation.

For a more detailed look at what the law entails please refer to our “Update on CGT Main Residence Exemption for expats” post.

Seek Tax Advice

The change in law has the potential to significantly impact non-residents. While you can get a general overview from the information provided in our blog, it is important that your specific situation be assessed by a tax specialist. This is important because your individual situation will be dependant on many variables that can’t be adequately covered in a general blog. A personalised assessment will ensure that you understand your options and can make the best decision for your situation.

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Update on CGT Main Residence Exemption for expats

Matthew Marcarian   |   12 Nov 2019   |   8 min read

Update: Since publication of this post the Bill has passed and is now law. The law passed is the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019. ) It was passed with no further amendments. This means non-residents will not be able to claim the CGT main residence exemption from 1 July 2020. The scenarios below currently apply under the new law.

For the past few years Australian expats have been waiting to see if the axe will drop on their ability to claim the capital gains tax (CGT) main residence exemption.

The current main residence exemption allows individuals to claim an exemption on paying CGT when they sell the home that they have been living in. Under the normal CGT rules, an individual may continue to claim their former home as their main residence for up to 6 years of absence. This applies unless and until the homeowner purchases and moves into another house that becomes their main residence in Australia.

The new measure has been in the works since the 2017-2018 budget, with non-residents potentially becoming ineligible to claim the main residence exemption since May 9th 2017.

Main residence exemption removed for non-residents in new Bill

The shortcomings of this bill have been previously highlighted and continue to be of concern. After the Bill lapsed in April 2019, we have waited to see whether it would reappear. The hope was that a new Bill would be rewritten in a way that was fairer to taxpayers.

Unfortunately it was reintroduced on the 23rd of October 2019 in largely the same form. Like the original bill, it applies retroactively and allows no consideration for long term Australian residents who may end up caught out by the changes.

While many concerns with the original bill remain unaddressed, there are a few changes.

These changes have extended the transitional measures and added in some compassionate exceptions. The transitional measures ensures that existing foreign resident home owners have some time to sell their main residence under the existing rules. Previously they had until 30th June 2019. Under the new Bill they now have until 30th June 2020 to sell under the existing CGT rules. The additional exceptions that the revised Bill introduced means that there are now limited situations in which the main residence exemption may still apply for foreign residents. 

So, if you’re an expatriate with a former main residence in Australia you should consider now what strategy you wish to take. It’s time to consider if you need to sell while you can access the existing CGT exemption.

Summarised below is an outline of what these new laws could mean for you and what you can do about it.

What Happens If I Hold Onto My Australian Home When I Move Overseas?

Once you’re a foreign resident then any Australian property home you own is treated as a CGT asset. You are no longer able to apply the main residence exception that is available to Australian taxpayers.

Basically this means you will be liable for full CGT on any profit from the sale of the property. This applies even if you lived in the home for 20 years before becoming a non-resident. Since the main residence exemption can potentially save you tens of thousands of dollars in CGT this is a big change for temporary residents and Australians looking to move overseas.

As mentioned, there are limited situations where non-residents may still access the main residence exemption. This includes the transitional provision that allows you to sell your main residence under the existing CGT exemption if you sell before June 30th 2020. It also includes concessions that equate to compassionate grounds on the event of death, divorce, or terminal illness.

As a Non Resident Can I Use the CGT Main Residence Exemption When I Sell My former Australian home?

Normally when you satisfy the criteria for claiming the main residence exemption for CGT then you can apply this exemption (in part or in full). However, if this bill passes into law, foreign residents will no longer be able to access the main residence exemption. Well, in most situations.

Let’s take a look at when the exemption may still apply:

1- Did you purchase your main residence before or after May 9th 2017?

If you purchased your property after May 9th 2017 then you’re out of luck. You will not be able to claim an exemption for your principal residence if you sell it while you are a non-resident. That’s because you purchased your main residence after these new measures were proposed.

However, if you purchased before May 9th 2017 (and post 20 September 1985) then you are covered by the transitional provisions. This means you have until 30th June 2020 to sell under the current CGT rules and access the main residence exemption. Wait any longer and the exemption is no longer available if you sell your main residence while you’re a non-resident.

The big drawback of selling after 30th June 2020 is that the main resident exemption will not even apply for the period of time that you lived in the property. That means you won’t even get access to a partial exemption.

2- What If a serious life event happens to you within 6 years of becoming a non-resident?

With the new bill being introduced, there are now some situations where a non-resident may continue to access the main residence exemption for CGT. These concessions only apply if you’ve been a non-resident for less than 6 years. As a non-resident you may still be eligible for the main residence exemption if one of the following life events happens:

  • You, your spouse or your child (under 18) get diagnosed with a terminal medical condition.
  • You, your spouse or your child (under 18) pass away.
  • You get divorced or separated.

Basically, if something unexpected happens within several years of becoming a non-resident for Australian tax purposes, then you may still be able to access the same concessions that Australian residents can. While no one can factor these contingencies into a tax strategy it’s good to know that this exists if the worst happens.

3- Will You Become An Australian Resident Again?

If you come back to Australia and become an Australian tax resident, then the main residence exemption is available to you again under the normal rules. This means you will have the opportunity to apply the CGT main residence exemption, either in part (if the property hasn’t exclusively been your main residence) or in full. Keep in mind that this only applies if you sell while you’re an Australian tax resident.  

This means that if you’re planning to return to Australia then it might be worth holding onto the property so that you can reduce your CGT liability. That’s great news if there’s a chance of returning to Australia to live in your home (or elsewhere) again. Of course, this should not be the only factor to consider when deciding whether to hold onto or sell your former home under the main residence exemption.

What If I Die While I’m a Non-Resident?

You might decide to hold onto your property because you’re planning to come back to Australia. But what if that doesn’t happen?

If you die within 6 years of becoming a non-resident then your estate may still be able to access your main residence exemption. However, when you pass away more than 6 years after becoming a foreign resident then your estate will be caught by the changes and the main residence exemption will not be applicable. That means your estate will be stuck with the full CGT liability.

What Do I Do With My Australian Property Now?

The answer to this is very personal. It depends on your ongoing plans, whether you’re concerned about the tax impact of these legislative changes, what the market is like, and what the best decision is for both your immediate and long term needs.

For instance, selling a property now for a $50,000 profit with no CGT to worry about would still net you less than selling it down the road for a $200,000 profit with a $45,000 CGT liability.

Ongoing income or costs also weigh into your decision, as do any plans to return to Australia down the track. Unfortunately, it also depends on unknown factors, including the unpredictable nature of tax law changes that may happen in the future. As always, it’s important to get tailored advice for your unique situation when considering what to do. Individual situations can involve complexities that extend beyond generic information.

As always, it’s important to get tailored advice for your unique situation when considering what to do. Individual situations can involve complexities that extend beyond generic information.


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Residency – Harding’s Appeal Victory

Matthew Marcarian   |   5 Mar 2019   |   4 min read

The biggest personal tax residency case in 40 years just got bigger. The taxpayer Mr Glen Harding having lost his case in front of a single judge in the Federal Court has won an emphatic victory in the Full Federal Court in a decision handed down on 22 February 2019.

In Harding v Commissioner of Taxation [2018] FCA 837 in a unanimous decision the Court found that Glen Harding was not a resident of Australia because;

  • he did have a Permanent Place of Abode in Bahrain; and
  • he did not reside in Australia;

As we reported last year in our blog (an Appeal to Common Sense) the taxpayer, Glen Harding, appealed from an initial Federal Court decision against him.

The Facts of Harding’s case were, in essence, that Mr Harding, in his evidence, had abandoned his residence in Australia, with the intention never to return. However, in establishing life in Bahrain, he lived in an apartment building called “Classic Towers”. Initially he took a two bedroom apartment because he believed that his wife and children would visit him from time to time.  He remained in that apartment from 10 June 2009 until 9 June 2011.  When his marriage broke down around 2011 and he realised that his wife would not be moving to Bahrain, he moved in to a one bedroom apartment where he remained until 9 June 2012.

The case was all about whether Mr Harding was a resident in Australia for the income tax year ended 30 June 2011 and the single judge in the first instance found that because of the style of accommodation that Mr Harding chose in Bahrain, being a fully furnished apartment, he had not established a permanent place of abode in Bahrain, despite several other factors which demonstrated that he was living in Bahrain.

Several principles of residency law were analysed in detail by the Court. However, the main focus was on the question of what was meant by the phrase ‘Permanent Place of Abode’. A clear understanding of that phrase is critical because of the definition of tax residency in Section 6(1) of the Income Tax Assessment Act 1936.

That definition says that a person is a resident of Australia if they reside in Australia and includes a person who is Australian domiciled unless the Commissioner would be satisfied that the person has established a Permanent Place of Abode outside Australia.

Most Australian expats who move overseas will remain domiciled in Australia and hence, unless they can show that they have established a permanent place of abode overseas, will remain fully taxable in Australia. It has never been the case that an Australian who is itinerant overseas avoids taxation in Australia.

So the question ‘what is a Permanent Place of Abode?” is critical. In their joint decision,  Davies and Steward JJ with Logan J in agreement, indicated that the word ‘place’ should be read as including a reference to a country or state and they expanded by saying;

In the context of the legislative history, in our view, the phrase “place of abode” is not a reference, as one might have thought, only to a person’s specific house or flat or other dwelling.  If that had been Parliament’s intention it would have used the phrase “permanent abode” rather than “permanent place of abode”.  The word “place” in the context of the phrase “outside Australia” in subpara (i) invites a consideration of the town or country in which a person is physically residing “permanently”.

In taking that approach, the Court referred to the analysis of Sheppard J in Applegate’s case where he indicated that as follows:

“place of abode”’ may mean the house in which a person lives or the country, city or town in which he is for the time being to be found.  I am of the view that the latter is the meaning of the expression used in s. 6(1.) of the Act.  Thus a person might be correctly said to have a permanent place of abode in, say, Vila, notwithstanding that during a given period he lived in a number of different establishments occupying each for only a relatively short period.  His case is no different from one where a person, such as the appellant here, lives, for a substantial period, in the same house.

So here we see, for the first time, a definite focus by the Federal Court on the permanence in a particular jurisdiction as being of paramount importance rather than the particular ‘type’ of accommodation that a tax payer chooses to live in within that jurisdiction.

If this decision stands, it would be a victory for common sense, because if a person is living permanently in a particularly city it should not be critical what type of accommodation the person chooses to live in.

Author: Matthew Marcarian

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The Road to Oz

Matthew Marcarian   |   8 Feb 2019   |   1 min read

Our Principal, Mathew Marcarian, together with our Managing Director in Singapore, Boon Tan, were recently featured in the STEP Journal* (a publication produced by STEP for its members) discussing the local taxation laws that apply to Trust beneficiaries relocating to Australia.

STEP is an organisation that focuses on improving the public understanding of the issues families face in relation to inheritance and succession planning.

Read the full article.

* Matthew Marcarian and Boon Tan, ‘The road to Oz’, STEP Journal (Vol27 Iss1), pp.41-43

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Permanent Place of Abode – Harding Appeals to common sense

Matthew Marcarian   |   24 Jul 2018   |   8 min read

The taxpayer, Mr Harding has appealed to the Full Federal Court of Australia from a decision handed down on 8 June 2018 by Justice Derrington, in Harding v Commissioner of Taxation [2018] FCA 837. In that case His Honour, found that Mr Harding was resident of Australia for tax purposes under the Domicile Test, because he failed to establish a ‘permanent place of abode’ in Bahrain during the relevant year, even though he left Australia permanently in 2009 and lived in Bahrain until 2015, before moving to Oman.

We believe the decision creates significant uncertainty and we are glad to see it appealed.

What happened in the case?

In 2009 Mr Harding departed Australia to take up full time employment in Saudi Arabia. He chose to live in Bahrain (as is commonly done) and obtained a visa to do so. Mr Harding and his wife Mrs Harding had previously lived overseas in the Middle East.

On the facts outline in the case, Mr Harding seemed to have lived in the one apartment in Bahrain for almost 2 years from June 2009 to 9 June 2011, including almost all of the year ended 30 June 2011 – which was the year in dispute in the case.

Matters were apparently made complicated for Mr Harding because on this occasion his wife (and his children) did not accompany him to Bahrain initially and after going so far as to enrol his youngest son into the British School in Bahrain, Mr Harding’s marriage did not survive.

There is a some suggestion that Mr Harding only secured a two bedroom apartment when he initially moved to Bahrain, perhaps because he knew that when his family moved (as he intended that they would) more suitable accomodation would be required. His Honour also appeared to be completely convinced that Mr Harding had departed Australia permanently – even going so far as to list the things which he considered were evidence of that fact.

What was the problem?

The problem for Mr Harding was that even though His Honour was convinced that he had left Australia permanently (and was not resident according to ordinary concepts), His Honour was not convinced that Mr Harding had established a ‘permanent place of abode’ in Bahrain. Consequently since Mr Harding was an Australian domicile – he was still a tax resident of Australia.

This is because of the operation of the ‘Domicile Test’ in Australia’s residency laws. The Domicile Test treats all persons who have their domicile in Australia as being tax resident, unless they can show that they have a ‘permanent place of abode’ outside Australia. We believe that the concept of Permanent Place of Abode is a settled concept under Australia’s tax law and has been so for over 40 years since FC of T v Applegate 79 ATC  4307 (Applegate). The concept of ‘place of abode’ has its ordinary meaning and the use of the word ‘permanent’ in connection with an abode simply implies a place which is not temporary.

Given that the Court agreed that Mr Harding;

– made his life in Bahrain;
– had a visa to reside in Bahrain and in fact resided in Bahrain;
– owned a car in Bahrain;
– had exclusive use of an apartment in Bahrain which he leased (which the Court agreed was not short-term accomodation; see para 75);
– travelled every day from Bahrain to his full time place of work in Saudi Arabia;

we find it difficult to see why Mr Harding was found not to have a permanent place of abode in Bahrain.

The factors that seemed to be held against Mr Harding were that he did not own many possessions (given the apartment was fully furnished) and it was reasonably easy for him to move between apartments in the same complex which he did in July 2011 (after spending almost 2 years in the fist apartment) when it became apparent that Mrs Harding was not going to move to Bahrain.

It also seemed to weigh strongly on His Honour’s considerations that Mrs Harding did not seem to want to live in the original apartment Mr Harding had chosen (even though it was big enough to house the family) and that Mr and Mrs Harding together looked at alternative accomodation when she visited him in Bahrain.

A relevant fact also apparently was that Mr Harding’s postal mail was not sent to Bahrain, but continued to be sent to his former home in Australia. In relation to this His Honour remarked in his closing remarks (para 149) that “It is indicative of an intention to reside at premises permanently or, at least, not temporarily if that place is used as the address for correspondence. Were a person to use their apartment address as that to which important correspondence is to be addressed it can be thought that they are intending to remain there for an extended period of time.” We cannot understand why His Honour considered that the receipt of postal mail in Australia was of material significance, when by contrast His Honour did not see it as particularly significant that Mr Harding had continuing financial arrangements with Australia (paragraph 85).

Factors suggesting Mr Harding did have a Permanent Place of Abode was in Bahrain

The strangeness of the decision here is compounded by the fact that although Mr Harding’s contract of employment was only for 12 months, when Counsel for the Commissioner argued that Mr Harding’s presence in Bahrain was ‘somewhat tenuous’ because of this, His Honour responded by remarking (correctly in our view) on the permanent nature of Mr Harding’s departure from Australia, his intention never to return to Australia to live, and his working history which demonstrated that was ’eminently employable’, effectively dismissing the Commissioner’s argument that the short term nature of the employment contract was a material weakness in the case.

Indeed at para 147 His Honour remarks that “An associated argument advanced by the Commissioner was that as Mr Harding’s employment in the Middle East might be terminated at short notice, his presence there was necessarily of a transitory nature. That submission, however, fails to take into account that Mr Harding was intent on remaining in the Middle East, although not necessarily in Bahrain, and his presence there was not, necessarily, tied to his continued employment with TQ Education.”

The decision in this case is all the more puzzling given that His Honour accepted that Mr Harding took leases of the apartments as extended term propositions also accepting that“that Mr Harding made his life in Bahrain. It was the place from which he commuted daily to his work in Saudi Arabia. He formed friendships there and it was where he attended restaurants and bars after work. He also went to the beaches there and engaged in go-carting at the local grand prix track. In general terms, he pursued the expatriate lifestyle with which he had been familiar for many years.”

Implications for Australian Expats

We hope that the decision in Harding is overturned on appeal. The answer to question of whether a person has established a ‘permanent place of abode’ overseas should be arrived at simply and in a common sense fashion, by considering whether the taxpayer has only a temporary place of abode in the country.

For residency purposes if a place is not temporary then it must be permanent otherwise a person cannot have any certainty.  Surely we cannot have a third class of residency, being a state of being somewhere in the middle of temporary and permanent.

If the Court accepts that Mr Harding ‘made his life in Bahrain’ it should accept that he had a permanent place of abode there, regardless of where his postal mail is sent to.

It is pertinent to conclude by reflecting on the often quoted words of Fisher J in Applegate who said;

“To my mind the proper construction to place upon the phrase ‘permanent place of abode’ is that it is the taxpayer’s fixed and habitual place of abode. It is his home, but not his permanent home..Material factors for consideration will be the continuity or otherwise of the taxpayer’s presence, the duration of his presence and the durability of his association with the particular place.”

We look forward to a common sense judgement from the Full Federal Court in Mr Harding’s case.

UPDATE: On 22 February 2019, the Full High Court handed down a decision on the Harding v Commissioner of Taxation [2018] FCA 837  case. Please see Residency – Harding’s Appeal Victory for the decision.

Author: Matthew Marcarian

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Australian Expats still awaiting decision on CGT change

Matthew Marcarian   |      |   3 min read

In our blog of 25 February this year we reported on what we consider to be highly inequitable capital gains tax changes that the Government has introduced into parliament. The changes are contained in the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018.  

The Bill, as drafted, denies foreign residents (including Australian expats) access to the capital gains tax (CGT) main residence concession if they sell their former main residence while they are living overseas. In short, no CGT relief would be available to Australian expats who sell their property while they live overseas even for the period of time they lived in their home before departing Australia. 

The Bill has still not been passed and seems for now to be held up in the Senate, which we hope augurs well for Australian expats.

Main Residence Exemption Removal still possible

Unfortunately despite a number of sensible submissions to the Senate (including our own CST Tax Advisors Submission), the Senate Committee has recommended that the Government proceeds with the proposals as announced.

Essentially the Committee indicated that it ‘considers that the measures contained in these bills will form an essential part of the government’s comprehensive and targeted plan to improve outcomes for Australians across the housing spectrum’.

The Committee did not explain why it thought that removing the CGT main residence exemption is a targeted plan to improving housing outcomes. We believe the natural reaction for most Australian expats to a potential loss of the CGT exemption would be not to sell their property until they one day return to Australia. Essentially a lock-in effect will be created rather than improving the quantity of housing stock available for sale. The Senate Committee Report can be access by following this link.

Our Recommendations

We sincerely hope that despite the Senate’s recommendation to proceed that the Government will rethink their proposal to ensure that Australian expatriates are treated equitably.

We strongly urge the Government to fix the Bill by ensuring that amendments are made so that:

  • all Australian expatriates who were already non-resident of Australia when the changes were announced on 9 May 2017, should continue to be able to access the absence concession regardless of where they reside; and
  • all persons should be able to access the partial CGT exemption for at least that part of the ownership period during which they lived in the property and were resident of Australia.

If the Government does not fix the equity issues in the Bill, at the very least we hope that the Government can extend the transitional period end date from 30 June 2019 (way too close) out to 30 June 2020 or 2021 to give people sufficient time to consider their options. Expecting Australians living overseas to be aware of ‘legislation by press release’ is not satisfactory.

Given that the changes are so fundamental in our view the Government owes a minimum duty to write to all foreign residents taxpayers who are lodging tax returns in relation to Australian rental income, in the event that these fundamental changes apply to them.

In this regard we note the Committee’s recommendation that it “recommends that the Australian Government ensures that Australians living and working overseas are aware of the changes to the CGT main residence exemption for foreign residents, and the transitional arrangements, so they are able to plan accordingly.“(Recommendation 1, Paragraph 2.34 of the Senate Committee Report on Page 17).

Want to make a Submission?

If you wish to make a submission to the Government it would not be too late to write to the Federal Treasurer. Alternatively you can contact CST for more information.

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Removal of CGT Main residence exemption for Australian expatriates – disastrous tax changes now imminent

Matthew Marcarian   |   25 Feb 2018   |   6 min read

As we reported in our blog last year – the Australian Government announced that it would remove the CGT main residence exemption for foreign residents.

It was said that this reform was being introduced as part of measures to address housing affordability in Australia. Due to other legislative priorities a bill to enact the change was not introduced and we had hoped that the Government would have taken the time to ensure grandfathering of all existing properties.

However the bill was re-introduced earlier this month as Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018, apparently unchanged after the exposure draft consultation period last year.

The Bill has now been referred to a Senate Standing Committee which represents the last opportunity to lobby for changes to be made to the Bill. Submissions close 5 March 2018.

What is the problem?

In trying to tighten our CGT laws, the Bill denies Australians living abroad access to the “CGT absence concession”. This existing concession gives many Australian expats the opportunity to retain the CGT exemption on their former home for up to 6 years, even if they rented their home out after they had moved overseas. This exemption will be removed.

Disastrously though, the changes seem to be more fundamental. The Bill, as drafted, denies even a partial CGT exemption by providing no CGT relief even for the period of time when the person had lived in their home before departing Australia. The Explanatory Memorandum to the Bill makes this alarming problem crystal clear (see Example 1.2 which is extracted below). We do not believe this was the Government’s intention.

The only way out under the draft Bill is that taxpayers seem to be allowed to move back into the property after returning to Australia (as a resident) and to then sell the home on a CGT free basis (assuming the absence exemption otherwise applies). This creates a tax-driven ‘lock-in’ effects which is likely to create significant issues for taxpayers and rather than assist housing supply could in fact create further supply constraints.

Does this apply to you?

If you are an Australian expatriate then the Bill provides that unless you sell your former home prior to 30 June 2019, you will be subject to CGT on the sale of the property if you sell it after that date while you are still a non-resident of Australia for tax purposes. Unfortunately, as currently drafted, the Bill would not even provide you with a partial CGT exemption to recognise the period of time that you lived in your home prior to your departure. To preserve your CGT exemption you would be left with the choice of either selling prior to 30 June 2019 or else keeping the property until you one day return to Australia.

The tightness of the 30 June 2019 deadline has seen concerns expressed in the Australian Financial Review recently about a fire sale in expat owned property. While predictions of a fire sale may not be true, it is nonetheless a highly unfair position to put home owners in and the Bill represents poor policy implementation.

Artificially ending the absence concession by using a ‘drop dead date’ on 30 June 2019 is highly equitable. It will mean that failure to sell by 30 June 2019 could mean that an Australian living overseas could be exposed to hundreds of thousands of dollars of tax, given the increases in Australian property over the last 3 years.

What should be done to fix this?

We strongly urge the Government to fix the Bill by ensuring that amendments are made so that:

  • all Australian expatriates who were already non-resident of Australia when the changes were announced on 9 May 2017, should continue to be able to access the absence concession regardless of where they reside; and
  • all persons should be able to access the partial CGT exemption for at least that part of the ownership period during which they lived in the property and were resident of Australia.

We believe that the flaws in this Bill are an oversight that will be rectified once these problems are better understood. In our experience most Australians living abroad who keep their home in Australia do pay taxes and continue to contribute to the Australian economy.

If the Government wishes to persist with the change of law to only permit CGT exemptions for those who are tax resident in Australia –  then they should ensure that they are fair to the thousands of Australians who have moved overseas (most of whom will return) but who have retained their former homes in Australia.

Final submissions are now being requested and we strongly recommend that interested parties make a submission on this inequitable change.

You can contact your local member of parliament and forward this blog.

If you are concerned about the unfairness of this change submissions can be made to.

Committee Secretariat contact:

Senate Standing Committees on Economics
PO Box 6100
Parliament House
Canberra ACT 2600

Phone: +61 2 6277 3540
Fax: +61 2 6277 5719
economics.sen@aph.gov.au

Extract from Explanatory Memorandum to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018

Example 1.2 — Main residence exemption denied

Vicki acquired a dwelling in Australia on 10 September 2010, moving into it and establishing it as her main residence as soon as it was first practicable to do so. On 1 July 2018 Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On 15 October 2019 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019. The time of CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 October 2019. As Vicki was a foreign resident at that time she is not entitled to the main residence exemption in respect of her ownership interest in the dwelling. Note:

This outcome is not affected by:

• Vicki previously using the dwelling as her main residence; and

• the absence rule in section 118-145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from 1 July 2018 to 15 October 2019 (assuming all of the requirements were satisfied).

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