Journal of Australian Taxation
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THE
NEW ZEALAND DEFINITION OF "RESIDENCE" FOR INDIVIDUALS: LESSONS FOR
AUSTRALIA IN A "GLOBAL" ENVIRONMENT[*]
By
Clinton Alley,[**] Duncan
Bentley[***]
and Simon James[****]
The definition of "residence"
for individuals differs between Australia and New Zealand. This article
examines the global
context in which individuals now operate and puts forward a
"number of days" test as the most appropriate to protect the
revenue
and attract foreign investment. This may be reinforced by using the
"centre of vital interests" definition as a
tie-breaker. Using this
discussion, the article examines the advantages and disadvantages of each of
the New Zealand and Australian
definitions and puts forward proposals for the
revision of the Australian definition.
Residence is a critical concept in the tax
legislation of most countries. In its more general meaning it identifies those
persons
belonging to the country. It is defined more strictly for tax purposes.
In most jurisdictions, persons defined as tax residents are
taxed on their
worldwide income.[1] Non-residents are usually taxed on their
domestic income arising within the taxing state. Therefore the definition of
residence in
domestic legislation is an essential determinant of liability to
taxation. It is not the sole determinant. Definitions of residence
aim to
delineate the taxing rights of a country.[2] Bilateral double tax treaties allocate taxing
rights between countries in an attempt to prevent double taxation or double
non-taxation.
For most jurisdictions the definition of
residence for individuals has been in place and working for a considerable
time. A long history
of case law and exercise of administrative discretion has
helped to clarify the basic concepts, certainly in Australia and New Zealand.[3]
Disagreement is usually over interpretation of the rules in their application
to particular facts and circumstances. The allocation
of taxing rights based on
double tax treaty definitions of residence of taxpayers is not particularly
controversial. However, residence
of individuals is becoming more topical in
the context of globalisation and the development of
electronic commerce. Australia has been in the process of rewriting its tax
laws for some time,[4] and this may include rewriting the definition
of residence of individuals. New Zealand rewrote its definition of residence of
individuals
in 1988.[5] This article explores these three threads.
The aims of the article are:
• to demonstrate the importance of the
definition of residence for individuals with increased globalisation
and to propose a simpler approach to defining residence than that used in New
Zealand or Australia (Parts 2 and 3);
• to identify the
characteristics of the New Zealand and Australian statutory definitions of
residence for individual taxpayers and to
determine the applicability of the
above proposal (Parts 4 and 5); and
• to make
recommendations as to the content of a revised Australian definition (Part 6).
Why is residence for an individual of such
great importance in Australia and New Zealand? Australia taxes residents on
their worldwide
income irrespective of the source of that income and taxes
non-residents only on that income which has its source in Australia.[6]
A similar basic rule is used in New Zealand. Residents of New Zealand are
liable for New Zealand income tax on income derived from
any part of the world.
This applies whether or not this income is remitted back to New Zealand.
Non-residents are liable for New
Zealand income tax only on income derived from
New Zealand.[7]
In defining whether a taxpayer is resident,
the Australian Income Tax Assessment Act 1936 (Cth)
("ITAA36") does so using a complex definition of residence. A
non-resident is defined as "a person who is not a resident
of
Australia".[8] The definition therefore includes those
taxpayers who do not fall within the resident classification and relies on the
latter complex
definition for its meaning. The New Zealand legislation defines
both a resident and a non-resident, using a simpler definition (see
Part 4).
In their definitions, both New Zealand and Australia
rely in part on an arbitrary number of days of presence in (and for New
Zealand,
absence from) the relevant country to determine residence status.
Crucial to the definitions, but far less arbitrary and, as a result,
more
difficult to define, is the concept of "permanent place of abode".[9]
The complexity of the Australian definition is further increased by the use of
the common law definition of residence and the concept
of domicile.
Definitions of residence vary between jurisdictions
and Australia and New Zealand are not unusual in their approaches. Using Vann's
analysis, there are three general types of definition of residence for
individuals.[10]
The first depends on the facts and circumstances of the individual to determine
their connection with the relevant jurisdiction.[11]
The second uses general legal concepts such as domicile and citizenship.[12]
The third uses an arbitrary number of days that a person spends in the
jurisdiction. The days can be assessed over a calendar year,
a tax year, as a
cumulative period, or over a combination of years.
The Organisation
for Economic Co-operation and Development's ("OECD") Model
Convention on Income and on Capital ("OECD Model")[13] acknowledges the different types of
definition. The OECD Model allocates taxing rights to individuals on the basis
of their primary
place of residence in Art 4, para 2.
There is an ordering of criteria. A permanent home is the first indicator of
residence and it is the permanence factor that is
emphasised.[14]
If there is a permanent home in two states, then the test uses closer personal
and economic relations or the centre of vital interests.
Where there is no
permanent place of abode or if the centre of vital interests is unclear, the
place of habitual abode is used. If
this test is unclear then nationality is
used as the tie-breaker. Failing that the states must settle the issue by
mutual agreement.
Article 4, which is widely adopted in bilateral double tax
treaties, operates as a tie-breaker clause to prevent double taxation
where
both countries define the individual as tax resident.
An Art 4 tie-breaker clause is needed in
double tax treaties. However, an individual is less likely to be in a position
to become
a dual resident under detailed definitions that look to the facts of
each case. Dual residence is more likely where countries use
an arbitrary
number of days test to determine residence. Some countries, such as Malaysia,[15] simply use the arbitrary number of days
test. Others, such as New Zealand and Australia, operate an arbitrary number of
days test
in conjunction with other more detailed tests. If a country adopts an
arbitrary number of days test, it should ensure that either
it has
comprehensive bilateral tax treaties with its major trading partners, or, like
Malaysia, it treats tax residents generously.[16] Otherwise, the
double taxation for executives and other expatriate personnel could influence
the decision to invest in that state,
other factors being equal.[17]
Both Australia and New Zealand have substantial tax treaty networks, which
makes the arbitrary number of days rule justifiable in
an economic environment
where both countries have undergone significant economic liberalisation
to attract foreign investment.
The definition of residence
is becoming increasingly important to a wide range of individual taxpayers,
particularly those who either
choose to spend time working overseas, or are
required to do so as part of their employment. Most taxpayers realise that it is difficult to avoid taxation by claiming
not to be a resident of any jurisdiction. However, taxpayers travelling overseas may wish to be considered non-residents
in their home countries as the taxation in the host country may be more favourable, or their home country may not grant full relief
or exemption from taxes paid in the host country.[18]
Others may wish to argue that they are still residents in their home country
although they live overseas, because this may allow
them to take advantage of
resident rebates, exemptions, lower rates of taxation and other incentives.
Bilateral tax treaties protect the host
country's revenue base by allowing source taxation of income from employment in
that state.[19]
The income is taxable in the state where the employment is actually exercised.
However, this is generally subject to the individual
being present in the host
country for over 183 days in a 12-month period where the remuneration is paid
to the individual by a non-resident
employer, where the employer does not bear
the cost of the remuneration through a permanent establishment in the host
country.
For the expatriate employee or the global
wanderer, the more complex a country's definition of individual tax residence,
the more
difficult it is to determine their residence status. Business secondments in particular are becoming more common and
increasingly short-term. Difficulties in determining tax residence increase the
cost of
expatriate employment and foreign direct investment. The growing trend
towards globalisation adds another dimension to
determining residence. Individuals working abroad are likely to have at least
one other possible state
of residence and sometimes several. From an investor's
perspective, it is important that the residence rules are simple and easy
to
apply, otherwise compliance costs increase. For this reason, foreign investors
are likely to prefer residence rules based on an
arbitrary number of days.[20]
However, there is another side to the
problem. Electronic commerce allows individuals to play the residence rules to
their advantage.
Australia and New Zealand's residence and source rules are
primarily based on physical connection. As such, they do not attempt to
protect
the revenue base by taxing income that has a substantial economic connection
with those jurisdictions, but which is neither
derived by residents nor sourced
there. The question of how to tax individuals operating across borders in a
world of electronic
commerce promises to be just as difficult to answer as the
question of how to tax companies. For both individuals and companies,
a
permanent establishment or residence is no longer necessary to operate
effectively within a jurisdiction.[21]
Electronic commerce makes it much easier for
providers of services and intangible products to spend short periods in a
country where
their income is essentially derived but not sourced. In most
jurisdictions they will not exceed 183 days of presence in the host
country for
their income to be taxed in that country under the dependent personal services
articles of the double tax treaties.[22] Nor will they
establish the fixed base required for source taxation of independent personal
services.[23]
These tests were formulated when consultants used to have to spend time, and
establish a fixed base, in the same country as their
clients in order to
provide their services or products. Now an increasing range of services and
products can be provided electronically,
with a minimal requirement for
physical presence. The same consultants can base themselves in a jurisdiction
of choice and establish
the necessary connections to be deemed resident there.
In establishing residence in a jurisdiction
of choice it is necessary to become non-resident in the individual's current
home jurisdiction.
The consultants would need to ensure that they fell outside
the relevant residence definitions and established a necessary connection
with
their country of choice. This would generally require the disposal of their
permanent place of abode in the original home country
and establishing a
permanent place of abode in the new home country. The consultants would also
need to limit the time spent in the
original home country, at least in the
period immediately after leaving. The advanced international communications
infrastructure
means that moving to another country is not such a dislocation
as it was a generation ago. The consultants could perform the same
or similar
work as before but be taxed (if tax applies) only in their new place of
residence provided they did not establish connections
elsewhere subject to
source-based taxation.
In both Australia and New Zealand, the rules
encourage this new breed of consultant who is prepared to move about the world
to not
establish residence or a fixed base in Australia or New Zealand, nor
remain long enough for dependent personal services income to
be taxed there.
Why pay relatively high rates of individual tax in Australia or New Zealand
when a person can live comfortably in
a tax haven or low tax jurisdiction and
pay low or no taxes? The domestic residence rules are designed to assist this
approach provided
individuals are prepared to sever their connections with
their previous country of residence, spend less than 183 days per annum
there
and establish a permanent place of abode (or domicile) elsewhere. The domestic
source rules governing income from services
generally focus on the place of
performance of the services[24]
or, in certain circumstances, other factors such as the place of contract or
the place of payment.[25] If a consultant chooses to live in a
jurisdiction with a double tax agreement with Australia or New Zealand, the
standard dependent
and independent personal services articles follow the OECD
Model. They largely restrict taxation in Australia or New Zealand to where
work
is performed there through a fixed base or where the consultant or employee is
present for more than 183 days.
Should the rules change? They are designed to
exclude non-residents from tax on income sourced outside Australia and New
Zealand.
To assist with answering this question assume a consultant leaves
Australia and establishes permanent residence in a low tax jurisdiction
X,
which has no double tax agreement with Australia. The consultant continues to
provide services in Australia but ensures that the
services are largely
performed in X and only provides the product of the services to clients in
Australia. The contract is concluded
in X and the payments are made to the
consultant's bank in X. The consultant would not be taxed in Australia provided
he or she is
not resident and the income is not sourced in Australia. There is
an argument that the consultant in this example has an effective
personal and
economic connection with Australia, but under the current rules Australia
cannot tax such transactions.[26]
It is interesting that although the
discussion on electronic commerce and taxation highlights the ease with which
services can be
provided across jurisdictions, there is little focus on
individual residence or extending the scope of the definition of source for
dependent personal services.[27] This is because it
is far easier to dislocate the presence of an electronic business than to move
as an individual. The focus on
individuals is more on tracing their physical
location to ensure that revenue authorities can verify individual taxpayers'
identities,
ascertain their liability to taxation, and collect the relevant
amount of taxation.[28] Electronic commerce enables existing
residents to avoid tax more easily and it is this that has caught tax
administrators' attention.
Residence is an issue in discussions of the
rules governing taxing rights in electronic commerce. However, it is in the
context of
jurisdiction to tax business profits at source.[29]
The emphasis by the OECD and other discussion groups has been to determine an
appropriate definition of permanent establishment to
take account of websites
and servers.[30]
Physical residence of individuals rather than their businesses is not
discussed, and it is not a significant issue in terms of volume
of cases.
Nonetheless, although the existing residence rules can cope, which is an
indicator in international discussion that they
should be left well alone,[31] they may warrant minor modification. It may
be time to provide a clearer statutory definition of residence in an attempt to
link
tax more closely to personal and economic connection.
The most effective combination is to provide
an arbitrary day test together with a focus on effective personal and economic
connection.
This may only require a change of emphasis. Currently the primary
test for determining tax residence is a permanent home. Given the
ease with
which a permanent home may be established this may no longer be appropriate.
The OECD Model Commentary on Art 4 emphasises that
the home must be permanent. However, the commentary states that it can be any
form of home, whether a "house or apartment
belonging to or rented by the
individual, [or a] rented furnished room".[32]
To counter the manipulation of the
definitions it may be more effective to give priority to the second test in Art
4, which focuses
on the closeness of personal or economic relations. This test
is also described as the centre of vital interests. The centre of vital
interests highlights more clearly an effective personal and economic
connection.
As a caveat to this approach, it could be
argued that there is no need to change as the economic benefit derived is
effectively taxed
through other taxes, such as the Goods and Services Tax
("GST"). In Australia, there is no GST on the import of creditable
services, because GST is structured so that the value of such services is taxed
in the hands of the ultimate consumer.[33] This means that,
normally, an enterprise importing goods would not pay GST on importation, but
would charge GST on sale of its goods
or services. Where GST would not be
charged otherwise after importation, the importer must pay GST under the
reverse-charge rule.[34] GST is therefore paid either at importation
or subsequent to importation. Neither of these issues is within the scope of
this article.
Nonetheless, the centre of vital interests
test is consistent with the "Benefits Principle", which, in broad
terms, allocates
taxing rights to the country that offers the taxpayer the most
benefits. It allows residents to be taxed where they have closest
personal and
economic ties and business profits to be taxed in the country of source, which
has provided the infrastructure to produce
those profits. Avi-Yonah
sets out the traditional approach to residence based taxation:[35]
In the case of individuals, residence-based taxation makes sense. First, residence is relatively easy to define in the case of individuals. Second, because most individuals are part of only one society, distributive concerns can be addressed most effectively in the country of residence. Third, residence overlaps with political allegiance, and in democratic countries, residence taxation is a proxy for taxation with representation.
Where residence is not easy to define, such
as for individuals who are part of more than one society, whose political
allegiance is
not really an issue and who are seeking to avoid connection with
a country, a broader test is needed. A mix of the arbitrary number
of days and
centre of vital interest rules provides a broader approach.
From the perspective of globalisation
there are two important issues that derive from the attempt to achieve a
balance of import and export neutrality.[36] The first is that
countries should design their rules to protect their revenue base and prevent
manipulation of tax residence rules.
They can achieve this in negotiating
bilateral tax treaties. They should consider giving greater prominence in the
individual residence
tie-breaker clause to the centre of vital interests and
close personal and economic relations tests over the permanent place of abode
test under its current meaning.
The second issue is that countries should
design their rules to attract the expatriates associated with foreign
investment. Where
it has an effective treaty network, a country should consider
using simple definitions of residence, such as an arbitrary day rule,
so that
foreign investors and visiting expatriates can determine, quickly and simply,
the tax implications for expatriate employees.[37]
The test for determining whether a taxpayer
is a resident in New Zealand is stated in s OE 1 of the Income Tax Act 1994
("ITA94"). It is a twofold definition that, unlike the Australian
definition, defines when a taxpayer is both resident
and non-resident. Until
amended in 1988, a natural person was adjudged a resident in New Zealand if
that person had a permanent place
of abode in New Zealand, or was present in
New Zealand for a continuous period of 365 days, with certain permitted
absences.[38]
Who is and who is not a New Zealand resident
for tax purposes is outlined in s OE 1,[39] incorporating the
following definitions (in summarised form):
An individual is resident in New Zealand if
that person:
(1) has a permanent
place of abode in New Zealand or
(2) has been present
in New Zealand for more than 183 days of any 12 month period.
An individual ceases to be a resident in New
Zealand if:
(1) that person is
absent from New Zealand for more than 325 days of any 12 month period and
(2) during that
period of absence has at no time a permanent place of abode in New Zealand and
(3) is not absent in
the service of the Government of New Zealand.
A person present for any part of a day is
deemed to be in New Zealand for the whole of that day.
Under this legislative provision, the
"permanent place of abode" concept overcomes the arbitrariness of a
test based solely
on the number of days spent in the country. A person is a New
Zealand resident if they have a permanent place of abode in New Zealand
or
if they have been personally present in New Zealand for more than 183 days in
any 12 month period. It is an either/or situation so
that only one of those
situations need apply for that person to be adjudged a resident. The reduction
in the number of days from
365 to 183 days in any 12 month period reflects the
reality of modern travel and the transitory status of many taxpayers.
Conversely,
to be a non-resident a person must have been out of the country for
more than 325 days in any 12 month period and must not have a
permanent place
of abode in New Zealand. Both criteria must apply. This introduces the
permanent place of abode concept into the
definition of a non-resident.
The broadening of the definition appears to
be driven by a desire to protect the revenue base. It is easier to become a
resident and
subject to the tax laws than it is to become a non-resident and
fall outside the New Zealand tax laws applicable to residents. There
does not
appear to be any reason for the reduction in the number of days it takes to
become a non-resident from 365 to more than
325. However, the fact that it only
takes 183 days to become a resident, as compared to the 325 days to become a
non-resident, underlines
the importance of the additional permanent place of
abode test and the need for the tie-breaker provision in double tax treaties
discussed in Part 2 above.
The increased significance of a permanent
place of abode in the definition of residence means that it is important to
consider what
is meant by this concept. The only case under the old definition
that throws any light on this is the case of Geothermal Energy New Zealand
Ltd v CIR.[40]
The judgment in this case concluded that "home" was a place around
which the taxpayer's domestic life revolved. That is,
in the case of a married
man (or woman) where his wife (or her husband) and children resided at that
particular time, and in the
case of a single person the place which is the
centre of their interests and affairs.
It follows that an individual's home is not
determined by the ownership of any interest in the residence or property, a
view previously
held by the Commissioner of Inland Revenue ("CIR").
Although it is not defined in the ITA94, the Inland Revenue Department
("IRD") has issued the following list as a guide for determining an
individual's permanent place of abode:[41]
• the presence
of the person in New Zealand, whether continuous or interrupted;
• accommodation,
whether owned or not;
• social ties,
family membership of clubs etc;
• economic
ties, bank accounts, credit cards, investment, superannuation funds etc;
• employment
or business in New Zealand, whether permanent or transient and casual;
• personal
property, whether furniture, clothing, car etc has been maintained in New
Zealand;
• welfare
benefits received in New Zealand;
• intentions,
whether the intention is to live in New Zealand or return overseas after a
period of time.
It is important to note that under domestic
law, a taxpayer can maintain similar ties, a residence, a physical home, or a
permanent
place of abode in other countries but still be a New Zealand resident
for tax purposes. If the taxpayer has an enduring relationship
in New Zealand
that is a permanent place of abode, the taxpayer will always be a resident of
New Zealand. This test overrides the
provision relating to the number of days
the taxpayer is in New Zealand.
In late 1993, the Taxation Review Authority
("TRA") decided a further case dealing with residency. Case Q55[42] concerned the residency for tax purposes of
a university professor on study leave in Europe. The issue in contention was
whether
the professor had a permanent place of abode in New Zealand while he
was overseas for a period exceeding one year. While overseas
the professor
received a salary from a New Zealand university and his Auckland home was
rented out under a fixed term lease. The
professor was absent from New Zealand
for 368 days.
This case was decided under the law, stated
as it was then, in the Income Tax Act 1976 (NZ). Therefore the professor
was subject to the permanent place of abode test, that as a resident who was
absent in excess of 325
days over a 12 month period, he was deemed not to be a
New Zealand tax resident if he did not have a permanent place of abode in
New
Zealand. This meant that if the professor did not have a permanent place of
abode in New Zealand he would not have been liable
for tax on any income which
was not derived in New Zealand for that period. As the professor was working
and therefore earning his
salary outside New Zealand it could be held that
although paid by a New Zealand university, this salary was derived outside New
Zealand.
Permanent place of abode has evolved to mean
a place where a person normally or habitually lives and a place with which the
person
has an enduring relationship. These factors were evidenced in this case
by the professor's connections to New Zealand through his
employment, club
memberships, bank accounts, investments, properties owned and his home.
Having a permanent place of abode in another
country did not affect whether this person also had a permanent place of abode
in New
Zealand. While in Europe the professor maintained foreign bank accounts
and owned a car, but he admitted to the TRA that he did not
establish another
home and did not have a permanent place of abode overseas.
The contentious issue in this case was the
importance that the New Zealand home should be given in determining the
existence of a
permanent place of abode when the home was unavailable for the
period the professor was away. The IRD has stated, along with the
list they
issued as a guide,[43] that the permanent
place of abode test does not focus solely on the ownership or availability for
use of a dwelling.
The TRA found in this case that the paramount
factor in assessing residency was a person's ties with New Zealand. Despite the
professor
being unable to return to his home during the time he was overseas,
he still had a permanent place of abode in New Zealand. The short-term
unavailability of the home for the professor's use was outweighed by his
intention to occupy it, and its availability upon his return
to New Zealand.
Time is obviously important in deciding residency and as the professor was
absent from New Zealand for only one year,
the connections with New Zealand
were given more importance. It was found that he remained a resident of New
Zealand and was therefore
liable to pay tax on all his worldwide income whether
derived in New Zealand or elsewhere.
Determination of the existence of a permanent
place of abode is a matter of fact. This is confirmed in the more recent Case
U17.[44]
The taxpayer was a successful New Zealand businessman. After he separated from
his wife he accepted a position and moved to Singapore
where he leased an
apartment, opened a bank account, took out credit cards, leased a car, secured
the services of a local doctor
and learnt to speak Malay. The taxpayer's wife
and children remained in New Zealand in a home provided by the taxpayer. The
taxpayer
subsequently purchased a dairy farm as an income-earning asset that
provided employment for his wife and children and as an asset
against which he
could borrow to finance his Singaporean business. The taxpayer made frequent
trips back to New Zealand and while
in New Zealand he generally attended to
business relating to a New Zealand company in which he had an interest as a
director. The
CIR assessed the taxpayer as a resident in both New Zealand and
Singapore and as liable for tax at the higher New Zealand rate. The
CIR
contended that during the relevant income years the taxpayer had maintained a
permanent place of abode in New Zealand and that
his economic relations were
closer to New Zealand than Singapore.
The TRA disagreed. The taxpayer had abandoned
his residence in New Zealand and was wholly resident in Singapore between 1990
and 1994.
The fact that the taxpayer kept assets, both real and personal, in
New Zealand was explained by his desire to provide for his family
in New
Zealand and to provide an asset base against which he could finance his
Singapore business. His frequent visits to New Zealand
and involvement with a
New Zealand company did not detract from his assertion that he had given up his
New Zealand residence and
had become wholly resident in Singapore during the
relevant period.
In the Tax Information Bulletin,
answers to questions that people have asked are sometimes published and give an
insight into the attitude of the IRD. In the November
1999 edition,[45]
a New Zealand resident asked whether he would be a resident for tax purposes
during his two-year absence working for an international
organisation
in the United States. The person did not intend to resign from his New Zealand
job, but to take leave of absence. He said that he
would consider employment
opportunities in the United States and Europe at the end of the two years, as
well as the option of returning
to his New Zealand job. The person's family was
to travel with him, and their Wellington house was to be rented out while they
were
away. The only investment (other than the house) remaining in New Zealand
was to be his interest in the Government Superannuation
Scheme, to which he was
to continue making contributions for one year.
The IRD stated that counting against a
finding of a permanent place of abode were the circumstances of the person's
absence - the
period of his absence being of significant length, the fact that
his family were to go with him, and that they were to take most
of their personal
property. On the other hand, the person was to retain strong associations with
New Zealand throughout his absence.
Most importantly, he was to have a job here
ready for his return and a house available for him and his family to live in.
His intention
was that he might come back to New Zealand at the end of his
two-year contract. Some property was to be kept here. Although the family's
house was to be tenanted in their absence, it could still be seen as being
available to family members to live in.
Reference was made to Case Q55 and the comment by the TRA that:
a "permanent place of abode" does not require that a dwelling be always vacant and available for the person to live in; but that there is a dwelling in New Zealand which will be available to the taxpayer as a home when, and if, that taxpayer needs it, and that the taxpayer intends to retain that connection on a durable basis, with that locality.[46]
The discussion went on to conclude that as
the person had a job in New Zealand and a home potentially available to him, he
had ongoing
associations with New Zealand during his absence of sufficient
strength to constitute a permanent place of abode, despite his two-year
absence. This meant that he would be potentially subject to tax in New Zealand
on his worldwide income. Whether or not he would be
subject to tax in New
Zealand depended upon the operation of the New Zealand/United States of America
double tax agreement.
If the person's leave of absence was for a
period of three years, and the other facts were the same, the IRD suggest the
conclusion
would probably be that he would not have a permanent place of abode
in New Zealand. It should be noted, however, that an absence
of three years
would not, on its own, be determinative. The facts of each situation must be
weighed up. In another situation, a person
may have a permanent place of abode
in New Zealand, even though working overseas for three years, because of the
existence of other
ties with New Zealand throughout the period of absence.
The facts in this item were distinguished
from Case U17[47] by the IRD, in that the taxpayer in Case
U17 was away from New Zealand for four years, and did not have employment in
New Zealand available to him during that time (although
he did have a business
interest in New Zealand). He had also separated from his wife and his old home
was not available to him.
New Zealand operates the traditional
permanent place of abode test together with the arbitrary number of days test.
The interpretation
of permanent place of abode has changed significantly. As
shown above, the significance of an interest in, or ownership of, any residence
or property is no longer paramount, but rather one of several factors to be
taken into account. This accords with the centre of
vital interests test, which is being applied as the permanent place of abode
test. It would be preferable for
the test to be renamed the centre of vital
interests test to accord with international understanding and the OECD Model.
In Australia individuals are resident for tax
purposes if they are:[48]
• Australian residents under common law
(the common law or ordinary meaning test); or
• domiciled in Australia, unless the
Commissioner is satisfied that their permanent place of abode is outside
Australia (the
domicile test); or
• in
Australia, continuously or intermittently for more than one half of the year of
income, unless the Commissioner is satisfied that
their usual place of abode is
outside Australia and they do not intend to take up residence in Australia (the
183 day test); or
• a member of
certain Commonwealth superannuation schemes (or the spouse or child under 16 of
such a member).
The Australian definition is more complex and
less clear than the New Zealand definition. This reflects a different drafting
style
and a tendency towards complexity for which the Australian statute has
become infamous.[49] The last statutory test is fact specific and
limited in operation and is not considered in this article.
The purpose of this Part is not to provide a
comprehensive analysis of the Australian rules. It attempts to draw out the
main threads
of the law as it is applied to determine the appropriateness of
the proposed arbitrary number of days plus centre of vital interests
test to
Australia. This is not an issue canvassed specifically by the numerous
commentaries on the residence provisions.
This test is not used in New Zealand. There
is substantial relevant case law both in Australia and the United Kingdom which
attempts
to determine the ordinary meaning of residence at common law and it is
this ordinary meaning that forms the starting point in determining
whether or
not a taxpayer is resident.[50] The underlying theme
is that a taxpayer resides in the place where he or she has a "home".
This is a question of fact,
and if a taxpayer is found to have a
"home" in Australia, there is no need to proceed further.
The word "reside" was defined by Viscount Cave LC in Levene v IRC:[51]
... and is defined in the Oxford English Dictionary as meaning "to dwell permanently or for a considerable time, to have one's settled or usual abode, to live in or at a particular place." ... In most cases there is no difficulty in determining where a man has his settled or usual abode, and if that is ascertained he is not the less resident there because from time to time he leaves it for the purpose of business or pleasure.
His Honour also cited Cesna Sulphur Co Ltd v Nicholson:[52]
There is not much difficulty in defining the residence of an individual; it is where he sleeps and lives.
There may not have been much difficulty in
applying such a definition in 1876. However, as discussed in Parts 2 and 3
above, it is
often less clear today. Where the application of the ordinary
meaning of residence is uncertain, the specific statutory definitions
that
extend the common law definition become more important. In practice it is often
simpler to start with the specific statutory
definitions, since if they apply
to make a taxpayer resident there may be no need to proceed with the detailed
factual analysis necessary
using the common law definition. This is consistent
with the proposal for an arbitrary number of days test, combined with a centre
of vital interests test. The common law meaning of residence most closely
relates to the centre of vital interests test.
In an attempt to provide clarification of the
Australian Taxation Office ("ATO") interpretation of the ordinary
meaning
of "resident" for visitors to Australia, the ATO issued Taxation
Ruling TR 98/17.[53] The ruling identifies relevant factors to be
considered in determining whether an individual entering Australia is resident
under
the ordinary meaning. The two primary factors are the quality and
character of the individual's behaviour while in
Australia and their period of physical presence in Australia.
The ruling states that the quality and
character of an individual's behaviour are
demonstrated by further secondary factors. The first is the main intention or
purpose of a person's presence. The ruling distinguishes
between coming to
Australia for the purpose of employment or education and travelling,
albeit while doing casual work. It makes it clear that the visa notation on a
person's passport is merely indicative of purpose
as the criteria for visa and
tax purposes may differ.
The second factor to demonstrate an
individual's behaviour is the location of the
person's family, whether a place of abode is maintained outside Australia,
business ties in Australia and
the existence of a contract of employment in the
person's home country. The third factor is the maintenance and location of
assets
in Australia, particularly occupation and purchase of a dwelling that
may indicate establishment of a home in Australia. The fourth
factor is the
extent of social and living arrangements during a stay that may indicate
residence, including joining clubs or organizations,
educating children and
leasing a home. These factors are helpful in that they provide a more
comprehensive description of the Commissioner's
approach to determining
residence. In themselves they simply reflect existing case law. It is always
going to be their application
in conjunction with the second primary factor,
the period of physical presence in Australia, that
will be most contentious.
Taxation Ruling TR 98/17 takes the view that any visitor staying more
than six months will be treated as resident from the time when the visitor
begins to demonstrate behaviour consistent with
residing in Australia. This approach is not controversial in itself. However,
the examples given in the ruling focus
on individuals staying in Australia for
just over six months and the application of the factors set out in the ruling
to the examples
illustrates how open to interpretation the relevant factors (as
discussed above) are.
Any attempt to determine at what point the
ordinary meaning of residence takes effect depends upon a subjective
interpretation of
both subjective and objective factors. The fact that the six
month test is used by the ATO shows that, from a practical necessity
standpoint, arbitrary time tests as at least one limb of a definition,
do provide the certainty that both taxpayers and the ATO want from the law.
However, the common law test, which reflects the centre
of vital interests
test, should retain its integrity. It is not appropriate to assume that because
a taxpayer has remained in Australia
for more than six months that the
taxpayer's centre of vital interests has automatically shifted. Objective
criteria should be used
when a taxpayer states that her or his permanent place
of abode is elsewhere. Otherwise, the common law definition of residence/centre
of vital interests test loses its validity.
There are essentially three types of domicile
in Australian tax law: domicile of origin, which is the domicile of the father
at the
date of birth (with special rules for an illegitimate child); domicile
of choice, which is established by the Domicile Act 1982 (Cth) and the intention to select a new permanent place of
abode; and domicile by operation of law, which applies when, for example, a
child's domicile changes as a result of the child's parents changing domicile.
Although Australian domicile may be established,
the individual will still not be treated as a resident if that individual's
permanent
place of abode is outside Australia. The test of domicile, in effect,
becomes superfluous to the "permanent place of abode"
test.
Irrespective of domicile, the individual will be a resident in Australia if the
"permanent place of abode" is established
and a non-resident if it is
not established.
5.3 Permanent Place of Abode
The leading Australian authority on the words
"permanent place of abode" is FC of T v Applegate
("Applegate"). It is also frequently quoted in New Zealand
residency case law.[54] In Applegatte,
it was held that "permanent" does not mean "everlasting"
and that if a taxpayer has an intention to make a home
outside Australia for
the time being, then that will be an important element in characterising
the home as permanent place of abode. This allows for taxpayers to become
non-residents even though they may have the intention to
return to Australia at
some point in the future. The principle has been applied in subsequent cases.
In Applegate, Fisher J stated:
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. It connotes a more enduring relationship with the particular place of abode than that of a person who is ordinarily resident there or who has there his usual place of abode. 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.[55]
Permanent place of abode is not defined by
the legislation in either Australia or New Zealand so case law is very
important. As the
New Zealand IRD have produced a set
of guidelines for taxpayers, so has the ATO issued similar guidelines in Income
Tax Ruling IT 2650 on residency. The ruling (at para
23) offers a useful checklist of criteria for establishing "permanent
place of abode":
• the intended
and actual length of an overseas stay;
• whether
there is any intention to return to Australia or to travel on to another
country;
• whether the
taxpayer has established a home outside Australia;
• whether the
taxpayer has abandoned a home in Australia to go overseas;
• the duration
and continuity of the taxpayer's presence in the overseas country; and
• the durability of association with a
place in Australia, as evidenced by bank accounts, notifications to relevant
authorities,
and family, social and business ties.
The criteria mentioned in the New Zealand and
Australian guidelines are very similar, although none of these factors is
decisive.
However, it is important to note that the Australian definition
focuses on a permanent place of abode outside Australia in contrast
with the
New Zealand requirement of a permanent place of abode inside New Zealand. From
an evidentiary perspective this makes the
New Zealand definition easier to administer
and control.
Consistent with FC of T v Jenkins
("Jenkins"),[56] Income Tax
Ruling IT 2650 recognises that the existence of a
permanent place of abode is a question of fact in each case and that the
duration of an individual's stay
or intended stay out of Australia is not, of
itself, conclusive and must be considered along with all other relevant
factors. This
is in contrast to the specific time element legislated in the New
Zealand rules. However, given the practical advantages of setting
down a broad
time limit, the Commissioner exercises his discretion in Income Tax Ruling
IT 2650, as he does in Income Tax Ruling IT 2607, and states that as a
general rule he will accept that a taxpayer becomes a non-resident after two years
spent abroad.
As a result, in order to help them qualify
under the ruling for non-resident status, taxpayers seconded overseas have
tended to negotiate
contracts for periods longer than two years, or open-ended
or renewable contracts with a two year minimum period. This is somewhat
arbitrary, as is the New Zealand legislation on this issue, but the certainty
it gives to taxpayers compensates for this. The downside
is that the ATO
requires compelling reasons to treat someone as non-resident who has been overseas
for less than two years. Although
it should be noted that in both Applegate
and Jenkins, the individuals were treated as non-resident and in both
cases they were actually absent from Australia for less than two years.
A significant practical consequence of the
difference between the New Zealand and Australian definitions of residence
arises from
the New Zealand focus on an individual having a permanent place of
abode in New Zealand, as compared with the Australian focus on
an individual
having a permanent place of abode overseas. Under the New Zealand definition,
provided any time requirements are satisfied,
residence would only appear to
apply to individuals while they are actually in New Zealand. Therefore they
would become resident
on arrival and cease to be resident on departure.
In Australia, on the other hand, residence
continues until a permanent place of abode is established overseas.
Non-residence ceases
when an individual relinquishes a permanent place of abode
overseas. This can lead to complications. For example, expatriates working
overseas can be detrimentally affected in that payments made to them in respect
of services performed as non-residents or income
earned from any source while
overseas could in fact be derived by them as residents once they have given up
their permanent place
of abode overseas, even though they have not physically
returned to Australia.[57] It is fairly common for expatriates to take
leave overseas after a secondment and prior to returning
to Australia. If the domicile test applies they will no longer have a permanent
place of abode outside Australia
and consequently, any income derived while on
leave will be taxed in Australia on the basis that they are resident. This
again leads
to uncertainty and the need for taxpayers to have high-level
professional help to navigate a safe passage through the complexities
of the
ITAA36 and the ITAA97.
Following through the earlier argument that
the permanent place of abode test should change to a centre of vital interest
test, it
is interesting
to note the approach to interpretation of permanent
place of abode taken by the ATO. The rulings seem to have broadened the concept
of permanent place of abode to encompass the factors taken into account for the
common law residence test and the centre of vital
interests test. Practically,
the focus on a taxpayer living in a permanent location is no longer sufficient
as an objective test
of residence. Other factors that are taken into account
should be recognized in the law.
The half year or 183 day rule is calculated
by days and hours in both Australia and New Zealand.[58]
In Wilkie v IRC,[59]
a taxpayer present in the UK (which also has a 183 day residency rule)[60]
for 182 days and 20 hours in an income year of 366 days, was held not resident
for a period equal to six months.
In Australia, if this test applies a person
is treated as resident for the entire income year. This is not the case in New
Zealand
where the residency applies as from the first day of arrival in New
Zealand counted in the 183 days.[61]
The fact that the Australian legislation
refers to more than one half of "a year of income" means that a
person could be
in Australia for just under half of two years of income; that
is, for a total of just under a full year, and not become a resident
under this
test. The New Zealand legislation appears to get around this problem by
referring, in both tests, to a number of days
in "any twelve month
period".
In New Zealand, the 183 day test stands on
its own. If a taxpayer satisfies this test, he or she is a resident. In
Australia, taxpayers
may be resident unless the Commissioner is satisfied that
their usual place of abode is outside Australia and that they do not intend
to
take up residence in Australia. This test helps to determine when a person
takes up residence in Australia but does not help in
determining when a person
has ceased to be a resident. The term "usual" is used for this test
rather than "permanent"
place of abode but how these terms differ
seems unclear.
Globalisation and electronic commerce present a threat to the
revenue base in that high net worth individuals may move their residence to low
tax
jurisdictions and continue their activities in Australia and New Zealand
electronically as though they had not left. Yet the residence
and source rules
may preclude (or severely restrict) Australian and New Zealand revenue
authorities from taxing them. This problem
goes beyond the residence rules. It
is the overall economic environment (including taxation) that prompts
generators of wealth to
live elsewhere.[62] Short of reverting
to an era of exchange control and limits on freedom of movement, the demands of
a relatively free market require
policy makers to concentrate on ensuring that
their jurisdiction provides the appropriate mix of economic, infrastructure and
lifestyle
benefits to attract wealthy individuals. The tax residence rules are
but a small part of this matrix.
Australia's tax legislation began its current
metamorphosis under the auspices of a Tax Law Improvement Project. Its stated
aim was
"to rewrite the law with a better structure, and make it easier to
understand".[63] The definition of residence has not yet been
rewritten and is one area where simplification of the definition should include
substantive
change.[64] This is necessary to overcome the
shortcomings of the existing legislation and to give statutory effect to the
approach taken in
practice by the Commissioner.
If the rules for residence can be postulated
in a brief, clear and concise manner yet still cover all the necessary
circumstances
(as it appears the New Zealand legislation comes close to
achieving) this must be a desirable feature. However, the New Zealand and
Australian permanent place of abode tests should be recognized as having moved
their definition away from the central position of
a permanent family home. In
this regard, the OECD Model's centre of vital interests test should be used to
give the same practical
effect.
The New Zealand legislation overcomes several
problems identified in the Australian legislation:
• Many of the Australian cases attempt
to use legislation and case law to define a non-resident; there being no
definition of
a non-resident in the Australian tax legislation. New Zealand
residence cases have been saved this difficult and often fruitless
activity by
the inclusion in the legislation of a definition of a non-resident, albeit more
restrictive than that of a resident.
A taxpayer is a resident if present for
more than 183 days and a non-resident if absent for more than 325 days in any
12 month period.
Australia should have arbitrary day tests to establish both
residence and non-residence. This will provide certainty, particularly
for
expatriates moving in and out of Australia.[65]
The New Zealand legislation overcomes the
arbitrariness of a test based solely on the number of days present or absent
from the country
by using the permanent place of abode test in addition to
number of days. However, it manages to avoid the complexity of the Australian
definition of residence. A similar approach in Australia would give effect to
the way the Commissioner has in practice attempted
to exercise his discretion,
by using a centre of vital interests test rather than the permanent place of
abode test.
• Focusing on the existence of a centre
of vital interests in Australia rather than outside Australia, following the
New Zealand
approach with the widely defined permanent place of abode test,
eliminates many unnecessary evidentiary and control problems for
both the ATO
and the taxpayer. It also helps to make the law more certain and less likely to
be unwittingly contravened.
• It is better to avoid the multiple
tests for residence in Australia in the interests of certainty, simplicity and
clarity.
The arbitrary number of days test combined with a centre of vital
interests test would help to provide certainty and protect the
revenue base.
• The definition of residence will need
amendment to cope with the growth in electronic commerce. However, any changes
should
occur in the context of an overall review of the implications for the
revenue base of international electronic commerce transactions.
As "permanent place of abode" has
become a crucial concept in both Australia and New Zealand its broadening definition
should
be reflected by it being renamed as the "centre of vital
interests". This ties in with international
nomenclature and better describes what the test is really for. The legislation
could also provide broad guidelines
as to the content of the test.
There is always room for improvement in tax
legislation. There are problems with the New Zealand statutory definitions, for
example,
the difference between the 183 day rule and the 325 day rule for an
individual to cease to be a resident can lead to some interesting
scenarios,
but different countries can learn from each other and improvement to the
legislation should be a continuing process. The
time is right for a revision of
the Australian legislative residency laws that reflects the reality of the
changing global environment
in which it operates, including the influences of
e-commerce and globalisation.
[*] The authors
first published a proposal for reform of the definition of residence in
Australia in CR Alley and D Bentley, "In
Need of Reform? A Trans-Tasman Perspective on the Definition of 'Residence'"
(1995) 5 Revenue Law Journal 40. The rewrite of the Australian
definition remains "imminent". The proposals in the article remain
relevant. However, globalisation and electronic
commerce have added a new dimension to the analysis. The authors have therefore
revisited and updated the original
proposals.
[**] Senior Lecturer, Department of Accounting,
University of Waikato.
[***] Professor and Dean of the School of Law, Bond
University.
[****] Reader in Economics, University of Exeter.
[1] The territorial
basis of taxation is seldom used although it can be found in Hong Kong special Administrative Region. Peroni
argues that the territorial basis of taxation is fundamentally inconsistent
with the prevailing concepts of fairness that underlie
the traditional
residence based system: see RJ Peroni, "Back to
the Future: A Path to Progressive Reform of the US International Income Tax
Rules" (1997) 51 University of Miami Law Review 975, 981. On the
fairness issues, see NH Kaufman, "Fairness and the Taxation of
International Income" (1998) 29 Law & Policy in International Business
145.
[2] The discussion
in this article is limited to national definitions of residence for income tax
purposes, although the term is also
important in determining liability to tax
within some federal and other jurisdictions in which taxing rights are divided
between
states or smaller taxing units. For example, see Quill v North
Dakota [1992] USSC 64; (1992) 504 US 298, which looked at taxing rights between the
different states in the United States and the importance of "nexus".
See further,
M Groves, "Where There's a will, There's a Way: State Sales
Tax and Use Taxation of Electronic Commerce" (1998) 74 Indiana Law
Journal 293.
[3] Leading cases
include Lloyd v Sulley (1884) 2 TC 37; Levene v IRC [1928] UKHL 1; (1928) 13 TC 486; Lysaght v IRC (1928) 13 TC 511; FC of T v
Miller [1946] HCA 23; (1946) 73 CLR 93; Slater v C of T (NZ) [1949] NZGazLawRp 66; [1949] NZLR 678; and FC
of T v Applegate 79 ATC 4307 ("Applegate"). Administrative
decisions as expressed in rulings of the tax authorities are discussed in Parts
4 and 5.
[4] This was begun
by the Tax Law Improvement Project, which was announced by the Australian
Federal Government on 17 December 1993.
The project was to run over three
years. The Income Tax Assessment Act 1997 (Cth)
("ITAA97"), which rewrote approximately half of the Income Tax
Assessment Act 1936 (Cth)
("ITAA36"), was the result before the project was put on hold. ITAA36
remains partly rewritten. It is unlikely that the
two Acts will remain in this
state indefinitely, but it may take some time before a government decides to
remedy the position by
either rewriting the remainder of ITAA36 or by starting
again completely.
[5] For a
discussion of the previous definition and changes, see CR Alley and D Bentley,
"In Need of Reform? A Trans-Tasman Perspective on the
Definition of 'Residence'" (1995) 5 Revenue Law Journal 40.
[6] ITAA36, s
25(1) (to 30 June 1997); ITAA97, ss 6-5, 6-10 and
6-15 (from 1 July 1998).
[7] Income Tax
Act 1994 (NZ) ("ITA94"), ss AA 2 and BD
1(2)(c).
[8] ITAA36, s
6(1).
[9] In Applegate
79 ATC 4307, 4314, Northrop J described the meaning of "permanent place of
abode" in the Australian legislation: "What
is of importance is
whether the taxpayer has abandoned any residence or place of abode he may have
had in Australia. Each year of
income must be looked at separately. 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 that year of income. This is to be contrasted with
a temporary or transitory
place of abode outside Australia."
[10] R Vann, "International Aspects of Income Tax" in V Thuronyi (ed),
Tax Law Design and Drafting (Vol 2, 1998) 718,
729 provides a useful analysis of individual residence rules in the
international context.
[11] This is the traditional approach in which all the different facts are
weighed to determine the closeness of the connection. See the
discussion on
permanent place of abode in Part 4.2 below.
[12] The United Kingdom and Australia both include domicile in their
definitions. The US uses the concept of citizenship. Vann, above
n 10, 730
argues that although the US taxes citizens, citizenship is really an aspect of
residence.
[13]
OECD Committee on Fiscal Affairs, Model Tax Convention on Income and on
Capital (2000).
[14] Ibid, Commentary on Art 4, 4-5.
[15] Malaysian Income Tax Act, s 7.
[16] In Malaysia, tax residents are taxed on their worldwide income on a
remittance basis and even then, there are concessions to encourage
repatriation
of much needed foreign currency.
[17] Discussed further in AJ Easson, Taxation
of Foreign Direct Investment: An Introduction
(1999) 17 and 125. As Easson points out, this burden
may be ameliorated by specific tax reliefs for
expatriate employees.
[18] For example, social security contributions may not be classed as a tax
to attract relief, but the contribution may have the effect
of a tax. See further, K Messere, Tax Policy in
OECD Countries: Choices and Conflicts (1993) ch
8.
[19] OECD Model, Art 15.
[20] For a comprehensive explanation of the taxation of expatriates see R
Vann, "Improving Policy For the Taxation of
Expatriate Employees in Australia" (2001) 7 New Zealand Journal of
Taxation Law and Policy 70.
[21] Discussions on the taxation of electronic commerce have highlighted,
among other things, the importance of jurisdiction in taxing
electronic
transactions. Jurisdictional issues were raised at the formal level by the OECD
in a paper, Electronic Commerce: The Challenges to Tax Authorities and
Taxpayers (1997), presented at an informal round table discussion between
business and government in Turku, Finland. It is available at
[http://www.oecd.org/daf/fa/e_com/e_com.htm].
This was followed in 1998 by OECD
Committee on Fiscal Affairs ("CFA"), Electronic Commerce: A Discussion Paper on Taxation Issues (1998). The paper
was presented for discussion at the OECD Government/Business Dialogue on
Taxation and Electronic Commerce held
in Hull, Quebec, Canada, on 7 October
1998. At the same time, the OECD Ministerial Conference met in Ottawa and
produced, among other
papers: A Borderless World – Realising
the Potential of Electronic Commerce (1998) and CFA, Electronic
Commerce: Taxation Framework Conditions (1998). The OECD set up Technical
Advisory Groups to take forward the OECD initiatives on taxation and electronic
commerce proposed
at the Ottawa conference. Working Party 1 on Tax Convention
and Related Questions has since finalised proposals
for revisions to Art 5 of the OECD Model, see [http://www.oecd.org]. There was
no mention of individual residence rules
in the various papers and proposals.
Various country reports have taken a similar approach when they have examined
the issues raised
by electronic commerce. In the context of residence, the
primary focus is on business transactions and jurisdiction to tax.
[22] OECD Model, Art 15.
[23] Ibid Art 14.
[24] This is illustrated in the Australian case of FC of T v Efstathakis 79 ATC 4256, which found that where a Greek
public servant worked for a press agency of the Greek Government in Australia
she derived
her income in Australia, as that was where the work for which she
was paid was performed.
[25] The Australian case of FC of T v Mitchum
[1965] HCA 23; (1965) 113 CLR 401 considered the place of contract and the place of payment as
relevant where the services could be performed anywhere.
[26] The consultant would have to take care that the services did not
attach to goods and fall within the rules to tax non-resident importers
and
exporters under ITAA36, ss 38-43.
[27] See OECD papers, above n 21. National and international reports have
taken a similar approach. See, for example, ATO, Tax and the Internet
(1997); ATO, Tax and the Internet: Second Report (1999); and Inland
Revenue and HM Customs and Excise, Electronic Commerce:The UK's Taxation Agenda (1999) available at
[http://www.inlandrevenue.gov.uk/e-commerce/index.htm]. Residence is ignored
equally by commentators. See, for
example, J Owens, "The Tax Man Cometh to
Cyberspace?" [1997] 2 June Tax Notes International 1833; L Hinnekens, "The Challenges of Applying VAT and Income
Tax Territoriality Concepts and Rules to International Electronic
Commerce"
(1998) 26 Intertax 52; L Hinnekens, "International Taxation of Electronic
Commerce: An Emerging Framework" (1999) 27 Intertax
440; D Pinto, "Taxation Issues in a World of Electronic Commerce"
(1999) 2 Journal of Australian Taxation 227; D Bently,
"The ATO, Tax and the Internet: The Emperor's New Clothes?" (1999) 9 Revenue Law Journal 99; and the recent book by RA
Westin, International Taxation of Electronic Commerce (2000).
[28] R Doernberg and L Hinnekens,
Electronic Commerce and International Taxation (1999). Doernberg and Hinnekens state (at
167) that "the central issue raised by these technological possibilities
is determining where the employee is rendering
services" and therefore
where the employee is liable to tax. Although the authors refer to the concept
of "economic allegiance"
in determining tax liability, they prefer
the source rule to be the location of the person rendering services, so that
"disputes
between countries is limited to the relatively concrete concept
of physical location" (at 173). They do make the point, however,
that Art
16 of the OECD Model allows directors' fees and similar payments made to a
director in her or his capacity as director of
a company which is resident in
another contracting state to be taxed in that state even if the services are
not rendered in that
state.
[29] Based on Art 7 of the OECD Model. See HL Chang, "The Impact of
E-Commerce on Allocation of Tax Revenue Between Developed and
Developing
Countries" [1999] 21 June Tax Notes International 2569; and L Hinnekens, "Looking for an Appropriate Jurisdictional
Framework for Source-State Taxation of International Electronic Commerce in the
21st Century" (1998) 26 Intertax 192. See
also the discussion of the effect of electronic commerce on company residence
in Doernberg and Hinnekens,
above n 28, 332.
[30] See note 21 above.
[31] OECD Model and see note 27 above.
[32] OECD Model, C(4)-5.
[33] A New Tax System (Goods and Services Tax) Act 1999, Div 84.
Section 11-15 states that "You acquire a thing for a creditable purpose to
the extent that you acquire it in carrying on your enterprise".
A
creditable purpose does not include acquisitions of supplies that would be
input taxed or of a private or domestic nature.
[34] Ibid.
[35] The Benefits Principle is a largely US concept. It is discussed
extensively in R Avi-Yonah, "Symposium: International
Taxation of Electronic Commerce" (1997) 52 Tax Law Review 507, also
cited and discussed in Westin, above n 27, 149 and 150.
[36] See Easson, above n 17, for an extensive
discussion of these issues.
[37] Vann, above n 10.
[38] Under the former ITA76, s 241(1) a "continuous period"
allowed a break of not more than 28 intervening days as long as
those
intervening days did not exceed in aggregate 56 days in the income year.
[39] ITA94, s OE 1.
[40] (1979) 4 NZTC 61478.
[41] New Zealand IRD (1995) 7(1) Tax Information Bulletin 12.
[42] (1993) 15 NZTC 5313
[43] New Zealand IRD, above n 41, 10.
[44] (1999) 19 NZTC 9174.
[45] New Zealand IRD (1999) 11(10) Tax Information Bulletin 20.
[46] (1993) 15 NZTC 5313, 5320.
[47 ]47 (1999) 19 NZTC 9174.
[48] ITAA97, s 995-1 defines an Australian resident as a person who is a
resident of Australia for the purposes of ITAA36. ITAA36, s 6(1) provides the
definition of residence.
[49] Discussed at length in D Bentley, "Ten Years of the Revenue Law
Journal: A Diary of Tax Reform" (2000) 10 Revenue Law Journal 1.
[50] See, for instance, Applegate 79 ATC 4307.
[51] [1928] UKHL 1; [1928] AC 217, 222.
[52] [1876] UKLawRpExch 17; [1876] LR 1 Ex D 428.
[53] Some commentators are concerned about the seemingly arbitrary nature of
decisions on ordinary residence. See M Wills, "The Income
Tax Implications
of a Foreign Individual Contracting to do Business in Australia, with
Particular Reference to the Concepts of 'Residence'
and 'Source'" [1997] BondLawRw 3; (1997) 9
Bond Law Review 35, 39. It is always difficult to determine an outcome
based on a mix of subjective and objective factors. It does not mean that the
tests are inappropriate, simply that they can be difficult to apply.
[54] Examples in New Zealand residency case law where Applegate has
been referred to include TRA Case 93/35; TRA Case 87/26; and TRA
Case 83/225.
[55] 79 ATC 4307, 4317 (per Fisher J).
[57] Vann, above n 10.
[58] For a discussion of the options used and their advantages and
disadvantages, see OECD, "The 183 Day Rule: Some Problems of Application
and Interpretation" in OECD Model Volume II, R(9)-1.
[60] External Communications Unit of Inland Revenue UK, Residents and
non-residents Liability to tax in the United Kingdom, International Series
IR20 (1999) 6 states: "You will always be resident if you are here for 183
days or more in the tax year.
There is no exception to this."
[61]
ITA94, s OE 1(2).
[62] For a comprehensive discussion, see Easson,
above n 17.
[63] Tax Law Improvement Project Team, Information Paper No 2 - Building
the New Tax Law (1995), found in CCH Australian Income Tax Bills
(1995) 100,053. Although the Tax Law Improvement Project no longer exists, it
is inevitable that the rewrite of the legislation will
continue in some form.
[64] Ibid.
[65] See also Vann, above n 10.
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