Several recent decisions by the Administrative Appeals Tribunal (AAT) have highlighted the common misconception that Australian citizens living and working overseas are not required to pay Australian tax on their income.

This misconception is a serious risk for taxpayers living and working in low tax jurisdictions, where the differences between the local income tax rates and Australian personal income tax rates are greatest.

Taxpayers and advisors need to be particularly careful as Australian Tax Office (ATO) audit activity has recently increased in this area. In addition to the underpaid tax, taxpayers may have to pay interest and penalties.

Boer v Commissioner of Taxation

The AAT confirmed that income received by Mr Boer from his employment in Oman was properly included in his Australian tax assessment for the 2009 income year.

Mr Boer, an Australian citizen, began working with a company in Oman in November 2008. As part of his work arrangement, he was required to work a 35 days on and 35 days off rotation. At the end of each rotation, Mr Boer departed from Oman and, on several occasions, returned to Australia to visit family and friends. While he was working in Oman, he lived in a single room apartment with an ensuite, bed, lounge area and a mini kitchen. However, he did not have exclusive possession of his accommodation as he shared it with another employee who worked a complementary roster.

The AAT held that Mr Boer was a resident of Australia for tax purposes because he had failed to establish a permanent place of abode outside of Australia.

Sully v Commissioner of Taxation

Similarly in this case, the AAT ruled that income received by Mr Sully from his employment as a marine engineer in Dubai was correctly included in his Australian tax assessment for the 2009 tax year.

Mr Sully, an Australian citizen, took up a position with a company in Dubai in April 2008. His employer provided him with accommodation where he shared a two bedroom apartment with another employee of the same company. Later, he was posted to work in New Orleans where he lived in an apartment. Mr Sully maintained family ties in Australia and owned a house in Cairns during the relevant period.

The AAT held that Mr Sully did not satisfy the ‘ordinary meaning of the word resides’ test as he only maintained residual connections with Australia. However, the AAT was not convinced that he had established a permanent place of abode in another country. Mr Sully was found to be a ‘citizen of the world’ who was prepared to go wherever his work took him. As such, because his domicile of origin was Australia, he was considered to be a resident for tax purposes.

Sneddon v Commissioner of Taxation

In this case the AAT held that Mr Sneddon was an Australian tax resident and the income he obtained from his employment in Qatar for the 2009 income year was properly included in his Australian tax assessment.

Mr Sneddon started working with a company in Qatar in April 2008. While in Qatar, he lived alone in a fully furnished apartment provided by his employer.

After considering eight relevant factors, the AAT concluded that Mr Sneddon was a resident of Australia under the ordinary meaning of the word ‘resides’. He maintained a ‘continuity of association’ with Australia despite his physical absence from Australia for a majority of the income year.

The AAT also noted in passing that Mr Sneddon did not satisfy the second test as he did not establish ‘a permanent place of abode’ in Qatar.

What it means for you and your clients

The ATO has a thorough audit program targeted at Australian citizens who live and work overseas (particularly in low tax jurisdictions). In our experience, there are two types of risk.

  • In the first category are Australian citizens living and working overseas but continuing to be tax residents of Australia (often under the extended definition of ‘resident’). The risk for these taxpayers is they fail to declare foreign source income in their Australian tax returns, and the ATO raises assessments for underpaid tax, interest and penalties.
  • The second category relates to Australians who are genuinely non-residents, but get caught up in ATO audits because they failed to take appropriate administrative steps (such as notifying government agencies and correctly completing immigration cards) to show they permanently left Australia and became non-residents.