The Tax Office has sent letters to people living overseas who have made claims as non-residents for tax purposes. We strongly recommend that expats consult with their tax professional prior to responding to the letter as international tax matters further compound the already complex tax rules.
The pro-forma letter asks for a response within 28 days to establish that the receiver is indeed a non-resident, and states that if no such response is forthcoming it will issue an assessment on the basis that the taxpayer is an Australian resident for tax purposes.
The Australian tax regime operates on source of the income. Non-residents only pay tax on Australian sourced income, and that has not been subject to withholding tax. Whereas Australian tax residents pay tax on their worldwide income.
This assessment will bring all known foreign-sourced income into the Australian tax net.
It is understood that the Tax Office is using information obtained from the “bank transparency” data matching program that targets overseas banks. This initiative was announced last year (see it here, which also lists the banks involved).
Legitimate expat, but retained “connection”
Australians who live and work in other countries but who retain some residual connections to Australia seem to be prime targets for this type of audit activity. The Tax Office letter asks the question of expats that they should consider their residency status and provide evidence to support their position.
The “connections” mentioned, or “continuity of association” as the Tax Office has put it, can include retaining an interest in land or a building in Australia, maintaining health insurance cover in Australia, and transferring a significant amount of earnings into an Australian bank account.
The Tax Office has had mixed results in various court cases in relation to these matters. In Shord v Commissioner , the taxpayer lost the case, and in Dempsey v FC of T the court found in the favour of the taxpayer.
The Tax Office issued a “decision impact statement” after the decision in Dempsey. It indicated that it is going to keep on pursuing expats claiming non-resident status, particularly where people working overseas may be retaining some form of connection to their country of birth.