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New ATO ruling on individual tax residency and High Court guidance on treaty interpretation

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Jun Au of DLA Piper Australia reports on two key Australian tax developments, with legislative uncertainty remaining on individual tax residency but judicial clarity on treaty interpretation.

Individual tax residency

The Australian Tax Office (ATO) recently released Taxation Ruling (TR) 2023/1 on June 7 2023. This ruling sets out the Commissioner's interpretation on the statutory rules of residency for individuals, as well as providing several examples to assist taxpayers self-assessing their residency status.

The new ruling consolidates previous residency-related rulings and principles from significant cases on residency (e.g., Harding v FCT [2019] FCAFC 29, Pike [2019] FCA 2185; [2020] FCAFC 158 and Addy [2019] FCA 1768; [2020] FCAFC 135).

It is important to note that the ruling does not address the proposed changes to the residency tests, announced by the previous government in the May 2021 Budget. These proposed measures included a primary "bright line" test whereby a person who is physically present in Australia for 183 days or more in any income year will be regarded as an Australian tax resident.

Broadly, the ruling focuses on three of the four residency tests for individuals below:

The ordinary concepts test

Broadly, the individual is a resident of Australia according to ordinary concepts (this test arises from the use of the words "who resides in Australia" in the preamble portion of the definition).

The Commissioner has moved from all factors and circumstances being relevant, to focussing on the nature, duration and quality of a person's physical presence in Australia and their intention to treat Australia as home.

The domicile test

The individual is domiciled in Australia, unless the ATO is satisfied that the person's permanent place of abode is overseas.

The ruling notably maintains the two-year "rule of thumb" to assist in determining when a length of overseas stay is substantial, for the purpose of considering whether a taxpayer's permanent place of abode is overseas.

The 183-day test

The individual has been in Australia for more than 50% of the income year, unless the ATO decides that their usual place of abode is outside Australia and that they do not intend to take up residence here.

Importantly, with the absence of any bright-line tests, these tests remain relatively subjective and are still dependent on the Commissioner’s judgement of various factors.

Principles of treaty interpretation

In April 2023, the High Court delivered its judgment in Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. & Anor [2023] HCA 11. This decision concerned the recognition and enforcement of a €101 million arbitral award in Australia made under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). Ultimately, the High Court had to consider whether, and to what extent, Spain’s entry into the ICSID Convention constituted a waiver of foreign state immunity under the Foreign States Immunities Act 1985 (Cth) from Australian court processes concerning recognition and enforcement.

The High Court ultimately held that Spain could not rely on state immunity from jurisdiction to resist the investors' application for the recognition and enforcement of an arbitration award.

Whilst this is not a tax case, and does not concern a double tax treaty, the High Court judgement contains many noteworthy and useful principles in relation to double tax treaty interpretation:

  • The general principles of treaty interpretation are contained in the Vienna Convention on the Law of Treaties. This is even though the Vienna Convention on the Law of Treaties post-dates the relevant convention in this case (the ICSID Convention). The High Court reiterated that the Vienna Convention was generally declaratory of customary international law;

  • Article 31(1) of the Vienna Convention on the Law of Treaties provides that a treaty must be interpreted "in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose";

  • Article 32 provides that extrinsic sources, including the travaux préparatoires, may be used to confirm or determine the meaning when it is ambiguous or obscure or leads to a manifestly absurd or unreasonable result;

  • Article 33(1) provides that if a treaty has been authenticated in two or more languages, then the text is equally authoritative in each language unless the treaty provides or the parties agree otherwise. However, under Art 33(4), if an apparent difference in meaning arises between the equally authoritative authentic texts, then the meaning that should be adopted is that which best reconciles the texts, having regard to the object and purpose of the treaty; and

  • Treaties should have the same meaning in all party states/jurisdictions.

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