Covid-trapped expats face inadvertent tax double-up

15 June 2021 Consultancy.com.au 5 min. read

Australia’s increasingly drawn-out international border closures have severely impacted the lives of many individuals, but the complex matter of tax residency has been largely overlooked.

There’s an estimated 35,000 Australian nationals still stranded abroad awaiting the chance to return, trapped since March of last year when the government closed Australia’s international borders in the face of an advancing global pandemic. Since then, indications as to a reopening date have been continuously pushed further and further out, with the recent federal budget revealing the government was now aiming for the middle of next year.

In addition to the 35,000 Australians stranded overseas, there’s an unknown number who have been trapped in Australia and desperate to depart to return to their work and residence abroad, including dual citizens and those who initially returned on the Australian government’s directions. While there’s a heavy emotional and financial toll in many of these cases on both sides of the fence, there’s a secondary issue which has until now received little attention: taxation.

Covid-trapped expats face inadvertent tax double-up

Together with foreign expatriates who have been stuck in this country due to the expense and scarcity of outbound flights, some 500,000 nationals have returned to Australian shores since the beginning of the pandemic – many who were under the impression, as misled by the government, that the border closures would be short-lived. Now, some of these individuals face unexpected tax liabilities due to inadvertent and unavoidable residency.

Recently, the experts from international accounting and advisory network Baker Tilly have examined the implications of what the firm describes as a “dramatically complicated issue of tax residency” and one which may take years to play our. “When the pandemic hit, the Australian Prime Minister asked all Australian nationals to return home,” says Alison Wood, a high net worth specialist and Sydney-based partner with Baker Tilly member Pitcher Partners.

“As a result, many of our clients are now questioning whether they may have inadvertently created a permanent establishment for their entity and dragged it into the Australian tax net by adhering to that advice and by themselves being physically present in Australia. This is a fluid situation. We haven’t had the time or opportunity to plan as we would normally do; we now have to consider residency status on a more frequent basis due to new time constraints.”

Presently, there are many tests used to determine residency, including whether an individual has been present in the country for more than half of the year and if their regular domicile is in Australia. Other factors assessed include an individual’s behaviour, such as their social and living arrangements and if they have any local family and business ties. Examples as to intention might include agreeing to a 12 month lease, or taking up annual membership with social clubs.

Caught in limbo

Yet, unable to afford rental costs in two jurisdictions, it’s not unexpected that many Covid-returnees were forced to give up their tenancies abroad with the intention of finding new accommodation on return. Already likely to have local family ties, the indefinite nature of the pandemic and response measures has also caused those who still intend to depart at the first opportunity to behave in a manner similar to ordinary residents, such as by securing longer-term housing.

Initially the Australian Tax Office released basic guidance that a foreign resident would not become an Australian resident if stranded here temporarily due to Covid-19, provided that they usually live overseas permanently and intend to return as soon as practicable. Yet, anyone who couldn’t leave within the first twelve months since arrival has seen their general overseas residency status lapse, and can no longer gain an exit permit based on that exemption.

According to Wood; “Many countries have implemented emergency measures to relax rules and prevent people from unintentionally breaching tax residency codes. But in many instances, legislation has been brought into effect ‘on the fly’, and not as well thought through as it could have been with the benefit of review and broad consultation. For some countries, guidance as to what the consequences are and, more importantly, how to mitigate those consequences has been lacking.”

Further complicating the issues in Australia is that these questions are now coinciding with the tax residency reform already underway and confirmed in this year’s budget, which will remove the subjective tests as to intention and consider physical presence and the so-called ‘183-day Test’ as the main standard. Such confusion is not only a concern for the individuals and entrepreneurs involved, but has also created difficulties for taxation consultants.

“This is tax’s version of ‘long Covid-19’,” says Nigel May, a partner with MHA MacIntyre Hudson – UK member of Baker Tilly. “The issues we are talking about here are only going to emerge fully over the next few years as we uncover what people have done and where they have been – and the tax consequences will, inevitably, follow. There are a huge number of connotations to this situation that will take an awfully long time to play out.”