Moving to a More “Certain” Test for Tax Residence in Australia: Lessons for Canada?

canadian tax journal / revue fiscale canadienne (2020) 68:1, 143 - 68 https://doi.org/10.32721/ctj.2020.68.1.sym.dirkis

Michael Dirkis*

PRÉCIS Le Canada et l’Australie ont, en apparence, des critères semblables pour établir la résidence fiscale des particuliers. Les deux pays ont un critère de résidence de common law (resides test, en Australie), des règles de « lien continu » (continuing attachment, un critère obligatoire en Australie), un critère de type 183 jours, et des dispositions axées sur les fonctionnaires. Une différence clé entre les deux pays, malgré des critères de résidence très semblables, est que les litiges sont rares au Canada tandis qu’en Australie, au cours de la dernière décennie, au moins 43 décisions en matière de résidence fiscale ont été rendues par des tribunaux administratifs, la Cour fédérale et la Haute Cour. En réaction au nombre élevé de litiges résultant des programmes intensifs de conformité menés par l’Australian Taxation Office, le Board of Taxation a entamé en 2016, de sa propre initiative, un examen des règles de résidence fiscale s’appliquant aux particuliers. Le rapport en résultant qui a été soumis au gouvernement établissait que les règles actuelles n’étaient plus appropriées et devaient être mises à jour et simplifiées. Bien que le gouvernement australien n’ait pas approuvé les recommandations du Board of Taxation, il a chargé ce dernier d’entreprendre d’autres consultations afin de s’assurer que les règles de résidence proposées soient bien conçues et ciblées, en particulier en ce qui a trait aux questions d’intégrité (c’est-à-dire, d’anti-évitement). Un rapport final, envoyé au gouvernement en avril-mai 2019, proposait un certain nombre de critères de démarcation. Ces critères proposés sont basés en partie sur l’approche adoptée par la Nouvelle- Zélande et, en 2013, par le Royaume-Uni, dans leurs règles de résidence. Dans cet article, l’auteur examine les similarités et les lacunes des règles canadiennes et australiennes en matière de résidence fiscale des particuliers selon les critères d’équité, de simplicité et d’efficacité (intégrité), puis il passe en revue les recommandations du Board of Taxation en vue de déterminer si les modifications proposées des règles australiennes pourraient servir de guide à une future réforme canadienne, si les circonstances politiques l’exigent.

* Professor of Taxation Law, University of Sydney Law School. The author would like to acknowledge the support of the Ross Parsons Centre of Commercial, Corporate and Taxation Law in respect of this research. An earlier draft of this extensively revised and updated paper was presented at the conference “Re-Imagining Tax for the 21st Century: A Conference Inspired by the Scholarship of Tim Edgar,” held in Toronto, February 8 - 9, 2019.

143 144 n canadian tax journal / revue fiscale canadienne (2020) 68:1

ABSTRACT Canada and Australia have superficially similar tests for determining the tax residence of individuals. Both have a common-law residence (or resides) test, “continuing attachment” rules (a statutory test in Australia), a 183-day type of test, and provisions focused on government officials. A key difference between the countries in this regard, despite broadly similar residence tests, is that litigation in Canada is rare whereas Australia, over the last decade, has seen at least 43 administrative tribunal, Federal Court, and High Court decisions with respect to tax residence. In response to the high levels of litigation resulting from concentrated Australian Taxation Office compliance programs, the Board of Taxation commenced a self- initiated review of the income tax residence rules for individuals in May 2016. The report subsequently submitted to government noted that the current rules were no longer appropriate and needed to be updated and simplified. Although the Australian government has not endorsed the board’s recommendations, the board was directed to undertake further consultation in order to ensure that the proposed residence rules are appropriately designed and targeted, with a particular focus on integrity (that is, anti- avoidance) issues. A final report, sent to the government in April/May 2019, proposed a number of bright-line tests. These proposed tests are based in part on the approach adopted in the NZ and 2013 UK residence rules. In this paper, the author considers the similarities and shortcomings of the Canadian and Australian rules on individual tax residence according to the criteria of equity, simplicity, and efficiency (integrity), and then reviews the Board of Taxation’s recommendations with an eye to whether the proposed Australian changes could provide guidance for any future Canadian reform, should the political circumstances so dictate in the future. KEYWORDS: AUSTRALIA n CANADA n COMPARATIVE ANALYSIS n INDIVIDUALS n REFORMS n RESIDENT

CONTENTS Introduction 145 Overview of Canada and Australia’s Individual Residence Tests: The Rules and Their Weaknesses 146 Canada’s Individual Residence Tests 146 Australia’s Tests for Individual Residence 149 Overview of the Weaknesses in Australia’s and Canada’s Tests for Individual Residence 151 Abandoning the Role of the Common Law in Testing for Individual Residence 154 The 2013 UK Rules 154 Drivers and Policy 154 Overview of the Legislation 156 Is This Model Applicable for Australia and Canada? 159 The Proposed Australian Changes 160 Rationales and Policy 160 Outcome of the Board of Taxation’s Self-Initiated Review 163 Potential Problems with the Proposed Model 165 Lessons for Canada? 168 Conclusion 168

moving to a more “certain” test for tax residence in australia n 145

INTRODUCTION In May 2016, the Australian Board of Taxation—a non-statutory advisory body that provides the government with real-time advice on tax policy in an effort to improve the design and operation of taxation law—commenced a self-initiated review simply titled “High Wealth Individuals and Residency.”1 On July 9, 2018, Australia’s then minister for revenue and financial services released the results of that review,2 in a report titled Review of the Income Tax Residency Rules for Individuals.3 The board concluded, following a targeted, confidential, and “extensive” consultation, “that the existing residency rules are no longer appropriate as the fundamental basis of individual income taxation,” and it recommended that the rules be modernized and reformed.4 This finding with respect to Australia’s rules could be applied to Canada’s rules, given that Canada and Australia have superficially similar tests for determining the residence of individuals.5 The Australian finding is not new. A comprehensive review of Australia’s residence and source rules, completed in 2005 by this author,6 established that Australia’s residence rules for individuals were inadequate in their practical application when evaluated according to four tax policy objectives: the

1 Australian Government, Board of Taxation, “CEO Update—July 2017,” at 2 (https://cdn.tspace .gov.au/uploads/sites/74/2016/12/July-CEO-updates.pdf ). 2 Australian Government, The Treasury, “Review of Tax Residency Rules for Individuals,” Media Release, July 9, 2018 (http://ministers.treasury.gov.au/ministers/kelly-odwyer- 2016/ media-releases/review-tax-residency-rules-individuals). 3 Australian Government, The Board of Taxation, Review of the Income Tax Residency Rules for Individuals (Parkes, ACT: Board of Taxation, August 2017) (herein referred to as “the board’s 2017 report”) (https://cdn.tspace.gov.au/uploads/sites/70/2018/07/T307956 -income-tax -res-rules.pdf ). 4 Ibid., at paragraph 1.2. The board concluded in ibid., at paragraph 1.4, that the modernized residency rules should (a) reflect current global work practices; (b) provide certainty to individuals of their tax residency status; (c) . . . be [applicable] by an ordinary individual without tax advice in all but the most complex of cases; (d) remove antiquated concepts such as domicile; and (e) adopt factors that are easy to understand, reduce reliance on common law definitions, and are less open to manipulation. 5 Both Australia and Canada have (1) a common-law residence test, (2) continuing attachment rules (“ordinary resident” and “domicile,” respectively), (3) a 183 -day type of test, and (4) provisions focused on government officials. 6 Michael J. Dirkis, Is It Australia’s? Residency and Source Analysed, Australian Tax Research Foundation Research Study no. 44 (Sydney, NSW: Australian Tax Research Foundation, 2005), specifically chapter 3 examining individual residency. 146 n canadian tax journal / revue fiscale canadienne (2020) 68:1 three traditional “good tax policy” objectives of equity, simplicity, and efficiency, plus a fourth objective of preventing tax avoidance.7 The 2005 review, in attempting to determine whether the rules on individual residence could be modified within the jurisdictional framework to meet these four policy objectives more fully, also evaluated other jurisdictions’ residence rules according to these policy objectives. In particular, the review examined the Canadian rules on individual residence. The 2005 study concluded that the “individual fact and circumstances” element of the individual residence tests in a number of jurisdictions, including Canada, could, in certain situations, (1) result in horizontal inequity, (2) reduce simplicity, and (3) leave the rules open to manipulation.8 In this paper, I do not seek to update or reproduce that study. Rather, I start by exploring the similarities between Canada’s rules on individual residence and Aus- tralia’s rules, and I consider their common weaknesses in terms of equity, simplicity, efficiency, and prevention of tax avoidance. Then, after briefly describing the Board of Taxation’s recommendations and the 2013 UK rules (which have influenced the proposed Australian reforms), along with the motives for those reforms and proposals, I evaluate them, too, according to the objectives of equity, simplicity, and efficiency (including the prevention of tax avoidance). Finally, I speculate about whether the proposed Australian changes might be a guide for any future Canadian reform, should the political circumstances of the future so dictate.

OVERVIEW OF CANADA AND AUSTRALIA’S INDIVIDUAL RESIDENCE TESTS: THE RULES AND THEIR WEAKNESSES Canada’s Individual Residence Tests The terms “resident” and “ordinarily resident” have been used in Canadian income tax law since the enacting of Canada’s first income tax statute in 1917.9 However, although the term “resident” is used more than 400 times10 in the Income Tax Act11 (more times than that, if we include the deeming provisions), the Act defines neither the term “resident” nor the term “ordinarily resident.” The Canadian tax law relies

7 Historically, since tax avoidance is distortionary, it would be considered in the context of efficiency. At the time of the study, however, a number of the Australian government’s most recent reform reviews had treated the prevention of tax avoidance as a separate policy objective. 8 Dirkis, supra note 6, at part VI conclusions. It is important to note that although the “facts and circumstances” element of the tests addresses an individual’s circumstances, individual facts and circumstances do not equate to horizontal equity. 9 Under subsection 4(1) of the Income War Tax Act, 1917, SC 1917, c. 28, tax was payable by “every person residing or ordinarily resident in Canada or carrying on any business in Canada.” 10 Edwin G. Kroft, “Jurisdiction To Tax: An Update,” in Tax Planning for Canada-US and International Transactions, 1993 Corporate Management Tax Conference (Toronto: Canadian Tax Foundation, 1994), 1:1 - 138. 11 Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”). moving to a more “certain” test for tax residence in australia n 147 principally on the common law12 to determine the residence status of individuals, basing the determination on whether they are “resident” in Canada (that is, they reside in Canada) or “ordinarily resident” in Canada13 (that is, they maintain a sufficient number of residential ties with Canada while abroad).14 Although the outcome of such a determination under common law is ultimately based on an individual’s facts and circumstances, the Canada Revenue Agency (CRA), in administrating the law, states:

The most important factor to be considered in determining whether an individual leaving Canada remains resident in Canada for tax purposes is whether the individual maintains residential ties with Canada while abroad.15

Thus, the residence concept in Canadian common law, given that it is wide enough to cover persons absent from Canada,16 seems to cover the same ground as the concept of “ordinarily resident” (that is, the place where a taxpayer has a settled routine of life and regularly, normally, or customarily lives).17 In fact, Rand J in Thomson noted that if the common-law concept of residence is given its full signifi- cance, “ ‘ordinarily resident’ becomes ‘superfluous.’ ”18 Even if “ordinarily resident” has a different meaning from “resident” at common law, under Canadian tax law a person who is ordinarily resident is deemed to be a resident.19

12 The source jurisdiction for interpreting these words appears to be the United Kingdom. In Thomson v. MNR, [1946] SCC 812, all four judges who reviewed legal precedents (Kerwin, Taschereau, Rand, and Estey JJ) considered the UK cases of Inland Revenue Commissioners v. Lysaght, [1928] AC 234 (HL) and Levene v. Inland Revenue Commissioners, [1928] AC 217 (HL). 13 See Thomson, supra note 12. 14 Rand J in Thomson, ibid., at 224, stated that the term “ ‘ordinarily resident’ carries a restrictive signification . . . and means residence in the course of the customary mode of life of the person concerned, and . . . is contrasted with special or occasional or casual residence.” Thus, the term is equated with habitual residence. This is further illustrated in cases where a person who is not “resident,” having left a country for work purposes (Cohen v. Commissioner of Inland Revenue, [1945] 13 SATC 362) or for military service (Slater v. Commissioner of Taxes, [1949] NZLR 678), is found to be “ordinarily resident” in that country. 15 Income Tax Folio S5 -F1 -C1, “Determining an Individual’s Residence Status,” at paragraph 1.10. 16 See McFadyen v. The Queen, 2000 TCC 2473; and Gaudreau v. The Queen 2004 TCC 840; aff ’d 2005 FCA 388. See also, generally, Jinyan Li, Joanne E. Magee, and J. Scott Wilkie, Principles of Canadian Income Tax Law, 9th ed. (Toronto: Thomson Reuters Canada, 2017), at 83 - 85, at paragraph 3.2(b). 17 The concept of “residence” covers former residents who have not severed all links with Canada. See McFadyen, supra note 16. See also Jack Bernstein and Kay Leung, “Who Is Ordinarily Resident in Canada?” (2001) 22:11 Tax Notes International 1309 - 16; and Jack Bernstein and Kay Leung, “News Analysis: CCRA Updates Residency Guidance” (2002) 26:3 Tax Notes International 260 - 62. 18 See Thomson, supra note 12, at 226. 19 Section 250(3) of the Act. 148 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Canada also has a 183 -day type of test. The Act20 deems persons to be residents if they “sojourn” in Canada for more than 183 days, or for several periods totalling 183 days, in a year.21 This deeming rule applies only when an individual is a non- resident throughout the year under common law. Thus, as has been noted, the term “sojourn” means something less than residence:

A sojourner is a person who is physically present in Canada, but on a more transient basis than a resident. A sojourner lacks the settled home in Canada which would make him or her a resident. A person who is a resident of another country and who comes to Canada on a vacation or business trip would be an example of a sojourner.22

Canada also has deeming rules provisions on residence that are focused on government officials and their dependants. The Act23 deems persons to be residents if they

n are members of Canadian Forces24 or overseas Canadian Forces school staff 25 or their dependent child;26 n are an ambassador, high commissioner, minister, agent-general, or other Can- adian or provincial government official or their dependent child;27 n are participants in certain international aid projects or their dependent child;28 or n are persons exempt under a tax treaty because they were related to, or a family member of, a Canadian-resident individual.29

Finally, if a person fulfills the residence requirements under the Act but is deemed under the tiebreaker test in a tax treaty to be a resident in another state, the person is treated as a non-resident for tax purposes.30

20 The fundamental concepts underlying the rules can be traced back to 1927: see Kroft, supra note 10, at 1:6. They were last modified in 1999: see Bernstein and Leung, “Who Is Ordinarily Resident in Canada?” supra note 17. 21 Section 250(1)(a) of the Act. 22 Li, Magee, and Wilkie, supra note 16, at 85 - 86, at paragraph 3.2(c). 23 The fundamental concepts underlying the rules can be traced back to 1927: see Kroft, supra note 10, at 1:6. They were last modified in 1999: see Bernstein and Leung, “Who Is Ordinarily Resident in Canada?” supra note 17. 24 See paragraph 250(1)(b) of the Act. 25 Ibid., at paragraph 250(1)(d.1). 26 Ibid., at paragraph 250(1)(f ). 27 Ibid., at paragraphs 250(1)(c) and (f ). 28 Ibid., at paragraphs 250(1)(d) and (f ). 29 Ibid., at paragraph 250(1)(g). 30 Ibid., subsection 250(5). moving to a more “certain” test for tax residence in australia n 149

Australia’s Tests for Individual Residence A statutory definition of “resident” came into effect on July 1, 1930, following Aus- tralia’s adoption of worldwide (residence-based) taxation.31 These residence rules had their genesis in the recommendations of the Australian 1920 Royal Commis- sion on Taxation,32 and the rules’ design was influenced by the 1920UK Report of the Royal Commission on The Income Tax33 and by the British common law. A definition of “resident” similar to the “current resident” definition in section 6(1) of the Income Tax Assessment Act 1936 was enacted in 1930.34 The term “Australian resident” is currently defined, in section 995 - 1 of the In- come Tax Assessment Act 1997,35 as a person who is a resident under the ITAA 1936. The statutory definition of “resident or resident of Australia” in section 6(1) of the ITAA 1936 consists of a “resides” (that is, residence) test and three statutory deeming tests.36 This residence test, as with the Canadian approach, is the primary test for individual residence. It classifies an individual as a resident if he or she can be said to be actually “residing in Australia”: “If a person is in fact residing in Australia then, irrespective of his nationality, citizenship or domicile, he is to be treated as a resident for the purposes of the Act.”37 Given the UK origins of the “resides” test, it is not surprising that Australia, like Canada, has continued to rely on those British decisions in interpreting the meaning of the word “resides.”

31 Section 4 of the Income Tax Assessment Act, No. 37 of 1922, was amended by section 2(a) and (i) of the Income Tax Assessment Act, No. 50 of 1930 (assented to on August 18, 1930) to substitute a new definition of “assessable income” (which extended the scope of assessable income to include, in the case of a resident, the gross income derived from all sources), and to insert a definition of “resident” or “resident of Australia.” 32 Australia, Royal Commission on Taxation, Reports of the Royal Commission on Taxation, Nos. 1 - 3, Together with Appendices (Melbourne: Government Printer, 1921 - 22), at 108. 33 United Kingdom, Report of the Royal Commission on the Income Tax, 1920, Presented to Parliament by Command of His Majesty (London: His Majesty’s Stationary Office, 1920), at 9. 34 The section 6(1) definition in the Income Tax Assessment Act 1936, No. 27, 1936 (herein referred to as “the ITAA 1936”) is practically identical to the original definition enacted by the Income Tax Assessment Act 1930, except for the superannuation test (section 6(1) definition (a)(iii)), which was added by the Income Tax Assessment Act, No. 30 of 1939. The subsequent changes to the section 6(1) definition (a)(i) only reflect changes to the Commonwealth’s superannuation scheme named in section 6(1) definition (a)(iii). 35 Income Tax Assessment Act 1997, No. 38 of 1997. 36 There also exists a definition of “temporary resident” in section 995 - 1 of the Income Tax Assessment Act 1997, and the undefined term “ordinarily resident” is used in sections 23AA, 251U(1)(e), and 252A(2A)(b) of the ITAA 1936. 37 Australia, Explanatory Notes, Bill To Amend the Income Tax Assessment Act 1922 - 1929 (Canberra: Commonwealth Government Printer, 1929), at 9. 150 n canadian tax journal / revue fiscale canadienne (2020) 68:1

The first two statutory tests, which originate in the 1930 definition, are the “domicile” test38 and the “more than half year,” or “183 -day,” test.39 The approach of these tests is similar to that of the “continuing attachment” rules and to the approach informing Canada’s “183 -day sojourn” rules. These tests were aimed at extending residence to individuals who may not reside in Australia on the basis of the primary test.40 But, unlike the Canadian tests, both of these Australian tests are subject to qualifications aimed at limiting their scope so as to avoid possible double taxation.41 In 1939, a third statutory test was enacted, the “superannuation” (that is, pension fund) test.42 It was enacted in order to bring within the scope of Australian taxation the salaries paid to locally engaged High Commission staff who had recently been extended the benefits of the Commonwealth superannuation scheme.43 The superannuation test has been changed since 1939 to reflect the introduction of new

38 The “domicile” test is in subsection (a)(i) of the definition and treats as a resident a person “whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia.” The purpose of this test was to place public officials located abroad in the same position as foreign public officials representing their governments in Australia. See supra note 37, at 10. The government had determined that the high commissioner for Australia in London did not pay tax in Australia because services were rendered outside Australia; they were exempt from British income tax and received the general exemption available to residents on their Australian-source income. 39 The “more than half year” or “183 - day” test is in subsection (a)(ii) of the definition and treats a resident as a person “who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that the person’s usual place of abode is outside Australia and that the person does not intend to take up residence in Australia.” The test was introduced for the purpose of obviating the difficulties in establishing whether a person is a resident in any country. See supra note 37, at 11. This exception was enacted (in the absence of tax treaties in 1930) in order to reduce the possibility of double taxation by ensuring that the visitors were not treated as residents. 40 See supra note 37, at 9. 41 The “domicile” test does not apply if a person has established a permanent place of abode elsewhere. The purpose of the rebuttal was to ensure that persons who had abandoned their Australian residence would not continue to be treated as residents. Such a protection was crucial at the time because, in the absence of tax treaties, those persons would have been potentially subjected to double taxation in respect of the income earned in their new place of residence. See supra note 37, at 10. The “more than half year” test will not apply if the commissioner is satisfied that the person’s usual place of abode is outside Australia and that he does not intend to take up residence in Australia. The qualification was introduced (in the absence of tax treaties) to reduce the possibility of double taxation by ensuring that the visitors were not treated as residents (for example, “no danger of treating as residents persons who are purely visitors”). See ibid., at 11. 42 The “superannuation” test in subsection (a)(iii) of the definition was added by the Income Tax Assessment Act 1939. Under this provision, a person who is either (1) a member of the superannuation scheme established by deed under the Superannuation Act 1990, No. 38 of 1990 or (2) an eligible employee for the purposes of the Superannuation Act 1976, no. 31 of 1976 (the “named schemes”) is deemed to be a resident. The spouse, or a child under 16 years of age, of such a person is also deemed by that relationship to be a resident under the test. 43 See Australia, House of Representatives, Parliamentary Debates, September 21, 1939, at 964. moving to a more “certain” test for tax residence in australia n 151

Commonwealth superannuation schemes. Unlike Canada’s government-service deeming rules, the superannuation test is not a government-service test per se, since it applies only to persons in the named schemes. It is also important to note that the scope and relevance of the superannuation test have been dramatically reduced; both schemes have been closed to new participants and to the impact of fund choice introduced by the Superannuation Legislation Amendment (Choice of Superannu- ation Funds) Act 2004.44 This act has generally enabled employees, from July 1, 2005, to choose the complying superannuation fund to which their employers are required to make compulsory superannuation contributions.45

Overview of the Weaknesses in Australia’s and Canada’s Tests for Individual Residence As mentioned above, I do not intend, in highlighting the common weaknesses of the Australian and Canadian rules on individual residence, to repeat the comprehensive review undertaken in 2005.46 Rather, my intention is to highlight the features of these rules that most clearly fail to meet the four tax policy objectives of equity, efficiency, simplicity, and the prevention of tax avoidance. To determine an individual’s residence, Canada’s and Australia’s residence rules, like those in many jurisdictions, rely on “individual facts and circumstances” tests and requirements. In Canada, a finding of whether an individual is “resident in Canada” or “ordinarily resident” is determined according to many factors that have been identified by the common law (for example, presence in Canada, location of family, and business ties). Similarly, in Australia, the “principal residence” (“resides in Aus- tralia”) test is based on many of the same factors as are identified by the common law. Even the statutory tests for deeming residence contain undefined terms that require the common law’s definitions. In Canada, the deeming rules use terms, such as “sojourn,” that are not only unique to Canada but also undefined and therefore of uncertain meaning.47 Australia’s deeming rules, too, use undefined words and phrases, such as “domicile,”48 “permanent place of abode,” “usual place of abode,”

44 Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004, No. 102, 2004. This Act was introduced on June 26, 2002 as Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 2002. 45 Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004, sections 32C(1), (3), (4), and 32NA(2)(a). 46 See chapter 3 in Dirkis, supra note 6. 47 That said, one may consider the NZ case of Slater, supra note 14, at 683 - 84, where a medical practitioner, held as a prisoner of war between 1940 and 1944, was found to be “ordinarily resident” in New Zealand. Northcroft J noted that this individual was no more than a sojourner and that, although he had a continued presence in prisoner of war camps, he could not be said to be resident in the camps. 48 Although the general common-law concept of “domicile” was received from the United Kingdom upon settlement, it has been modified in Australia by uniform state and federal legislation: Domicile Act 1982, No. 1 of 1982, as amended, New South Wales Domicile Act 152 n canadian tax journal / revue fiscale canadienne (2020) 68:1 and “does not intend to take up residence,” that rely on the common law for interpretation. Although it is claimed that the “fact and circumstances” tests are more “compat- ible with the political theory that government power comes from the consent of the governed,”49 they do not satisfy all of the policy objectives of equity, simplicity, efficiency, and the prevention of tax avoidance. Under these tests, the horizontal equity criterion is not met, since minor variations in taxpayers’ circumstances may result in taxpayers in similar circumstances being taxed differently. Second, “fact and circumstances” tests generally do not meet the simplicity criterion. The case-by- case determination of all key concepts means the rules can (1) give rise to arbitrary outcomes, (2) impose high compliance costs, (3) create uncertainty, and (4) be hard to administer.50 Finally, because the tests rely on individual facts and circumstances, they are easy to manipulate, and they generally fail the efficiency (prevention of tax avoidance) criterion. Australia’s Board of Taxation, in its August 2017 report to the Australian Treas- ury, concluded that Australia’s rules on individual residence

impose an inappropriate compliance burden on many taxpayers with relatively simple affairs as the rules are inherently uncertain to apply, include outdated concepts and rely on a “weighting” system that leads to inconsistent outcomes, which also gives rise to integrity risks.51

Further, both countries have half-year tests based on whether the individual’s presence (sojourn) in the jurisdiction is for more than (1) 183 days in a year (Canada) and (2) one-half of the year of income (Australia). Australia’s test, however, fails to meet the equity criterion because it includes exclusionary glosses that excuse individuals when the commissioner is satisfied that they have a “usual place of abode elsewhere” and “do not intend to take up residence.” As noted above, these “facts and circumstance” glosses can result in horizontal inequity because taxpayers in

1979, No. 118; Queensland Domicile Act 1981; South Australia Domicile Act 1980; Tasmania Domicile Act 1980, Victorian Domicile Act 1978, Western Australian Domicile Act 1981; and Northern Territory Domicile Act 1979. These acts abolish the rule of dependent domicile of married woman (section 6) and the rule of revival of domicile of origin (section 7), and they define when the capacity to have independent domicile exists (section 8); however, they do not actually define “domicile.” 49 Michael J. McIntyre, The International Income Tax Rules of the United States, 2d ed. (Stoneham, MA: Butterworth, 1992), at 1 - 21. 50 Peter G. Whiteman, David Goy, Francis Sandison, and Michael Sherry, Whiteman on Income Ta x , 3d ed. (London: Sweet and Maxwell, 1988), at 137. 51 Supra note 2, at paragraph 1.2(b). However, this finding by the board is at odds with the recommendation made in Canada, Report of the Royal Commission on Taxation, vol. 4 (Ottawa: Queen’s Printer, 1966), at 541, stating that “residence continue[s] to be the principal basis for determining liability to tax, largely because residence seems to imply a closer association than citizenship between the taxpayer and the use of services provided by a taxing jurisdiction.” moving to a more “certain” test for tax residence in australia n 153 similar circumstances can be taxed differently, while the facts and circumstance elements of the Australian test fail to meet the simplicity criterion. This is also a problem for Canada’s use of the term “sojourn,” as discussed above. In addition, because the measurement for residence under Australia’s half-year test involves an income year (that is, July 1 to June 30), the test fails to meet the efficiency (prevention of tax avoidance) criterion: taxpayers could spend upto 364 days in Australia but still satisfy the 183 -day test, provided that the 182 days were prior to July 1 and the balance were from July 1.52 Thus, the 183 -day test does not meet the tax-avoidance criterion because specific classes of persons can easily satisfy the test. Further, it has been argued that such arbitrary “day” tests tend to catch only taxpayers who are unsophisticated, unadvised,53 unlucky (for example, an individual taxpayer who is deemed a resident because a tailwind caused him to arrive in the country half an hour earlier than he might have),54 or poor planners (for example, the taxpayer has not taken into account that the time period covered a leap year).55 Finally, the Canadian rules contain a series of tests for determining whether civil servants of various kinds and their children should be deemed residents. These “government service” tests are driven by a political or national imperative. If the scope of the test is wide, however, as it is in Canada, these tests create horizontal equity between all government workers (that is, government workers in similar economic circumstances are treated similarly). At the same time, however, the tests perpetuate horizontal inequity between those government workers and all other non-resident workers employed by the non-government sector. And yet the government-service tests generally meet the simplicity criterion: the rules apply in a predictable way, are not complex, result in low compliance costs, and are expressed clearly. These tests also meet the “co-ordinated with other tax rules” element of the simplicity criterion, being consistent with the government-service rules in most tax treaties. In contrast, Australia’s superannuation test, which was not devised as a government- service test, lacks horizontal equity insofar as it applies inconsistently to public

52 Arthur Andersen, Working Overseas (c 1988), at 4, noted that this measurement rule provides a major tax-planning opportunity, particularly for expatriate experts employed in Australia in the first and last year of their assignment. 53 See Brian J. Arnold, International Tax Primer, 3d ed. (Alphen aan den Rijn, the Netherlands: Kluwer Law International BV, 2016), at paragraph 2.2.1. 54 Clinton R. Alley and Duncan Bentley, “In Need of Reform? A Trans-Tasman Perspective on the Definition of ‘Residence’ ” (1995) 5:1 Revenue Law Journal 40 - 54, cites the case of an unlucky taxpayer (a university lecturer) who, because of a tailwind, arrived on day 365 of his absence, thereby retaining his residence in New Zealand. Unfortunately, the judgment in Case F138 (1984), 6 NZTC 60237; TRA Case 21 (1984), 8 TRNZ 140 does not record this fact. 55 In Wilkie v. Commissioner of Inland Revenue, [1951] 32 TC 495, a taxpayer was found not to be resident for more than six months in a leap year (365 days) because he had been present for only 182 days and 20 hours. 154 n canadian tax journal / revue fiscale canadienne (2020) 68:1 servants (only applying to those who are members of the prescribed schemes) and to the spouses and children of those public servants (because it deems them to be residents regardless of the degree of actual connection between the employee and her spouse and children). In addition, the rule also appears to amount to discrimin- ation based on marital status. In summary, both the Australian and the Canadian tests for individual residence fail in some degree the four tax policy objectives of equity, simplicity, efficiency, and the prevention of tax avoidance.

ABANDONING THE ROLE OF THE COMMON LAW IN TESTING FOR INDIVIDUAL RESIDENCE The weaknesses common to the residence tests of both Canada and Australia are the same in many other jurisdictions. As mentioned above, the United Kingdom, in an attempt to overcome these weaknesses, has moved to a more arbitrary test, and a similar reform has been recommended in Australia. Below, I briefly explore the 2013 UK changes and the reform proposals in Australia. After briefly considering the reasons for change and the scope of the actual and proposed changes, I evaluate them according to the criteria for good tax law.

The 2013 UK Rules Drivers and Policy In 2013, the United Kingdom, after almost 200 years of having no definition of “residence” for individuals and of relying on the jurisprudence that constitutes the common-law resident test,56 adopted a statutory definition of “residence” for individuals.57 The changes were made in conjunction with reforms to the definition of “ordinary residence.” It was achieved after a stop-start reform process that spanned some 77 years.58 This whole process was driven by a desire to create certainty.

56 As noted by Dixon J in Gregory v. Deputy Federal Commissioner of Taxation (WA), 1937 HCA 57, the principles were first settled inAttorney General v. Coote, [1817] 146 All ER 433. 57 See section 218 and schedule 45 of the Finance Act 2013 (UK), c. 29 (herein referred to as “the Finance Act 2013 (UK)”), which received royal assent on July 17, 2013. 58 The process leading to codification of the residence test began in 1936 and finally, after many false starts, progress was made on March 23, 2011, with the United Kingdom, HM Treasury, 2011 Budget, March 23, 2011, at paragraph 1.136; its intention was to introduce a statutory definition of “residence” as of April 6, 2012. On June 17, 2011, HM Treasury and HM Revenue & Customs (HMRC) released Statutory Definition of Tax Residence: A Consultation (London: HM Treasury and HMRC, June 2011) (www.gov.uk/government/uploads/system/uploads/ attachment_data/file/81588/consult_condoc_statutory_residence.pdf ), which also included options for the reform of ordinary residence and overseas workday relief and a second consultative paper Reform of the Taxation of Non-Domiciled Individuals. This consultation is concluded. See United Kingdom, HM Treasury and HM Revenue & Customs, Reform of the Taxation of Non-Domiciled Individuals: Summary of Responses to Consultation (London: HM Treasury and HMRC, December 2011) (www.gov.uk/government/consultations/ moving to a more “certain” test for tax residence in australia n 155

The successful latest part of this process began in 2011. On June 17 of that year, HM Treasury and HM Revenue & Customs (HMRC) claimed that the reform process that restarted on March 23, 2011 was being driven by the government’s commit- ment “to introducing a statutory test that is transparent, objective, and simple to use.”59 Similarly, the HM Treasury and HMRC claimed in a statement on June 21, 2012 that the process was driven by a “desire that the rules for determining whether an individual is tax resident in the UK should be clear, objective and unambiguous.”60 There were other motives, however, unrelated to simplification or clarity. The first was a desire to reverse the Supreme Court’s 2011 decision in the Gaines-Cooper case.61 In that case, the Supreme Court found that a taxpayer was resident in the United Kingdom under the law despite appearing not to be a resident under the HMRC’s practice.62 The HM Treasury and HMRC also wanted to close down a

reform-of-the-taxation-of-non-domiciled-individuals). In a ministerial statement issued on December 6, 2011, the exchequer secretary to the Treasury advised that a number of “detailed issues” were raised in the consultation and that, therefore, this test would be delayed until the Finance Bill 2013, effective April 2013. It was noted that any reforms to the definition of “ordinary residence” would also be made at this time. See United Kingdom, HM Treasury, “Ministerial Statement: Non-Domicile Taxation and Statutory Residence Test,” December 6, 2011 (https://webarchive.nationalarchives.gov.uk/20131211102258/http://www.hmrc.gov.uk/ budget-updates/06dec11/wms-non-dom.pdf ). On March 21, 2012, the budget 2012 confirmed that, effective April 6, 2013, the government would introduce a statutory definition of “tax residence” and that it would publish a summary of responses to the consultation, together with draft legislation for comment. See United Kingdom, HM Treasury, 2012 Budget, March 21, 2012, at paragraph 2.51. On June 21, 2012, the HM Treasury and HMRC issued United Kingdom, HM Treasury and HM Revenue & Customs, Statutory Definition of Tax Residence and Reform to Ordinary Residence: A Summary of Responses (London: London: HM Treasury and HMRC, June 2012) (www.gov.uk/government/uploads/system/uploads/attachment_data/ file/190098/condoc_r esponses_srt_or_summary.pdf ), which included (1) the government’s response to the issues raised in consultation and (2) draft legislation, and it requested further consultation to refine some details. In December 2012, HM Treasury releasedStatutory Definition of Tax Residence and Reform of Ordinary Residence: Summary of Responses to the June 2012 Consultation (London: HM Treasury, December 2012) (www.gov.uk/government/uploads/ system/uploads/attachment_data/file/190097/consult_responses_statutory_definitions_of_tax _residence_reform_of_ordinary_residence_responses.pdf ), which sets out the government’s responses to the June 2012 consultation and provides an overview of changes made to the draft legislation. 59 See Statutory Definition of Tax Residence: A Consultation, supra note 58, at paragraph 1.7. 60 Statutory Definition of Tax Residence and Reform of Ordinary Residence: A Summary of Responses, supra note 58, at 3. 61 Davies & Anor, R (on the application of ) v. Revenue and Customs, 2011 UKSC 47 (BAILII). 62 Anna Florczak, “The New Statutory Definition of Residence for Individuals in the UK in the Light of the Tax Treaty Dual Residence Rules” (Master’s thesis, University of London, Institute of Advanced Legal Studies, 2013) (http://sas-space.sas.ac.uk/5887/1/Anna%20 Florczak%20MA%20Dissertation.pdf ). 156 n canadian tax journal / revue fiscale canadienne (2020) 68:1 number of opportunities for tax minimization. A clear policy motive underlying the change was to ensure that residence, once obtained, is very difficult to lose.63

Overview of the Legislation The new “statutory residence” test consists of a “basic rule”64 stating that a person will be deemed a resident only if she satisfies either the “automatic residence” test65 or the “sufficient ties” test.66 If neither test is satisfied for a tax year, that person (referred to as “P” in the legislation) is non-resident for that year.67 The “automatic residence” test is satisfied if P satisfies at least one of the four “automatic UK” tests68 and none of the “automatic overseas” tests.69 The four “automatic UK” tests consist of (1) a 183 -day rule,70 (2) a rule that “sufficient time” must be spent at home in the United Kingdom,71 (3) the “full time work in the UK” test,72 and (4) a specific test that applies to a year of death.73

63 See Statutory Definition of Tax Residence: A Consultation, supra note 58, at paragraph 3.6. 64 See section 218 and paragraph 3 of schedule 45 of the Finance Act 2013 (UK), which states the following: “An individual (‘P’) is resident in the UK for a tax year (‘year X’) if—(a) the automatic residence test is met for that year, or (b) the sufficient ties test is met for that year.” 65 The Finance Act 2013 (UK), schedule 45, at paragraph 5. 66 Ibid., schedule 45, at paragraph 17. 67 Ibid., schedule 45, at paragraph 4. 68 Ibid., schedule 45, at paragraphs 6 - 10. 69 Ibid., schedule 45, at paragraphs 11 - 16. 70 Ibid., schedule 45, at paragraph 6. 71 Ibid., schedule 45, at paragraph 8. The person’s presence must be for at least one period of 91 consecutive days (at least 30 of which fall within the tax year) throughout which condition A or condition B (or a combination of those conditions) is met. Condition A is that P has no home overseas, while condition B addresses the situation where P has one or more homes overseas but does not spend more than a “permitted amount of time” in any one of those homes in the tax year. A “sufficient amount of time” in a UK home is presence there at any point on at least 30 separate days in the tax year (ibid., schedule 45, at paragraph 8(4)), while “permitted amount of time” in an overseas home is presence there at any point on fewer than 30 days in the tax year (ibid., schedule 45, at paragraph 8(5)). References to P being present in a home on at least, or fewer than, 30 days are to 30 separate days, whether consecutive or intermittent, and that for these purposes, P is present at a home only if it is P’s home at that time (ibid., schedule 45, at paragraph 8(6)). Where P has more than one home in the United Kingdom, the test must be applied to each of those homes individually (ibid., schedule 45, at paragraph 8(8)). For a more detailed explanation, see Explanatory Notes to the Finance Act 2013 (UK) (www.legislation.gov.uk/ukpga/2013/29/notes/contents). 72 Finance Act 2013 (UK), schedule 45, at paragraph 9. The test is met if P works “sufficient hours” (as defined in ibid., schedule 45, at paragraph 9(2)) in the United Kingdom over a period of 365 days without a “significant break” from work (defined in ibid., schedule 45, at paragraph 29), and all or part of the 365 -day period falls within the tax year. More than 75 percent of P’s working days in the 365 -day period must be UK work days (ibid., schedule 45, at paragraph 9(1)(d)). A UK work day is a day in which P does more than 3 hours’ (Notes 72 and 73 are continued on the next page.) moving to a more “certain” test for tax residence in australia n 157

There are also five exclusionary “automatic overseas” tests any one of which, if satisfied, deems P to be non-resident for the tax year for which the test is applied.74 P will be non-resident for a tax year if

1. P spends fewer than 16 days in the United Kingdom in that year, does not die during the year, and was resident for one or more of the three tax years immediately preceding that year;75 2. P spends fewer than 46 days in the United Kingdom in that year and was resident for none of the three tax years immediately preceding that year;76 3. P works “sufficient hours overseas” for that year without a significant break from work,77 has fewer than 31 UK work days (that is, days on which the individual, while in the United Kingdom, works for more than three hours) in that year, and spends fewer than 91 days in the United Kingdom in that year78 (the “full time work overseas” test);79

work in the UK. There must be at least one day falling within both the 365 -day period and the tax year that is a UK work day (ibid., schedule 45, at paragraph 9(e)). “Sufficient hours” is determined by a five-step calculation in paragraph 9(2). Under that calculation process, P will have worked sufficient hours in the United Kingdom if P has worked on average 35 hours a week or more in the UK. The test will not apply if P has a relevant job on board a vehicle, aircraft, or ship at any time in the tax year (as defined in ibid., schedule 45, at paragraph 30) and makes, as part of the job, at least six cross-border trips in the tax year that either begin or end in the United Kingdom (or both begin and end in the United Kingdom) (ibid., schedule 45, at paragraph 9(3)). 73 Ibid., schedule 45, at paragraph 10. The broad effect of this test is that if P has been resident under one of the automatic UK residence tests in each of the previous three tax years and has a home in the United Kingdom, P remains resident in the year of death unless P went abroad in the previous year in circumstances such that split-year treatment applied (provided none of the automatic overseas tests are met). For a more detailed explanation, see the explanatory notes to the Finance Act 2013 (UK), supra note 71. 74 The Finance Act 2013 (UK), schedule 45, at paragraph 11. 75 Ibid., schedule 45, at paragraph 12. The Explanatory Notes to the Finance Act 2013 (UK), supra note 71, section 218, schedule 45, at paragraph 31, notes that this “exclusion ensures that P does not automatically become non-resident if P dies early in the tax year.” 76 The Finance Act 2013 (UK), schedule 45, at paragraph 13. 77 Ibid., schedule 45, at paragraph 29. 78 Ibid., schedule 45, at paragraph 22. 79 Ibid., schedule 45, at paragraph 14. As with the “sufficient hours” test in paragraph 9 of schedule 45, there is a five-step calculation in paragraph 14(3) for assessing whether or not P has worked sufficient hours overseas—an average of more than 35 hours in the tax year (ibid., schedule 45, at paragraph 14(3))—and there is an exclusion from the third “automatic overseas” test if P has a relevant job on board a vehicle, aircraft, or ship at any time in the year (as defined in paragraph 30) (see ibid., schedule 45, at paragraph 14(4)). The special rule in paragraph 23(4) (under which certain days on which P is present in the United Kingdom other than at midnight count as days spent in the United Kingdom) does not apply for the purposes of the third automatic overseas test (see ibid., schedule 45, at paragraph 14(2)). 158 n canadian tax journal / revue fiscale canadienne (2020) 68:1

4. P is non-resident for a tax year and dies during that year (subject to special conditions);80 or 5. P dies during a tax year after having already been non-resident under the third automatic overseas test for the two preceding tax years (or for the year preceding the current tax year, with the year before that qualifying for case 1 split-year treatment), and meets the third automatic overseas test as modified.81

As mentioned above, the second criterion under the basic test is the “sufficient ties” criterion. P will be resident under that test if P satisfies none of the “automatic UK” tests and the “automatic overseas” tests and has sufficient “UK ties”82 for the tax year.83 The number of UK ties sufficient to makeP a UK resident for a tax year depends on (1) whether she was a UK resident for any of the three tax years immediately preceding that year and (2) the number of days she spends in the United Kingdom in the year.84 The number of UK ties required is set out in paragraphs 18 and 19 of schedule 45 of the Finance Act 2013 (UK).85 In summary, the legislation enacted to give effect to the various tests—the basic test, the “automatic residence” test, the “automatic UK” tests, and the “automatic overseas” tests, along with the “sufficient tie” test and its embedded definitions— consists of 159 complex sections. This legislation includes numerous detailed definitions (covering, for example, what constitutes a “day spent,” a “home,” “work,”

80 Ibid., schedule 45, at paragraph 15. The conditions are that P “spends fewer than 46 days in the UK in that year, and either P was non-resident for the two tax years immediately preceding the tax year in which P dies or was non-resident for the tax year immediately preceding that tax year and the tax year before that was a ‘split year’ by virtue of Case 1, 2, or 3 of Part 3 of this Schedule (see paragraphs 44 - 46).” See the Explanatory Notes to the Finance Act 2013 (UK), supra note 71, section 218, schedule 45, at paragraph 37. The explanatory notes, ibid., state that the effect of this provision is “to ensure that an individual who dies without establishing three full years of non-residence may in certain circumstances benefit from a 46 -day rule equivalent to that in paragraph 13.” 81 The Finance Act 2013 (UK), schedule 45, at paragraph 16. The fifth automatic overseas test ensures that P’s non-resident status is preserved in certain circumstances where she dies while working overseas. The modifications to be applied to the third automatic overseas test in this situation are set out in paragraph 16(3). 82 Ibid., schedule 45, at paragraph 17. 83 Ibid., part 2 of this schedule. 84 Ibid., schedule 45, at paragraph 17(3). 85 Ibid., schedule 45, at paragraph 17(3), paragraph 18, sets out how the number of days P spends in the United Kingdom in a tax year determines the number of UK ties sufficient to make P resident for that year if P was a UK resident in one or more of the three tax years immediately preceding the year. Paragraph 19 sets out how the number of days P spends in the United Kingdom in a tax year determines the number of UK ties sufficient to make P resident for that year if P was a UK resident in none of the three tax years immediately preceding the year. Modifications for where P dies during the year are set out in paragraph 20. moving to a more “certain” test for tax residence in australia n 159 and a “location of work”) and extensive and specific anti-avoidance rules (many focused on countering actions that aim to avoid the scope of the defined terms). This is not an ideal outcome, since the complexity of subjectiveness has been re- placed with legislative complexity. One commentator, however, has concluded that although the new rules bring

a greater certainty when dealing with the complex situations of internationally mobile individuals than the old rules . . . there are certain areas which are still subjective and . . . [they are] . . . undesired complexity as the legislation is a maze of the tests combined with their subsidiary tests and the definitions which are either confusing or illogical at times.86

Thus, the very attempt to convert a complex policy into a certain outcome is made at the cost of complexity and a loss of equity, which is not ideal.

Is This Model Applicable for Australia and Canada? Whether such a model is suitable for Australia or Canada can be determined only in relation to each jurisdiction’s policy parameters. From the Australian perspective, the policies that underlie the UK rules do not reflect Australia’s current policy.87 The major difference is the UK policy of ensuring that resident status, once obtained, is very difficult to lose.88 Another major policy difference between the United Kingdom and the other two countries is that the UK rules are designed to work hand in hand with a “non- domiciled residents” regime under which UK residents who have their permanent home (“domicile”) outside the United Kingdom may not have to pay UK tax on foreign income if it is not remitted to the United Kingdom and is less than £2,000 in a year. If the income is £2,000 or more, or any money is brought back to the United Kingdom, that income is either subject to UK tax or the “remittance basis” of taxation applies. An exit tax can also be imposed. Australia does not have this system, and therefore the scope of the UK rules might need modification if the rules were adopted in Australia. The Board of Taxation observed, in its 2017 report, that the United Kingdom’s statutory residence test

would improve certainty for individuals applying the residency rules. However, the Board does not consider that the increased complexity and divergence from “principles based drafting” is justified.89

86 Florczak, supra note 62, at 50. 87 That policy is expressed in the source cited in supra note 37. 88 See Statutory Definition of Tax Residence: A Consultation, supra note 58, at paragraph 3.6. 89 See observation 1 in the board’s 2017 report, supra note 3, at 10. It is noted in ibid., at paragraph 1.172, “that codification akin to the UK approach would not align with the 160 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Despite that, the board recommended that,

[s]ubject to the policy statement, . . . each residency test begin with a bright line test to remove the facts and circumstances based tests for the majority of individuals . . . [and] that further consultation on these bright line tests be based on the New Zealand and United Kingdom residency rules.90

The author is unable to determine whether similar concerns about complexity and divergence from “principles-based” drafting exist in Canada.

The Proposed Australian Changes Rationales and Policy Despite the “facts and circumstances” nature of Australia’s rules on individual tax residence, only 25 matters dealing with the residence of individuals were heard by the High Court, the Full Federal Court of Australia, the Federal Court of Australia, and the Administrative Appeal Tribunal (AAT) in the 79 years between 1930 and 2009. This low level of litigation was probably owing to (1) the fact that much of the foreign income earned by residents was exempt in Australia91 until 1987; and (2) the existence, from 1987, of a wide exemption for foreign employment income derived by Australian-resident individuals.92 This changed, however, with the narrowing (as of July 1, 2009) of an exemption93 for foreign employment income derived by an Australian-resident individual94 and with the increased compliance activity in respect of offshore income, carried out by an ongoing cross-agency task force led by the ATO.95 Between 2010 and 2019, there

Government’s simplification agenda and the Board’s preferred principles based drafting approach. The overly complex drafting of the law and increased length of legislation is in direct conflict with simplification. Further, as codification is solely a process of importing into strict legislative provisions the current common law and guidance on the residency tests, it would not allow for the modernisation of the rules that the Board considers necessary.” 90 See recommendation 5 in the board’s 2017 report, supra note 3, at 53. 91 Under the former section 23(q) of the ITAA 1936, income that was subjected to tax in country of source was exempt. By late 1985, this prevailing exemption of foreign-source income encouraged investment in low-tax jurisdictions, which resulted in much foreign-source income being either not taxed or taxed lightly. See Alan Boxer, “Tax Reform Revisited” (1985) 2:4 Australian Tax Forum 363 - 84; and Richard D. Fayle, “Controlling Abusive Tax Shelters” (1985) 2:1 Australian Tax Forum 53 - 69. 92 In 1987, section 23(q) of the ITAA 1936 was repealed as the foreign tax credit rules (as they were then) were introduced with the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 No. 51 of 1986, and a wide employment income exemption was enacted (section 23AG of the ITAA 1936). 93 In section 23AG of the ITAA 1936. 94 See Tax Laws Amendment (2009 Budget Measures No. 1) Act 2009, No. 62, 2009. 95 The task force, Project Wickenby, was established in 2006. Its membership includes the ATO, the Australian Crime Commission (ACC), the Australian Federal Police, the moving to a more “certain” test for tax residence in australia n 161 have been 43 matters heard by the High Court, the Full Federal Court of Australia, the Federal Court of Australia, and the AAT in respect of the residence of individuals and issues associated with the residence of individuals. The issues covered in the litigation have included

n the application of the “resides” and “domicile” tests;96 n the determination of “permanent place of abode”;97 n the application of the “more than half year” test;98 n the application of the “superannuation” test;99 n the treaty tiebreaker test in article 4(2);100 and n related matters associated with the onus of proof and the provision of evidence in the context of residence disputes, and with the application of the former section 23AG of the ITAA 1936 (the “foreign employment income” exemption).101

Australian Securities and Investments Commission, the Attorney General’s Department, the Commonwealth Director of Public Prosecutions, and the Australian Transaction Reports and Analysis Centre. For more information, see Australian Government, Taxation Office, “Project Wickenby Results” (www.ato.gov.au/General/The-fight-against-tax-crime/News-and-results/ Project-Wickenby-results). 96 Mynott and Commissioner of Taxation, [2011] AATA 539; Iyengar and Commissioner of Taxation, [2011] AATA 856; Gunawan and Commissioner of Taxation, [2012] AATA 119; Sneddon and Commissioner of Taxation, [2012] AATA 516; Sully and Commissioner of Taxation, [2012] AATA 582; Re: Bezuidenhout and Commissioner of Taxation, [2012] AATA 799; Ellwood and Commissioner of Taxation, [2012] AATA 869; Re: Pillay and Commissioner of Taxation, [2013] AATA 447; ZKBN and Commissioner of Taxation, [2013] AATA 604; Murray and Commissioner of Taxation, [2013] AATA 780; Re: Dempsey and Commissioner of Taxation, [2014] AATA 335; Agius and Commissioner of Taxation, [2014] AATA 854; aff’d [2015] FCA 707; but further appeal lodged in 2015;The Engineering Manager and Commissioner of Taxation, [2014] AATA 969; Hughes and Commissioner of Taxation, [2015] AATA 1007; Landy and Commissioner of Taxation, [2016] AATA 754. 97 Re: Boer and Commissioner of Taxation, [2012] AATA 574; Mayhew and Commissioner of Taxation, [2013] AATA 130; Harding v. Commissioner of Taxation, [2018] FCA 837; rev’d [2019] FCAFC 29; aff ’d [2019] HCATrans 191;Handsley and Commissioner of Taxation, [2019] AATA 917; and Stockton v. Commissioner of Taxation, [2019] FCA 1679. 98 Re: Clemens and Commissioner of Taxation, [2015] AATA 124; Re: Jaczenko and Commissioner of Taxation, [2015] AATA 125; Re: Koustrup and Commissioner of Taxation, [2015] AATA 126; Groves and Commissioner of Taxation, [2011] AATA 609; and Guissouma and Commissioner of Taxation, [2013] AATA 875. 99 Baker and Commissioner of Taxation, [2012] AATA 168. 100 Re: Tan and Commissioner of Taxation, [2016] AATA 1062. 101 Shord v. Commissioner of Taxation, [2017] FCAFC 167 (AAT error re section 23); rev’g Shord v. Commissioner of Taxation, [2016] FCA 761 (section 23AG(7) and onus); aff ’g [2015] AATA 355 (resident test); Boyd and Commissioner of Taxation, [2013] AATA 494 (section 23AG); Coventry v. Commissioner of Taxation, [2018] AATA 175 (section 23AG(1AA)(a) exempted a public servant’s employment income from an aid project despite its being exempt from tax in Pakistan under 162 n canadian tax journal / revue fiscale canadienne (2020) 68:1

The sheer volume of this litigation gave the commissioner ammunition to argue that the current system is unsustainable because it is too complex in application and because the tax avoidance to which it gives rise is costly to government. The increased volume of litigation, however, was not due to uncertainty or complexity. Most of the recent litigation was

n consistent with existing jurisprudence;102 n driven not by the difficulties of interpretation and application103 but by the government’s 2009 decision to remove most taxpayers’ entitlement to the foreign employment income exemption.

The number of cases litigated after 2009 was also inflated by

n the ATO’s adoption of a mechanical “continuity of association with the place” test, which resulted in some cases being argued that should not have been litigated;104 n the ATO’s establishment of compliance programs, such as “Project Wick- enby,” that target offshore income; and n a failure to ensure compliance with the foreign employment income exemption in section 23AG of the ITAA 1936 from 1987 to 2009, which resulted in section 23AG issues being litigated more than 20 years later than they should have been.105

a development agreement between that country and Australia); Lochtenberg v. Commissioner of Taxation, [2018] AATA 4667 (section 23AG and Swiss component of Glencore incentive profit participation plan);Horrocks v. Commissioner of Taxation, [2010] AATA 307; Mulherin v. Commissioner of Taxation, [2013] FCAFC 115; aff ’g [2012] AATA 557) (on onus of proof ); and Commissioner of Taxation v. Seymour, [2015] FCA 320; rev’g [2014] AATA 788, allowing video evidence; and Seymour and Commissioner of Taxation, [2016] AATA 397, where the AAT allowed the taxpayers in Singapore to provide evidence in the proceedings, on the condition that the taxpayers reimbursed AAT for the expenses it incurred by conducting that part of the hearing outside Australia; and Addy v. Commissioner of Taxation, [2019] FCA 1768, on the validity of the backpackers tax—appeal filed on November 26, 2019. 102 For a comprehensive review of the futility of this litigation, see Michael Dirkis, “The Ghosts of Levene and Lysaght Still Haunting Ninety Years on: Australia’s ‘Great Age’ of Residence Litigation?” (2018) 47:1 Australian Tax Review 41 - 53. 103 Ibid. 104 Ibid. See also Michael Dirkis, “The Residency Rules,” in Phil Broderick, et al., The Australian Taxation System: The 2017 Great Debate (Sydney, NSW: The Tax Institute, 2018), 57 - 75. 105 Michael Dirkis and Angie Ananda, “Taxing Beyond Australia’s Horizon: The Section 23AG Changes” (2009) 44:3 Taxation in Australia 153 - 56. moving to a more “certain” test for tax residence in australia n 163

Outcome of the Board of Taxation’s Self-Initiated Review Despite these arguments, in May 2016 the Board of Taxation began a self-initiated project on the residence tests for high-wealth individuals,106 which posed the question, among others, of whether Australia’s rules on tax residence for individuals sufficiently reflect the goals of certainty, simplicity, and integrity when it comes to the fact patterns of 21st-century residence. As noted above, the 2013 UK model was something that the board considered as a model for reform. On July 9, 2018, the minister for revenue and financial services released the board’s 2017 report.107 The board concluded, following a targeted, confidential, and “extensive” consultation, that “the existing residency rules are no longer appropriate as the fundamental basis of individual income taxation” and recommended that the rules be modernized and reformed.108 The board’s case for changing the rules was that they

(a) no longer reflect global work practices in an increasingly global mobile labour force, that have changed both the frequency and nature of interactions with the residency rules; (b) impose an inappropriate compliance burden on many taxpayers with relatively simple affairs as the rules are inherently uncertain to apply, include outdated concepts and rely on a “weighting” system that leads to inconsistent outcomes, which also gives rise to integrity risks; and (c) are an increasingly prevalent area of dispute for taxpayers and the ATO given the fundamental difference in tax consequences for residents and non-residents—this is illustrated by the increased number of court decisions and ATO private rulings issued since 2009 (and the amendments to narrow section 23AG of the Income Tax Assessment Act 1936).109

106 Australian Government, Board of Taxation, “Self-Initiated Review of the Income Tax Residency Rules for Individuals” (http://taxboard.gov.au/consultation/self-initiated-review-of -the-income-tax-residency-rules-for-individuals). 107 The board’s 2017 report, supra note 3. 108 Ibid., at paragraph 1.2. The Board concluded in ibid., at paragraph 1.4, that the modernized residency rules should (a) reflect current global work practices; (b) provide certainty to individuals of their tax residency status; (c) [be able to] be applied by an ordinary individual without tax advice in all but the most complex of cases; (d) remove antiquated concepts such as domicile; and (e) adopt factors that are easy to understand, reduce reliance on common law definitions, and [be] less open to manipulation. 109 Ibid., at paragraph 1.2. 164 n canadian tax journal / revue fiscale canadienne (2020) 68:1

The board set out, in a further seven recommendations, its preferred framework for a new definition of tax “residence.”110 The key elements were that

(a) there should be a policy statement, such as an objects clause, that outlines the Government’s overarching individual tax residency policy addressing the tax policy objectives of equity, efficiency, simplicity and integrity [recommendations 2 and 3]; (b) in accordance with the policy statement, the new resident definition should include separate definitions for individuals establishing residency and ceasing- resi dency [recommendation 4]: (i) each definition should commence with a simple bright line ‘days count’ test that ensures the vast majority of individuals can determine their residency quickly and with certainty [recommendation 5]; and (ii) for individuals that do not satisfy either bright line test, an objective test based on the individual’s facts and circumstances should then apply to determine residency on the basis of specific key factors (to determine the individual’s connection or relationship to Australia) [recommendation 6]; (c) a rule should be adopted to the effect that Australian residency is maintained until tax residency is provably established in another jurisdiction, to address integrity concerns identified during consultation [recommendation 7]; (d) the current rule that seeks to deem Government officials and their families resident no longer captures many Government officials and, as such, any new definition should include a more effective rule that reflects the Government’s position regarding public servants (such as a specific government services rule) [recommendation 8].111

Following the release, on July 9, 2018, of the board’s 2017 report, the minister for revenue and financial services noted that complex issues raised in the report “deserve further analysis and consideration.”112 Thus, the government did not take a position on the recommendations in the board’s report. The minister noted that “before the Government takes any position on these matters I have asked the Board to consult further on key recommendations, including how Australia could draw on residency tests in other countries.”113 The minister indicated that once the board has completed its additional work, the government would consider the entirety of the board’s work on this topic and would do so in the light of broader reform priorities.

110 There were a three further recommendations concerning (1) labour mobility and the indirect consequences of the employee exemption (recommendation 9), (2) limitation of the “temporary residents” concession to four years (recommendation 10), and (3) consideration of the alignment of the rules on the individual’s tax residence and Australia’s immigration visa regime. See ibid., at 11 - 12. 111 The board’s 2017 report, supra note 3, at paragraph 1.5, and recommendations at 10 - 11. 112 See “Review of Tax Residency Rules for Individuals,” supra note 2. 113 Ibid. moving to a more “certain” test for tax residence in australia n 165

In September 2018, the board released a consultation guide,114 which sets out the board’s observations on potential design principles for guiding the modernization and reform of the rules on an individual’s tax residence. The guide poses 33 questions about how these design principles would operate to provide simplicity, certainty, and integrity; and whether these considerations are appropriately balanced. It focuses on

n the options for a two-step model for individual tax residence; n the integrity risk posed by “residents of nowhere,”115 and related schemes to circumvent the tax residence rules; and n updating the superannuation test.

The 33 questions posed in the 2018 consultation guide were divided up into the following seven categories:

1. policy statement (2 questions); 2. bright-line test (7 questions); 3. secondary test (12 questions); 4. integrity: resident nowhere (4 questions); 5. the superannuation test: options for reform (3 questions); 6. part-year residence (3 questions); and 7. transitional rules (1 question).

Potential Problems with the Proposed Model In this paper, I do not seek to respond to every question raised about the proposed model but will focus on the major areas of apparent difficulty.116 There are three overarching concerns with the board’s approach:

1. The board, as part of its terms of reference, focused on modifying what was intended to be a rule on tax jurisdiction in such a way that the rule became an anti-avoidance rule. The better approach would have been to redefine the jurisdiction claim and support it with targeted anti-avoidance rules.

114 Australian Government, Board of Taxation, Review of the Income Tax Residency Rules for Individuals: Consultation Guide (Parkes, ACT: Board of Taxation, September 2018) (herein referred to as “the 2018 consultation guide”) (https://cdn.tspace.gov.au/uploads/ sites/70/2018/09/BoT-Residency-Consulation-Guide-FINAL.pdf ). 115 Ibid., at 4. 116 The language and content of the following will be similar to those in the Taxation Institute’s November 20, 2018 submission to the board as it was drafted by the author. See Australian Tax Institute, “Review of the Income Tax Residency Rules for Individuals,” submission to the Australian Board of Taxation, November 20, 2018 (https://cdn.tspace.gov.au/uploads/ sites/74/2019/11/TRRI-Tax-Institute.pdf). 166 n canadian tax journal / revue fiscale canadienne (2020) 68:1

2. The proposed changes appear to frustrate the board’s goals of certainty and simplicity; an integrity regime is proposed that seeks to deal with rare occur- rences that arise not necessarily because of residence abuse but often because of the operation of other provisions of the Income Tax Assessment Acts.117 3. Despite the 2018 consultation guide’s assertion that the revenue impact of the measure will be “immaterial or negligible,”118 the reform proposals mooted in the guide will expand the scope of persons caught by the rules and thereby increase government revenue. The proposals—which include the development of a more adhesive residence rule, the creation of two clear bright-line tests (which may include the measurement of presence over any 12 -month period), and a factor test combined with revision of the superannuation test—will also increase the current scope of the rules on individual tax residence.

From a tax policy perspective, there are a number of issues with the bright-line test (that is, the primary test, based on time spent according to a “day count”) proposed by the board for automatically determining the tax residence status of the majority of individuals.119 These issues arise from the test’s departure from recommendation 4 of the board’s 2017 report—that is, the recommendation that a single outbound test should be developed.120 The board has now proposed three different bright-line outbound tests for individuals: (1) a lower bright-line threshold for those who have previously been resident; (2) a different threshold test for those who have not previously been resident; and (3) a special threshold test to determine whether individuals who are working full-time overseas are non-residents in certain circumstances.121 This departure from recommendation 4 seems to complicate rather than simplify matters. The “previous resident” test seems sufficient to establish an outbound bright-line test—that is, based on the rule that if any individual spends less than x days in Australia over any 12 -month period (that is, a period not tied to a financial year), he is a non-resident. The application of this test could also take into account presence in prior years, and thereby minimize avoidance by persons who leave the country before the specified time period is satisfied and return once the period restarts.

117 For example, (subject to the new anti-hybrid rules) a taxpayer who becomes a US resident will get the fully franked dividends tax-free under both the US and Australian rules even if the profits giving rise to those dividends accrued in a proprietary limited company while the taxpayer was an Australian-resident shareholder. The tax-free nature arises from the franking/ withholding rules, not from the residence status of the taxpayer. 118 2018 consultation guide, supra note 114, at 26. 119 Ibid., at 6 and 10 - 13. 120 The board’s 2017 report, supra note 3, at 10. 121 2018 consultation guide, supra note 114, at 10 - 11. moving to a more “certain” test for tax residence in australia n 167

The “previously not a resident” test seems unnecessary, and, from a policy view- point, it seems to undermine the inbound bright-line test. It seems to provide that if a person enters Australia for the first time and her stay exceeds 183 days, this “test the residence” determination is reversed, such that she is treated as a non-resident if she is here for more days than a person who was formerly a resident. This is the case because she is resident for the first time. This different treatment cannot be justified on the grounds of the adhesive principle. In fact, it undermines that principle by saying that it is adhesive only if you are a serial resident. For consistency and certainty, the factor test should be the instrument used to exclude them. The third outbound test seems to reinstitute the former scope of the amended employment exemption (section 23AG of the ITAA 1936) and extend its scope further by treating persons working full-time in non-taxing jurisdictions as non- residents. The only difference between this person and other departing Australians is that he must have a continuing employment relationship with an Australian employer and that the employment must be full-time. This “employment” element leads to definitional questions regarding what amounts to full-time work and whether the employment must be with the Austral- ian employer or with an affiliated entity. For example, defining full-time work in terms of hours can be problematic because, under some European countries’ labour laws, full-time work can range from 28 hours to 38 hours per week. In these countries, if you work longer weeks you get longer holidays. In the “gig” environment of today, in which a person is remunerated on a per-task or a piecemeal basis, full-time work as traditionally defined may not exist. Verification can be difficult for people who are employed by companies that the people themselves control. If someone is posted overseas for two or three years, she will either fall outside the bright-line outbound test or succeed under the factor test. Therefore, this test will increase complexity and is inconsistent with the guiding principles expressed in the 2018 consultation guide122 and in recommendation 4. Finally, recommendation 7 of the board’s 2017 report—the recommended adoption of a “new residency test for outbound individuals [to] ensure that all residents remain resident unless and until tax residency is established in another jurisdiction”123—was not picked up in the proposed outbound tests. Given that tax residence is easily acquired in a number of countries around the world (for example, Portugal) but may be difficult to establish in countries (for example, Lebanon) that do not have an income tax system, such a rule would result in inequitable outcomes in some cases and would encourage avoidance in other cases. Accordingly, recommendation 7 should not be adopted. There also remain issues with the proposed secondary test, which seems to be based on the United Kingdom’s “UK ties” approach. Although the factors that are

122 2018 consultation guide, supra note 114, at 7. 123 The board’s 2017 report, supra note 3, at 11. 168 n canadian tax journal / revue fiscale canadienne (2020) 68:1 relevant under the secondary test should all be easily verifiable, they also need to be highly relevant to a determination of residence. Some factors, suggested in the 2018 consultation guide124 and taken into account under the existing residence tests, are of little relevance (for example, immigration passenger cards, club memberships, driver’s licences, bank accounts, and health insurance) or are able to be manipulated, or they do not take into account the practical circumstances of modern life (for example, the inclusion of family members as a determinant factor regardless of dependence, age, and estrangement). The other issue with the proposal is the weighting of the factors. Any weighting system would no doubt add some complexity. However, there may be merit in exploring a weighting system as a secondary factor-based test, as the consultation guide suggests, provided that it is based on a short list of objective factors and it is clear what “weighting” is allocated to each one.

Lessons for Canada? In summary, issues with the board’s proposals remain, in addition to the issues discussed above in respect of the basic outbound tests and the factor proposals in the secondary test. Until these issues are resolved, the final approach to be adopted by Australia remains unclear. Therefore, at this stage, the Australian reform exercise, while it has highlighted a range of possible solutions to the shortcomings identified in Canada’s “facts and circumstances” approach to individual tax residence, has yet to provide a viable template for reform.

CONCLUSION The paper has highlighted defects common to the “fact and circumstances” approaches adopted by Canada and Australia in respect of rules for determining individual tax residence. Although the United Kingdom’s 2013 adoption of a statutory residence test for individuals removed the complexity arising from the subjectivity of the “facts and circumstances” approach, it came at a cost—namely, complexity. Therefore, the UK test’s value to Canada as a model for reform may be viewed as limited. Similarly, the incomplete Australian reform proposal highlights the difficulty of moving away from a facts-and-circumstance model, particularly where compliance objectives override the perceived objectives of simplicity and certainty. At best, the Australian proposals offer alternative avenues that Canada may consider should changes in its political climate make it a priority to repair the shortcomings in the country’s rules on individual tax residence.

124 Questions 11 to 17 in the 2018 consultation guide, supra note 114, at 14.