Shord v FCT – taxpayer held to be a ‘resident’ and taxable on foreign source income without qualifying for s23AG exemption or foreign tax offsets

A taxpayer has been unsuccessful before the Federal Court in appealing against the decision in Re Shord and FCT [2015] AATA 355.

In that case, the AAT had affirmed the Commissioner’s objection decisions and found:

• that the taxpayer was a resident of Australia for the 2006 to 2011 income years, despite the taxpayer’s claim that he had “let go” of Australia in 1999.
• The AAT also ruled that the taxpayer had not satisfied the requirements in s 23AG of the ITAA 1936 (as then relevant) to have his foreign sourced income treated as exempt income. In this regard, the AAT pointed out he had not established that he was engaged in “foreign service” for a continuous period of more than 91 days as required, or that there were “temporary absences” for leave or illness which would act as an exception.
• It also held he was not entitled to any foreign tax offsets as it found he had not produced evidence of any foreign tax paid on his overseas earnings. The disputed primary tax, penalties and interest was close to $300,000.

The facts as found by the AAT underpinning this conclusions were as follows (see extracts below).

1. He was found to ‘reside’ in Australia, even though worked overseas (not Australia), was gone for long periods of time and had stripped himself of most indicia of residence. But he did spend considerable periods of time in Australia between his ‘jobs’ overseas, where he lived with his second wife of over 20 years in a property they shared.
2. He was also found to be a ‘resident’ as he had not adopted a new ‘domicile of choice’ (after abandoning his UK ‘domicile of origin’ when he moved to Australia and married).
3. His ‘foreign service’ was found to be for less than 91 continuous days (without leave to connect shorter periods).
4. Further, there was no evidence to show that his work overseas was as an employee (such as to make it come within the definition of ‘foreign service’ in s23AG.
5. Whilst the bulk of the places he worked imposed income tax on his earnings, his evidence was that his employer paid it and there was no evidence that he paid foreign tax.

The Federal Court noted that 2 questions of law arose on appeal from the AAT decision.

• First, whether, at the relevant times, the taxpayer was engaged in foreign service within the meaning of s 23AG(7) in the tax years ended 30 June 2006 to 30 June 2009, and therefore exempt from income tax. The AAT concluded he was not so engaged.
• Second, was the taxpayer entitled to tax offsets for foreign income tax paid in the years ended 30 June 2006 to 30 June 2011 pursuant to s 770-10(1) of the ITAA 1997. The AAT held he was not so entitled.

The Federal Court held the AAT did not err in law in relation to both questions. Accordingly, the appeal was dismissed.

(Shord v FCT [2016] FCA 761, Federal Court, Gilmour J, 29 June 2016.)

[LTN 125, 1/7/16]

Extract from AAT decision

Mr Shord’s personal background and circumstances in the Relevant Period

29. Mr Shord was born in the United Kingdom on 29 July 1950.
30. In 1967, Mr Shord joined the UK armed forces as an Air-Corps Aircraft Technician.
31. In 1974, Mr Shord left the UK armed forces and became an off-shore diver, initially working mainly in the United Kingdom but later in the Middle East.
32. Mr Shord first came to Australia on a holiday in 1977.
33. Mr Shord married an Australian in August 1977 and started living in Australia in December 1978. This marriage produced one child (a daughter) and it ended in 1990 in divorce. Mr Shord subsequently became, and continues to be, estranged from his daughter from his first marriage.
34. On 11 November 1992, Mr Shord married Mrs Shord. Mrs Shord is an Australian citizen. Mr Shord and Mrs Shord have no children together.
35. All of the surviving members of Mr Shord’s family (namely 3 older sisters) have, at all material times, lived in the United Kingdom.
36. Mr Shord is an Australian citizen on 15 October 2004. Mr Shord has held an Australian passport since at least 15 October 2004 and a British passport since at least 22 January 2010. There is no documentary evidence that Mr Shord held a British passport before this date.
37. Mr Shord and Mrs Shord have been the registered proprietors, as joint tenants, of a property in Kelmscott, Western Australia since 19 December 1991 (Kelmscott Property). At all material times, the Kelmscott Property has been rented out (i.e. it is an investment property).
38. Since 22 January 1999, Mr Shord and Mrs Shord have been the registered proprietors, as joint tenants, of a property in Roleystone, Western Australia (Roleystone Property).
39. At all material times, Mrs Shord has lived at the Roleystone Property.
40. At all material times, Mr Shord has lived with Mrs Shord at the Roleystone Property when in Australia.
41. In his Witness Statement, Mr Shord describes various aspects of his personal background and circumstances, as follows:
24. My lifestyle is a nomadic lifestyle. I call the world my home. The barge that I work on is my home. The more established places are bases. These are used to store things that you may not be able to put on your back. My home in the UK is an established base to live and ravel from, also my contact place for work as well as a meeting place for friends and family living in the United Kingdom. My life style also relies on trust between my wife, who is reluctant to leave Australia to take up living in some foreign country. I am privileged in my position to be able to get my wife to join me in some countries where I may be, if the circumstances allow it. Even if it is only a few days while they move a barge or vessel to a new location.

………….

29. As advised by the Tax Office in 1999, I removed myself from all Electoral rolls in Australia. These included the Federal, State and Local. I am enrolled in the United Kingdom.
30. Under the advice of the Tax Office I withdrew all my Superannuation in about 1999 and closed the various accounts. Since then I have only received Superannuation contributions while working for a short time in Australia from July 2011.
31. As a requirement put to me by the Tax Office in 1999, I sold any assets that I had except for my share of the house I stay at while I am visiting Perth. I don’t own a car or any other motorised vehicle in Australia. I have no personal assets here in Australia, those I did have in 1999 have been disposed with.
32. The only investment that I have within Australia is a part share in a house that my wife and I purchased as her home here in Western Australia. I did own a part share in another house that was rented, but that has since been sold to allow me to pay out various debts that had been accumulating here in Australia and abroad.
33. I have no Australian shares or any other listed or unlisted investments in Australia.
34. I do not belong to any club, sporting or otherwise in Australia. I was a past member of the RSL in New South Wales but ceased many years ago.
35. Due to my occupation, I have medical insurance to cover me world wide. In the United kingdom I have a national insurance number which covers me throughout the European Community.
36. My wife lives most of the time in Australia. Cyn is a fully qualified nurse and midwife. She has always worked to keep herself, she is a very independent woman, and has recently retired, being 64 years old.

37. I have no other family in Australia.

…..

Time spent in and outside Australia in the Relevant Period

45. Table A, below, sets out the number of days that Mr Shord spent in Australia and outside of Australia in the income years ended 30 June 2000 to 30 June 2011 (which period encompasses the Relevant Period). Table A is based on information obtained from the Department of Immigration and Citizenship (Immigration Department) and, in particular, from Mr Shord’s incoming (arrival) and outgoing (departure) passenger cards.

TABLE A

46. At all material times, Mr Shord stated:
    • on his outgoing (departure) passenger cards, that he was an Australian resident departing temporarily; and
    • on his incoming (arrival) passenger cards, that he was a resident returning to Australia and that his intended address in Australia was the Roleystone Property.

………….

Mr Shord’s overseas employment in the Relevant Period

48. Table B, below, evidences transfers of funds from foreign sources into Mr Shord’s Australian Commonwealth Bank account^[4], and travel to and from Australia during the Relevant Period. Table B is based on information obtained from AUSTRAC and from the Immigration Department.

TABLE B

………..

Did Mr Shord “reside” in Australia in the Relevant Period?

……

74. It is clear from Mr Shord’s evidence that his physical, emotional and financial ties to Australia throughout the Relevant Period were significant. Mr Shord said in evidence that he shared a “deep emotional connection” with his wife, including during the time he spent apart from her, working overseas, in the Relevant Period. Whilst Mr Shord had family in the UK, his emotional ties to his wife in Australia (to whom he has now been married for 23 years) are clearly the most significant in his life. Whilst it is not in dispute that Mrs Shord is, as Mr Shord describes, a very “independent woman” and that she contributed to the household expenses, by reason of her work as a nurse/midwife, that does not, by itself, prove that Mr Shord did not “reside” in Australia during the Relevant Period.
75. Considering all of the relevant evidence, the Tribunal considers that Mr Shord maintained a “continuity of association” with Australia throughout the Relevant Period (primarily through his wife and the Roleystone Property) and although Mr Shord claims to have “let go” of Australia in 1999, the relevant facts and evidence prove otherwise:  Hafza v Director-General of Social Security and Levene v inland Revenue Commissioners.

What was Mr Shord’s “domicile” during the Relevant Period?

………..

79. The evidence before the Tribunal supports the finding that Australia was Mr Shord’s “domicile of choice” throughout the Relevant Period. Mr Shord has not proved that any other domicile replaced Australia as his “domicile of choice” at any time in the Relevant Period.

Was Mr Shord’s “permanent place of abode” outside Australia in the Relevant Period?

………

83. The evidence concerning Mr Shord’s “residence” in Australia also supports a finding that Mr Shord did not have a “permanent place of abode” outside Australia in the Relevant Period: refer to paragraphs 62, 69, 70 and 71 above.